UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________________________________________________________________
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2021.
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
(State or Other Jurisdiction of
Incorporation or Organization)
83-3349931
(I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act:
_________________________________________________________________________________________________________________________________
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
PNTG
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act, or the Act. ☐Yes ☒No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 February 28, 2022, 28,529,556 shares of the registrant’s common stock were outstanding. The aggregate market value of the shares of common stock held by non-affiliates of
the registrant on the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2021) was approximately $1,143,039,000 based upon the closing
price of the common stock on such date. For purposes of this calculation, the registrant has excluded the market value of all common stock beneficially owned by all executive
registrant.
officers
directors
and
the
of
Part III of this Form 10-K incorporates information by reference from the Registrant's definitive proxy statement on Schedule 14A for the Registrant's
2022 Annual Meeting of Stockholders to be filed within 120 days after the close of the fiscal year covered by this annual report.
Note on Incorporation by Reference
THE PENNANT GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I.
Part II.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statements and Schedules
Form 10-K Summary
Part IV.
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Item 1.
Item1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
Our reports, filings and other public announcements, including this Annual Report on Form 10-K may from time to time contain statements that do not
directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995, and typically include, but are not limited to, our expected future financial position, results of operations, cash flows, financing plans, business
strategy, budgets, capital expenditures, competitive positions, growth opportunities and plans and objectives of management. Forward-looking statements can often
be identified by words such as “anticipate,” “expect,” “intend,” “plan,” “predict,” “believe,” “seek,” “estimate,” “may,” “will,” “should,” “would,” “could,”
“potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. Additionally, many of these risks and uncertainties are
currently amplified by and will continue to be amplified by, or in the future may be amplified by, continued outbreaks of SARS-CoV-2, the virus that causes the
disease COVID-19 (“COVID-19”). The developments with respect to COVID-19 and its impacts have occurred rapidly, and because of the unprecedented nature
of the COVID-19 pandemic we are unable to predict the extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and
results of operations. These statements are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-
looking statements as a result of various factors, some of which are listed in Part I, Item 1A., Risk Factors, of this Annual Report on Form 10-K for the year ended
December 31, 2021. Accordingly, you should not rely upon forward-looking statements as predictions of future events. These forward-looking statements speak
only as of the date of this Annual Report, and are based on our current expectations, estimates and projections about our industry and business, management's
beliefs, and certain assumptions made by us, all of which are subject to change. We undertake no obligation to revise or update publicly any forward-looking
statement for any reason, except as otherwise required by law.
As used in this Annual Report on Form 10-K, the words, “Pennant,” “Company,” “we,” “our” and “us” refer to The Pennant Group, Inc. and its
consolidated subsidiaries. All of our independent operating subsidiaries, and the Service Center (defined below) are operated by separate, wholly-owned,
independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities,
as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report are not meant to imply, nor should they be construed as meaning, that The
Pennant Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Pennant Group, Inc.
The Pennant Group, Inc. is a holding company with no direct operating assets, employees or revenues. In addition, certain of our wholly-owned
independent subsidiaries, collectively referred to as the “Service Center,” provide centralized accounting, payroll, human resources, information technology, legal,
risk management, compliance oversight and other centralized services to the other independent operating subsidiaries through contractual relationships with such
subsidiaries.
The address of our headquarters is 1675 East Riverside Drive, Suite 150, Eagle, ID 83616, and our telephone number is (208) 506-6100. Our corporate
website is located at www.pennantgroup.com. The information contained in, or that can be accessed through, our website does not constitute a part of this Annual
Report on form 10-K.
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Item 1. Business
Overview
Part I.
The Pennant Group, Inc. is a leading provider of high-quality healthcare services to patients or residents of all ages, including the growing senior
population, in the United States. Through our innovative operating model, we strive to be the provider-of-choice in the communities we serve. On October 1, 2019,
we completed a spin-off from The Ensign Group, Inc. (“Ensign”) (NASDAQ: ENSG), our former parent company, which transferred all of its home health and
hospice agencies and substantially all of its senior living businesses to us.
As of December 31, 2021, we operate multiple lines of business, including home health, hospice and senior living, throughout Arizona, California,
Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. We provide home health and hospice services
through 88 agencies, and senior living services at 54 communities with 4,127 total units in our assisted living, independent living and memory care business. We
derive revenue from a diversified blend of payors including Medicare and Medicaid programs, private pay patients and residents and managed care payors.
We believe our key differentiators are our (1) innovative operating model that focuses on empowering and developing strong local leaders, (2) disciplined
growth strategy, and (3) ability to achieve quality care outcomes in cost effective settings. In our experience, healthcare is a local endeavor, largely dependent upon
personal and professional relationships, community reputation and an ability to adapt to the changing needs of patients, residents, partners and communities. As
our operational leaders build strong relationships with key partners in their local communities, they are empowered to make informed and critical operational
decisions that produce quality care outcomes and more effectively meet the needs of our patients and residents.
We believe our home health and hospice businesses are able to achieve quality outcomes—as measured by multiple industry and value-based metrics
(such as hospital readmission rates)—in cost effective settings. We believe our senior living business is able to offer our residents a safe and tailored quality-of-life
at an affordable cost, thus appealing to a broad population. With our platform of diversified service offerings, we believe that we are well-positioned to take
advantage of favorable demographic shifts as well as industry trends that reward providers offering quality care in lower cost settings.
Our Innovative Operating Model
Our innovative operating model is the foundation of our superior performance and success. Our operating model is founded on two core principles: (1)
healthcare is a local business where providers are most successful when key operational decision-making meets local community needs and occurs close to patients
or residents and employees, and (2) peer accountability from operational and resource partners is more effective at driving excellent clinical and financial results
than traditional hierarchical or “top-down” accountability structures.
Our model is innovative because each operation has been and will continue to be an independent operating subsidiary that functions under the direction of
local clinical and operational leaders, each of whom are empowered to make decisions based on the unique needs of the patients or residents, partners and
communities they serve. This is in contrast to typical models where control and key decision-making is centralized at the corporate level. Moreover, we utilize a
“cluster model,” where every operation is part of a defined “cluster,” which is a group of geographically proximate operations working together to allow leaders to
communicate and provide support and accountability to each other. Clusters create incentives for leaders to share best practices and real-time data and benchmark
clinical and financial performance with their cluster partners. We believe this locally-driven data-sharing and peer accountability model is unique among healthcare
and senior living providers and has proven effective in improving clinical care, enhancing patient and resident satisfaction and promoting operational efficiencies.
This “cluster” operating model is the same model used by local leaders prior to our spin-off from Ensign in 2019 (further discussed below under Company History)
and is key to the success of our future operations.
Our organizational structure empowers our highly dedicated leaders and staff at the local level to make key decisions and creates a sense of ownership
over operational and clinical results and the overall employee experience. Each operation’s leader and his or her staff are encouraged to make their operations the
“provider of choice” in the communities they serve. To accomplish this goal, our leaders work closely with their clinical staff and our expert resources to identify
unique patient and resident needs and priorities in their communities and to create superior service offerings tailored to those needs. We believe that our localized
approach to program development and care leads prospective patients or residents and referral sources to choose or recommend our operations to others. Similarly,
our emphasis on empowering local decision-makers encourages
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leaders to strive to become the “employer of choice” in the communities they serve. One of our core values is the principle that the best patient care is provided by
employees who experience significant work satisfaction because they are valued as individuals. Our leaders work hard to embody this core value and to attract,
train and retain outstanding clinical staff by creating a work environment that fosters critical thinking, measurement, and relevance. Our local teams are motivated
and empowered to quickly and proactively meet the needs of those they serve, without waiting for permission to act or being bound to a “one-size-fits-all”
corporate strategy. In many markets, we attribute census growth and excellent clinical and financial outcomes to a healthy organizational culture built on these
principles. With strong employee satisfaction across the organization, we believe we can continue to attract and retain the best talent in our industries.
Lastly, while our teams are local, they are also supported by cutting-edge systems and our “Service Center”, which is staffed with teams of subject-matter
experts who advise regarding their respective fields of expertise, including information technology, compliance, human resources, accounting, payroll, legal, risk
management, education and other services. The partnership and peer accountability that exists between our local leaders and Service Center resources allows each
operation to improve while benefiting from the technical expertise, systems and accountability provided by our Service Center.
Partner of Choice in Local Healthcare Communities
We view healthcare services primarily as a local business, driven by personal relationships, reputation and the ability to identify and address unmet
community needs. We believe our success is largely driven by our ability to build strong relationships with key stakeholders within the local healthcare
communities, leveraging our reputation for providing superior care.
We believe we are a partner of choice to payors, providers, patients, residents and employees in the healthcare communities we serve. As a partner, we
focus on improving care outcomes and the quality of life of our patients and residents in their home. Our local leadership approach facilitates the development of
strong professional relationships within communities, which allows us to better understand and meet the needs of our partners. We believe our emphasis on
working closely with other providers, payors, residents and patients yields unique, customized solutions and programs that meet local market needs and improve
clinical outcomes, which in turn accelerates revenue growth and profitability.
We are a trusted partner to, and work closely with, payors and other acute and post-acute providers to deliver innovative healthcare solutions in lower cost
settings. In the markets we serve, we have developed formal and informal preferred provider relationships with key referral sources and transitional care programs
that result in better coordination within the care continuum. These partnerships have resulted in significant benefits to payors, patients, residents and other
providers, including reduced hospital readmission rates, appropriate transitions within the care continuum, overall cost savings, increased patient satisfaction and
improved quality outcomes. Positive, repeated interactions and data sharing result in strong local relationships and encourage referrals from our acute and post-
acute care partners. As we continue to strengthen these formal and informal relationships and expand our referral base, we believe we will continue to drive
revenue growth and operational results.
Company History
The Pennant Group, Inc. was incorporated as a Delaware corporation on January 24, 2019, for the purpose of holding the home health and hospice
agencies and substantially all of the senior living businesses of Ensign, which was formed in 1999 with the goal of establishing a new level of quality care within
the skilled nursing industry. The name “Ensign” is synonymous with a “flag” or a “standard,” and refers to Ensign’s goal of setting the standard by which all others
in its industry are measured. The name “Pennant” draws on similar imagery and themes to represent our mission of becoming the “Ensign” to the home health,
hospice and senior living industries. We believe that, through our innovative operating model, we can foster a new level of patient care and professional
competence at our independent operating subsidiaries and set new industry standards for quality home health and hospice and senior living services.
On October 1, 2019, Ensign completed the spin-off of Pennant effected through a tax-free distribution (except as to cash received in lieu of fractional
shares) of substantially all of Pennant’s issued and outstanding common stock to the stockholders of Ensign, as a result of which Pennant became an independent,
publicly-traded company (the “Spin-Off”). Following the Spin-Off, Ensign had no continuing ownership interest in Pennant.
Our independent operating subsidiaries are organized into industry-specific portfolio companies, which we believe has enabled us to maintain a local,
field-driven organizational structure, to attract qualified leaders and expert resources, and to effectively identify, acquire, and improve operations. Each of our
portfolio companies has its own leader. These experienced
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and proven leaders are generally taken from the ranks of our operational leaders to serve as resources to independent operating subsidiaries within their own
portfolio companies and have the primary responsibility for recruiting qualified talent, finding potential acquisition targets, and identifying other strategic and
organic growth opportunities. We believe this decentralized organizational structure will continue to improve the quality of our recruiting and facilitate successful
acquisitions.
We have two reportable segments: (1) home health and hospice services, which includes our home health, hospice and home care businesses; and (2) senior
living services, which includes our assisted living, independent living and memory care communities. We also report an “all other” category that includes general
and administrative expense. Our reporting segments are business units that offer different services and that are managed separately to provide greater visibility into
those operations. For more information about our operating segments, as well as financial information, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 6, Business Segments, to the Consolidated and Combined Financial Statements.
Services
Home Health and Hospice. As of December 31, 2021, we provided home health and hospice services through 88 agencies. Our home health services
consist of providing a combination of clinical services including nursing, speech, occupational and physical therapy, medical social work and home health aide
services within a patient's home. Home health is often a cost-effective solution for patients and can also increase their quality of life by allowing them to receive
excellent clinical services in the comfort and convenience of the patient's home. Our hospice services focus on the physical, spiritual and psychosocial needs of
terminally ill patients and their families and consist primarily of clinical care, education and counseling. We generated approximately 70.0%, 70.3% and 68.6% of
our home health and hospice revenue from Medicare during the years ended December 31, 2021, 2020 and 2019, respectively.
Senior Living. As of December 31, 2021, we provided assisted living, independent living and memory care services in 54 communities with 4,127 total
units or rooms. Our senior living operations provide a variety of services tailored to our residents’ needs, including residential accommodations, activities, meals,
housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support not at the level of clinical care provided in
a skilled nursing facility. We generate revenue in these communities primarily from private pay sources, with a portion earned from Medicaid or other state-
specific programs. We derived approximately 71.3%, 73.2% and 77.4% of our senior living revenue from private pay sources during the years ended December 31,
2021, 2020 and 2019, respectively.
Our Growth Strategy
We believe that the following strategies are primarily responsible for our growth to date and will continue to drive the growth of our business:
Grow Talent Base and Develop Future Leaders. Our growth strategy is focused on expanding our talent base and developing future leaders. A key
component of our organizational culture is our belief that strong local leadership is a primary ingredient to operational success. We use a multi-faceted strategy to
identify and recruit proven business leaders from various industries and backgrounds. To develop these leaders, we have a rigorous “CEO-in-Training Program”
that includes significant in-person instruction on leadership, clinical and operational topics as well as extensive on-the-ground training and active learning with key
leaders from across the organization. After placement in a local operation, our leaders continue to receive training and regular feedback and support from
operational, clinical and Service Center peers. We believe our model of empowering local leaders and providing them a platform of support from expert resources
and systems will continue to attract and retain highly talented and entrepreneurial leaders.
Focus on Organic Growth. We believe that we have a significant opportunity to drive organic growth within our current portfolio, including recently
acquired operations. As we improve clinical outcomes, quality of care and operational results at each of our existing and newly acquired operations, we believe we
will become a provider of choice in the communities we serve, which leads to census growth. Through this census growth, and as we continue to expand our
service areas and offerings, we believe we will continue to translate revenue growth into bottom line success with rigorous adherence to our core operating
principles. By effectively using data systems and analytics and embracing a culture of transparency and accountability, we tend to see our local leaders steadily
improving operational results. We believe our unique operating model will continue to cultivate steady and consistent organic growth in the future.
Pursue Disciplined Acquisition Strategy. The disciplined acquisition and integration of strategic and underperforming operations is a key element of our
past success and is integral to our future growth plans. We have historically successfully transitioned both turnaround and stable target businesses, transforming
them into top-quality operations preferred by referral
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sources. We plan to continue to take advantage of the fragmented home health, hospice and senior living industries by being disciplined in acquiring strategic and
underperforming operations within both our existing and new geographic markets. With experienced leaders in place at the local level and demonstrated success in
improving operating conditions at acquired businesses, we believe we are well positioned to continue expanding our footprint through disciplined acquisitions.
Leverage Our Operational Capabilities to Expand Partnerships. Our local leadership approach enables us to adapt to and efficiently meet the needs of
our partners in the communities we serve. Our clinical and data analytics capabilities foster solutions and allow us to optimize clinical outcomes. We use this data
to communicate with key partners in an effort to reduce overall cost of care and drive improved clinical outcomes. We will continue to expand formal and informal
partnerships across the healthcare continuum by strategically investing in programs and data analytics that help us and our partners improve care transitions,
achieve better outcomes and reduce costs.
Growth and Acquisition History
Much of our historical growth can be attributed to our expertise in acquiring strategic and underperforming operations and transforming them into market
leaders in clinical quality, staff competency and financial performance. Our local leaders are trained to identify these opportunities for long-term organic growth as
we strive to become the provider of choice in our local communities. Accordingly, we plan to continue to drive organic growth and acquire additional operations in
existing and new markets in a disciplined manner.
From 2013 to 2021, we grew our home health and hospice services and senior living services revenue by 561.0% or a compounded annual growth rate of
26.6%.
From 2013 to December 31, 2021, we grew the number of our home health and hospice agencies and senior living units by 450.0% and 228.6%,
respectively.
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Agency and Unit Growth Since 2013
Home health and hospice agencies
Senior living communities
Senior living units
Total number of home health, hospice, and senior
living operations
2013
2014
2015
2016
16
12
1,256
25
15
1,587
32
36
3,184
39
36
3,184
December 31,
2017
2018
2019
2020
2021
46
43
3,434
54
50
3,820
63
52
3,963
76
54
4,127
88
54
4,127
28
40
68
75
89
104
115
130
142
We aim to continue to grow our revenue and earnings by expanding our existing operations and acquiring additional operations in existing and new
markets.
Industry Trends
The healthcare sector is one of the largest and fastest-growing sectors of the U.S. economy. According to the Centers for Medicare and Medicaid Services
(“CMS”), national healthcare spending increased from 8.9% of U.S. GDP, or $253 billion, in 1980 to an estimated 19.7% of GDP, or $4.1 trillion, in 2020. CMS
projects national healthcare spending will grow by an average of 5.4% annually from 2019 through 2028, accounting for approximately 19.7% of U.S. GDP, or
approximately $6.2 trillion, in 2028.
The home health and hospice segment is growing within the overall healthcare landscape in the United States. According to Grandview Research, Inc.’s
(“GVRI[‘s]”) research, the home health market is estimated at approximately $299 billion and is expected to grow at a compounded annual growth rate (“CAGR”)
7.88% from 2021 to 2028. The hospice industry is estimated at approximately $29 billion and is projected to grow at an estimated CAGR of 8.6%. The senior
living market is estimated at approximately $83 billion and is expected to expand at an estimated CAGR of 5.3% between 2021 to 2027. We believe that the
industries in which we operate will continue to benefit from several macroeconomic and regulatory trends highlighted below:
Increased Demand Driven by Aging Populations. As seniors account for an increasing percentage of the total U.S. population, we believe demand for
home health and hospice will continue to increase and demand for senior living services will improve as operating conditions impacted by the COVID-19
pandemic return to normal. According to the U.S. Census Bureau in 2020, between 2016 and 2060, the number of individuals over 65 years old is projected to be
one of the fastest growing segments of the United States population, growing from 15% to 23%. The Bureau expects this segment to increase nearly 92% to 94.7
million by 2060 (from 2016) as compared to the total U.S. population which is projected to increase by 25.2% over that same time period. Furthermore, the
generation currently retiring has access to less post-retirement benefits and accumulated less savings than in the past, creating demand for more affordable senior
housing and in-home care options. As a high-quality provider in lower cost settings, we believe we are well-positioned to benefit from this trend.
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Shift of Patient Care to Lower Cost Alternatives. The growth of the senior population in the U.S. continues to increase healthcare costs, often at a rate
faster than the available funding from government-sponsored healthcare programs. In response, government payors have adopted measures that encourage the
treatment of patients in their homes and other cost-effective settings where the staffing requirements and associated costs are often significantly lower than the
alternatives. With our emphasis on the home health, hospice and senior living industries, which are among the lowest cost settings within the post-acute care
continuum, we expect this shift to continue to drive our growth.
Transition to Value-Based Payment Models. In response to rising healthcare spending, certain markets’ commercial, government and other payors are
shifting away from fee-for-service payment models toward value-based models, including risk-based payment models that tie financial incentives to quality,
efficiency and coordination of care. We believe that payors will continue to emphasize reimbursement models driven by value and that our clinical outcomes
combined with our services in cost effective settings will be increasingly rewarded. Many of our home health agencies already receive value-based payments, and
we are well-positioned to capitalize on this trend as it unfolds across the markets we serve.
Significant Acquisition and Consolidation Opportunities. The home health, hospice and senior living industries are highly fragmented markets with
thousands of small and regional providers and only a handful of large national players. There were over 11,000 Medicare-certified home health agencies operating
in 2020, with the top ten largest operators accounting for approximately 26% of the market. There are approximately 4,500 hospice agencies in the U.S. with the
top ten largest operators accounting for about 18% of the total market share. As with the home health and hospice industries, there is significant fragmentation in
the senior housing industry, with the top 25 operators controlling only a quarter of the market. We believe that our strategy of acquiring strategic and
underperforming operations in these highly fragmented markets will be an instrumental piece of our future growth.
Changing Regulatory Framework. Regulations and reimbursement change frequently in our industries. Our model is designed to successfully navigate
these regulatory and reimbursement changes. For example, effective January 1, 2020, CMS enacted additional changes to the Medicare home health prospective
payment system (“HH PPS”) with the implementation of the Patient Driven Groupings Model (“PDGM”). As discussed in greater detail below under Government
Regulation, this reimbursement structure involved case mix calculation methodology refinements, changes to low-utilization payment adjustment (“LUPA”)
thresholds, the elimination of therapy thresholds, a change to the unit of payment from a 60-day episode to a 30-day period of care, and reduction in fiscal year
2020 and full elimination in fiscal year 2021 of requests for anticipated payments (“RAPs”). Beginning in fiscal year 2022, the CMS is replacing the RAP process
with the home health Notice of Admission (“NOA”), which requires a single NOA filing that will cover continuous 30-day periods of care until the patient is
discharged. This transition from RAP to NOA may cause delays in payment from CMS or even denial of payment, as the NOA process will be new for both CMS
and the Company. Just as we have navigated other major reimbursement and regulatory changes, we believe that our unique operating model allowed us to
transition to PDGM as local operations and clinical leaders, supported by our expert resources, effectively adapted to the new reimbursement environment.
Payor Sources
We derive revenue primarily from Medicare and Medicaid programs, managed care and private payors.
Medicare. Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older or are disabled. The Medicare
home health benefit is available both for patients who need care following discharge from an inpatient facility and patients who suffer from chronic conditions that
require ongoing but intermittent care. The Medicare hospice benefit is also available to Medicare-eligible patients with terminal illnesses, certified by a physician,
where life expectancy is six months or less.
Medicaid. Medicaid is a program financed by state funds and matching federal funds administered by state agencies or managed care organizations on
their behalf. Medicaid programs generally provide health benefits for qualifying individuals and may supplement Medicare benefits for the disabled and for
persons aged 65 and older meeting financial eligibility requirements. Medicaid reimbursement formulas are established by each state with the approval of the
federal government in accordance with federal guidelines.
Medicaid reimbursement varies from state to state and is based upon a number of different methodologies, including cost-based, prospective payment,
case mixed adjusted payments, and negotiated rates. Rates are subject to a state’s annual budgetary requirements and funding, statutory and regulatory changes and
interpretations and rulings by individual state agencies and State Plan Amendments approved by CMS.
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Managed Care and Private Insurance. Managed care patients consist of individuals who are insured by certain third-party entities, or who are Medicare
beneficiaries who have assigned their Medicare benefits to a managed care organization plan. Another type of insurance, long-term care insurance, is also
becoming more widely available to consumers and is not expected to contribute significantly to industry revenues in the near term.
Private and Other Payors. Private and other payors consist primarily of individuals, family members or other third parties who directly pay for the
services we provide.
The following table sets forth our total revenue by payor source as a percent of revenue generated by each of our reportable segments and as a percentage
of total revenue for the year ended December 31, 2021:
Medicare
Medicaid
Subtotal
Managed care
Private and other
(a)
Total revenue
Home Health and Hospice Services
Year Ended December 31, 2021
Home Health Services
51.2 %
5.7
56.9
29.2
13.9
100.0 %
Hospice Services
89.7 %
8.0
97.7
2.1
0.2
100.0 %
Senior Living Services
— %
28.7
28.7
—
71.3
100.0 %
Total Revenue
49.3 %
13.3
62.6
11.2
26.2
100.0 %
Private and other payors in our home health and hospice services segment includes revenue from all payors generated in our home care operations.
Reimbursement for Specific Services
Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently
enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to
impose reduced reimbursement rates, greater discounts, cost sequestrations in federal spending bills passed by Congress, and more stringent cost controls by
government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of
operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially
and adversely affect our business, financial condition and results of operations.
Reimbursement for Home Health Services. Our home health business derives substantially all of its revenue from Medicare, managed care, and private
pay sources, which may vary in the markets we serve. Our home health services generally consist of providing some combination of the services of registered
nurses, speech, occupational and physical therapists, medical social workers and certified home health aides. Home health is often a cost-effective solution for
patients and can also increase their quality of life and allow them to receive quality medical care in the comfort and convenience of a familiar setting.
Reimbursement for Hospice Services. Hospice revenues are primarily derived from Medicare. We receive one of four predetermined rate categories
based on four different levels of care provided: routine home care, continuous home care, inpatient respite care and general inpatient care. This payment structure
is designed to include all of the services needed to manage a beneficiary’s care, consisting primarily of clinical care, education and counseling. These rates are
subject to annual adjustments based on inflation and geographic wage considerations.
Reimbursement for Senior Living Services. Assisted living, independent living and memory care community revenue is primarily derived from private
pay residents at rates we establish based upon the services we provide and market conditions in the area of operation. In addition, Medicaid or other state-specific
programs in some states where we operate supplement payments for board and care services provided in assisted living and memory care communities.
Competition
The post-acute care industry is highly competitive, and we expect that the industry will become increasingly competitive in the future. The industry is
highly fragmented and characterized by numerous local and regional providers, in addition to large national providers that have achieved geographic diversity and
economies of scale. Some of our independent operating subsidiaries also compete with skilled nursing facilities, inpatient rehabilitation facilities and long-term
acute care hospitals. Competitiveness may vary significantly from location to location, depending upon factors such as the number of
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competing operations, availability of services, expertise of staff, and the physical appearance and amenities of senior living communities. We believe that the
primary competitive factors in the post-acute care industry are:
•
•
•
•
•
ability to attract and to retain qualified leaders and caregivers;
reputation and achievements of quality healthcare outcomes and patient and resident satisfaction;
attractiveness and location of senior living communities and other physical assets;
the expertise and commitment of operational leaders and employees; and
private equity and other firms with greater financial resources and/or lower costs of capital with similar asset acquisition objections.
We seek to compete effectively in each market by establishing a reputation within the local community as the “operation of choice.” This means that the
operation leaders are generally free to discern and address the unique needs and priorities of healthcare professionals, customers and other stakeholders in the local
community or market, and then create superior service offerings for that particular community or market that are calculated to encourage prospective customers
and referral sources to choose or recommend the operation.
Increased competition could limit our ability to attract and retain patients and residents, maintain or increase rates of reimbursement or to expand our
business. Some of our competitors have greater financial and other resources than we have, may have greater brand recognition and may be more established in
their respective communities than we are. Competing companies may also offer newer or more recently renovated communities or different programs or services
than we offer and may, therefore, attract individuals who are currently patients of our operations, potential residents of our facilities, or who are otherwise
receiving our healthcare services. Other competitors may have lower expenses or other competitive advantages than us and, therefore, provide services at lower
prices than we offer.
There are few barriers to entry in the home health and hospice business in jurisdictions that do not require certificates of need or permits of approval. Our
primary competition in these jurisdictions comes from local privately and publicly owned providers and hospital-owned healthcare providers. We compete based
on the availability of personnel, the quality of services, expertise of visiting staff, and, in certain instances, on the price of our services. In addition, we compete
with a number of non-profit organizations that finance acquisitions and capital expenditures on a tax-exempt basis and charity-funded programs that may have
strong ties to their local medical communities and receive charitable contributions that are unavailable to us.
Our senior living services also compete with local, regional and national companies. The primary competitive factors in these businesses include
reputation, cost of services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as
third-party reimbursement, information management and patient recordkeeping. The market for acquiring and/or operating senior living communities is highly
competitive, and some of our present and potential senior living competitors have, or may obtain, greater financial resources than us and may have a lower cost of
capital.
Our Competitive Strengths
We believe that we are well positioned to benefit from the ongoing regulatory, reimbursement and demographic changes within the home health, hospice
and senior living industries. We believe that we will achieve clinical, financial and cultural success as a direct result of the following key competitive strengths:
Innovative Operating Model. We believe healthcare should be operated primarily as a local business. Our local leadership-centered operating model
encourages our leaders to make key operational decisions that meet the individualized needs of their patients, residents and community partners. Recognizing the
local nature of our business, our leaders develop each operation’s reputation at the local level, rather than being bound by a traditional organization-wide branding
strategy. In addition, our local leaders work closely with their cluster partners to share data and improve clinical and financial outcomes. Moreover, we do not
maintain a traditional corporate headquarters, rather we operate our Service Center which supports operational results through world-class systems and by
providing ancillary expertise in fields such as information technology, compliance, human resources, accounting, legal and education. This enables individual
operations to function with the strength, synergies and economies of scale found in larger organizations, without the disadvantages of a top-down management
structure or corporate hierarchy. We believe this approach is unique within our industries and allows us to preserve the “one-operation-at-a-time” focus and culture
that has contributed to our success.
Proven Track Record of Successful Acquisitions. We adhere to a disciplined acquisition strategy focused on sourcing and selectively acquiring
operations within our target markets. Local leaders are heavily involved in the acquisition process and
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are recognized and rewarded as these acquired operations become the provider of choice in the communities they serve. Through our innovative operating model
and disciplined approach to strategic growth, we have completed and successfully transitioned dozens of value-add operations. Our expertise in acquiring and
transforming strategic and underperforming operations allows us to consider a broad range of potential acquisition targets and will be a key element of our future
success.
Superior Clinical Outcomes and Quality Care. We will continue to achieve success by delivering high quality home health, hospice and senior living
services. Using the CMS five-star quality rating criteria, our home health agencies achieved an average of 4.4 out of 5 stars across all agencies for the for the year
ended December 31, 2021, compared to the industry average of 3.0 stars (see Government Regulation below for further discussion on the five-star quality rating
system). Our locally-driven, patient-centered approach to clinical care allows us to meet the unique needs of our patients, resulting in improved clinical outcomes,
including reduced hospital readmission rates. These improved outcomes are driven by both our talented local clinicians and our data-driven analytical approach to
patient care and risk stratification. We believe that our achievement of high-quality clinical outcomes positions us as a solution for patients, residents and referral
sources, leading to census growth and improved profitability.
Diversified Portfolio by Payor and Services. As of December 31, 2021, we operated 88 home health and hospice agencies and 54 senior living
communities across 14 states. Because of this diversified portfolio, our blended payor mix was 49.3% Medicare, 13.3% Medicaid, 11.2% managed care and 26.2%
private pay for the year ended December 31, 2021. Our balanced payor mix can provide greater business stability through economic cycles and mitigates volatility
arising from government-driven reimbursement changes. For the year ended December 31, 2021, we generated 70.4% of our revenue from home health and
hospice services and 29.6% of our revenue from senior living services. Our diversified service portfolio allows us to opportunistically execute on our acquisition
strategy as valuations fluctuate over industry cycles.
Effective Talent Recruitment, Development and Retention. We believe we have been successful in attracting, developing and retaining outstanding
business and clinical leaders to lead our independent operating subsidiaries. Our unique operating model, which emphasizes local decision making and team
building, supported by our platform of expert resources and best-in-class systems, attracts a highly talented and entrepreneurial group of leaders. Our operational
leaders are committed to ongoing training and participation in regular leadership development and educational programs. We believe that our commitment to
professional development strengthens the quality of our operational leaders and staff and will continue to differentiate us from our competitors.
Human Capital
The operation of our home health and hospice operations and senior living communities requires a large number of highly skilled healthcare professionals
and support staff. As of December 31, 2021, we had 6,441 employees who were employed by our independent operating subsidiaries or our Service Center. None
of those employees is subject to a collective bargaining agreement relating to our operations.
Our ability to attract and retain future leaders is critical to our ongoing success. Therefore, we are dedicated to continuously recruiting and developing a
diverse group of capable leaders. As described in Item 1. Grow Talent Base and Develop Future Leaders, our CEO-in-Training program provides significant in-
person instruction and extensive training with key leaders from across the organization to empower local leaders.
For the year ended December 31, 2021, 56.7% of our total expenses were payroll related for our operations. Periodically, market forces, which vary by
region, require that we increase wages in excess of general inflation or in excess of increases in reimbursement rates we receive. We believe that we staff
appropriately, focusing primarily on the acuity level and day-to-day needs of our patients and residents. We seek to manage our labor costs by improving staff
retention, improving operating efficiencies, maintaining competitive wage rates and benefits and reducing reliance on overtime compensation and temporary
nursing agency services.
The healthcare industry as a whole has been experiencing shortages of qualified professional clinical staff. We believe that our ability to attract and retain
qualified professional clinical staff stems from our ability to offer attractive wage and benefits packages, a high level of employee training, a culture that provides
incentives for individual efforts and a quality work environment.
Government Regulation
General. The laws and statutes affecting the regulatory landscape of the home health, hospice and senior living industries continue to expand. In addition
to this changing regulatory environment, federal, state and local officials are
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increasingly focusing their efforts on the enforcement of these laws. In order to operate our businesses, we must comply with federal, state and local laws relating
to, among other things, licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention,
immigration, employment, rate-setting, billing and reimbursement, building codes and environmental protection. Additionally, we must also adhere to anti-
kickback statutes, physician referral laws, and safety and health standards set by the Occupational Safety and Health Administration (“OSHA”). Changes in the
law or new interpretations of existing laws may have an adverse impact on our methods and costs of doing business.
Our independent operating subsidiaries are also subject to various regulations and licensing requirements promulgated by state and local health and social
service agencies and other regulatory authorities. Requirements vary from state to state and these requirements can affect, among other things, personnel education
and training, patient and personnel records, services, staffing levels, monitoring of patient wellness, patient furnishings, housekeeping services, dietary
requirements, emergency plans and procedures, certification and licensing of staff prior to beginning employment, and patient rights. These laws and regulations
could limit our ability to expand into new markets and to expand our services and facilities in existing markets.
Medicare. All providers are subject to compliance with various federal, state and local statues and regulations in the U.S. and receive periodic inspection
by state licensing agencies to review standards of medical care, equipment and safety.
Conditions of Participation. Our home health and hospice operations must comply with regulations promulgated by the United States
Department of Health and Human Services (“HHS”) and CMS in order to participate in the Medicare program and receive Medicare payments. Among
other things, these conditions of participation (the “CoPs”), relate to the type of operation, its personnel and its standards of medical care, as well as its
compliance with state and local laws and regulations.
Home Health Quality Reporting Requirements. The CoPs require home health agencies to submit quality reporting data through Outcome and
Assessment Information Set (“OASIS”) assessments within 30 days of completing the assessment of the Medicare and Medicaid beneficiary as a
condition of payment and for quality measurement purposes. If the OASIS assessment is not found in CMS's quality system upon receipt of a final claim
for a home health episode and the receipt date of the claim is more than 30 days after the assessment completion date, CMS will deny the claim. Home
health agencies that do not submit quality measure data to CMS incur a 2% reduction in their annual home health payment update. Under the rule, all
home health agencies are required to timely submit both a Start of Care or Resumption of Care OASIS assessment and a Transfer or Discharge OASIS
assessment for a minimum of 90% of all episodes.
In addition, CMS requires that all Medicare certified home health and hospice agencies participate in the Consumer Assessment of Healthcare
Providers and Systems (“CAHPS”). CAHPS surveys are designed to produce comparable data on the perspective of patients and their caregivers that
allows meaningful and objective comparisons between agencies. Home health and hospice agencies that do not submit the required data incur a 2%
reduction in their annual base rate payment update.
Home Health Star Rating. As a consumer tool for selecting a home health provider, CMS has used a five-star rating model to rate home health
agencies since 2015. This Quality of Patient Care Star Rating is a summary measure of a home health agency’s performance based upon how well it
provides patient care. CMS uses seven measurements indicating quality to determine its rating, including how often the agency initiated care in a timely
manner, how often patients demonstrated improvements in ambulation, bed transferring, bathing, oral medication administration, decreased pain with
activity, less shortness of breath, and decreased need for acute care hospitalization. According to CMS, a 3-star rating means the agency provides good
quality of care. According to CMS Home Health Compare star rating criteria, our home health agencies have achieved an average of 4.4 out of 5 stars
across all agencies compared to the industry average of 3.0 stars for the year ended December 31, 2021.
Home Health Reimbursement, including HH PPS and PDGM. To qualify for home health services, Medicare CoPs require that beneficiaries
(1) be homebound (meaning that the beneficiary is unable to leave his/her home without a considerable and taxing effort); (2) require intermittent skilled
nursing, physical therapy or speech therapy services; (3) have a face to face encounter that (a) has occurred no more than 90 days prior to the start of care
or within 30 days after the start of care, (b) was related to the primary reason the patient requires home health services, and (c) was performed by a
physician or allowed non-physician provider; and (4) receive treatment under a plan of care established and periodically reviewed by a physician.
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Through December 31, 2019, under the Medicare HH PPS, Medicare pays home health agencies a predetermined base payment adjusted for
case-mix (the health condition and care needs of the beneficiary), as well as geographic differences in wages for home health agencies across the country.
There are also outlier payments to account for beneficiaries who incur unusually large costs. For patients who do not receive at least a specified number of
visits during their episode of care, HH PPS uses a low-utilization payment adjustment (“LUPA”). Until January 1, 2020, HH PPS provided home health
agencies with payments for each 60-day episode of care for each beneficiary. There were no limits to the number of episodes an eligible beneficiary can
receive.
In October 2019, CMS issued a final rule implementing PDGM. The PDGM reimbursement structure involves case mix calculation methodology
refinements, changes to LUPA thresholds, the elimination of therapy thresholds, a change to the unit of payment from a 60-day episode to a 30-day
payment period, and the reduction in fiscal year 2020 and full elimination in fiscal year 2021 of the RAP. Effective January 1, 2020, under PDGM the
initial certification of patient eligibility, plan of care, and comprehensive assessment remains valid for 60-day episodes of care and payments for home
health services are made based upon 30-day periods. During 2020, we received 20% of the estimated payment for a patient’s initial or subsequent period
of care up-front (after the initial assessment is completed and upon initial billing) and the remaining 80% upon submission of the final claim following the
30-day period of care. Beginning on January 1, 2022, the RAP process is replaced by a home health agency filing a NOA to cover continuous 30-day
periods of care until the patient is discharged. Within five calendar days of beginning care, home health agencies must submit a NOA or else face a
reduction in the payment that is equal to a 1/30th reduction of the expected wage and case-mix adjusted 30-day payment period for each day from the start
of care, equal to the current late submission deduction for RAPs. PDGM’s ultimate impact will vary by provider based on factors including case-mix,
admission source, and providers’ ability to adapt to the new reimbursement model's coding and therapy thresholds.
Home Health Value Based Purchasing (HH VBP). The Center for Medicare and Medicaid Innovation (“Innovation Center”) implemented the
original Home Health Value-Based Purchasing (“HHVBP”) Model from January 1, 2016 through December 31, 2021. The model was designed to support
greater quality and efficiency of care among Medicare-certified Home Health Agencies (“HHA”) across the nation. The HHVBP Model supported efforts
to build a health care system that delivers better care, spends health care dollars more wisely, and results in healthier people and communities. All
Medicare-certified HHAs that provided services in Massachusetts, Maryland, North Carolina, Florida, Washington, Arizona, Iowa, Nebraska, and
Tennessee competed on value, where payment was tied to quality performance. The overall purpose of the HHVBP Model was to improve the quality and
delivery of home health care services to Medicare beneficiaries with specific goals to; provide incentives for better quality care with greater efficiency,
study new potential quality and efficiency measures for appropriateness in the home health setting, and, enhance the public reporting process. The
HHVBP Model was expanded nationwide in the Calendar Year (“CY”) 2022 HH PPS rule. In addition, the rule finalized the end of the HHVBP Model
one year early for the HHAs in the nine original Model states, such that CY 2020 performance data will not be used to calculate a payment adjustment for
HHAs in the nine states and will not have their payments impacted in CY 2022.
The expanded HHVBP Model begins on January 1, 2022 and includes Medicare-certified HHAs in all fifty (50) states. Calendar Year 2022 is the
pre-implementation year wherein CMS will provide HHAs with resources and training. This will allow HHAs time to prepare and learn about the
expectations and requirements of the expanded HHVBP Model without risk to payments. The first full performance year for the expanded HHVBP Model
is CY 2023 (beginning January 1, 2023). Calendar Year 2025 will be the first year when payment will be adjusted determined on CY 2023 performance.
Review Choice Demonstration for Home Health Services. The Review Choice Demonstration for Home Health Services (RCD) provides
flexibility and choice for Home Health Agencies (HHAs), as well as risk-based changes to reduce burden on providers demonstrating compliance with
Medicare home health policies. The demonstration is mandatory for all Medicare certified HHAs in 5 states Illinois, Ohio, North Carolina, Floria and
Texas. Providers select from three initial choices:
Pre-claim review
Post-payment review
•
•
• Minimal post-payment review with a 25% payment reduction
After a 6-month period, HHAs demonstrating compliance with Medicare rules through pre-claim review or postpayment review will have
additional choices, including relief from most reviews except for a review of a small sample of claims. (To be eligible, HHAs must meet a 90% target full
provisional affirmation rate based on a minimum 10 requests/claims submitted.) This program is designed to reduce the number of Medicare appeals,
improve provider
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compliance with Medicare program requirements, should not delay care to Medicare beneficiaries, and does not alter the Medicare home health benefit.
Hospice Reimbursement and Cap Amounts. Payments are based on daily rates for each day a beneficiary is enrolled in the hospice benefit and
are subject to two annual caps. Rates are set based on specific levels of care, are adjusted by a wage index to reflect healthcare labor costs across the
country and are established annually through federal legislation. The following are the four levels of care provided under the hospice benefit:
•
Routine Home Care (“RHC”). Care that is not classified under any of the other levels of care, such as the work of nurses, social workers or
home health aides.
• General Inpatient Care. Pain control or acute or chronic symptom management that cannot be managed in a setting other than an inpatient
Medicare-certified facility, such as a hospital, skilled nursing facility or hospice inpatient facility.
•
•
Continuous Home Care. Care for patients experiencing a medical crisis that requires nursing services to achieve palliation and symptom
control, if the agency provides a minimum of eight hours of care within a 24-hour period.
Inpatient Respite Care. Short-term, inpatient care to give temporary relief to the caregiver who regularly provides care to the patient.
CMS has established a two-tiered payment system for RHC. Hospices are reimbursed at a higher rate for RHC services provided from days of
service one through 60 and then a lower rate for all subsequent days of service. CMS also provided for a Service Intensity Add-On, which increases
payments for certain RHC services provided by registered nurses and social workers to hospice patients during the final seven days of life.
Medicare payments are subject to two fixed annual caps, which are assessed on a provider number basis, and are broken into an inpatient cap
amount and an overall payment cap. These cap amounts are calculated and published by the Medicare fiscal intermediary on an annual basis covering the
period from October 1 through September 30. The inpatient cap limits hospice care provided on an inpatient basis. This cap limits the number of days that
are paid at the higher inpatient care rate to 20.0% of the total number of days of hospice care that are provided to all Medicare beneficiaries served by a
provider. The daily rate for all days exceeding the cap is the standard RHC daily rate, and the provider must reimburse Medicare for any payments
received in excess of that amount. The overall payment cap is calculated by the Medicare fiscal intermediary at the end of each hospice cap period to
determine the maximum allowable payments to a hospice provider during the period. We estimate our potential cap exposure by using available
information to compare our actual reimbursement for all hospice services provided during the period to the number of beneficiaries we served multiplied
by the statutory per beneficiary cap amount. If payments received by any one of our hospice provider numbers exceeds either of these caps, we are
required to reimburse Medicare for payments received in excess of the cap amounts. The hospice cap amount for the 2022 cap year is equal to the 2021
cap amount of $30,683.93 updated by 2% or $31,297.61 per beneficiary.
Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”). The IMPACT Act requires the submission of
standardized assessment data for quality improvement, payment and discharge planning purposes across the spectrum of post-acute care providers
(“PACs”), including home health agencies. The IMPACT Act requires PACs to report: (1) standardized patient assessment data at admission and
discharge; (2) new quality measures, including functional status, skin integrity, medication reconciliation, incidence of major falls, and patient preference
regarding treatment and discharge; and (3) resource use measures, including Medicare spending per beneficiary, discharge to community, and
hospitalization rates of potentially preventable readmissions for home health agencies. Failure to report such data when required would subject a PAC to a
2% reduction in market basket prices then in effect.
The IMPACT Act also included provisions impacting Medicare-certified hospices, including (1) increasing survey frequency for Medicare-
certified hospices to once every 36 months, (2) imposing a medical review process for operations with a high percentage of stays in excess of 180 days,
and (3) updating the annual aggregate Medicare payment cap.
Hospice Quality Reporting Requirements (“HQRP”). HQRP, mandated by the Patient Protection and Affordable Care Act, requires hospice agencies to
submit required quality data for inclusion on the public facing Hospice Compare website
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hosted by CMS. Hospices that fail to meet quality reporting requirements receive a 2.0% reduction to the annual market basket update for the fiscal years 2021,
2022, and 2023. This reduction penalty will be increased to 4.0% beginning in fiscal year 2024.
Licensure and Certificates of Need (“CON”). Home health, hospice and most senior living communities operate under licenses granted by the health
authorities of their respective states. Some states require healthcare providers (including home health, hospice and most senior living providers) to obtain prior
state approval for the purchase, construction or expansion of healthcare operations, or changes in services. Certain states, including a number in which we operate,
carefully restrict new entrants into the market based on demographic and/or demonstrative usage of additional providers. These states limit the entry of new
providers or services and the expansion of existing providers or services in their markets through a CON process, which is periodically evaluated and updated as
required by applicable state law. For those states that require a CON, we must also complete a separate application process establishing a location and must receive
required approvals. Washington and Montana are the only CON state in which we operate home health or hospice agencies.
Patient Protection and Affordable Care Act (“ACA”). Various healthcare reform provisions became law upon enactment of the ACA in 2010. The
reforms contained in the ACA have affected our independent operating subsidiaries in some manner and are directed in large part at increased quality and cost
reductions. These reforms include modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and
the imposition of enrollment limitations on new providers. Presidential and congressional elections may result in significant changes in legislation, regulation, and
implementation of Medicare, Medicaid, and government policy, along with potential changes to tax rates and other tax treatment of our operations. We continually
monitor these developments so we can respond to the changing regulatory environment impacting our business.
Civil and Criminal Fraud and Abuse Laws and Enforcement. Various complex federal and state laws exist which govern a wide array of referrals,
relationships and arrangements, and prohibit fraud by healthcare providers. Governmental agencies are devoting increasing attention and resources to such anti-
fraud efforts. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and the Balanced Budget Act of 1997 (“BBA”) expanded the penalties
for healthcare fraud. Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its
behalf may bring an action under the False Claims Act (“FCA”), alleging that a healthcare provider has defrauded the government by submitting a claim for items
or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports. The Fraud
Enforcement and Recovery Act of 2009 (“FERA”) expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly
avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. The FCA clarifies that if an item or service
is provided in violation of the Anti-Kickback Statute, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a
false claim. Civil monetary penalties (“CMPs”) under the FCA range from approximately $11,803 to $23,607 and are adjusted annually for inflation. Under the qui
tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a
percentage of the federal government’s recovery. Due to these whistleblower incentives, lawsuits have become more frequent. Many states also have a false claim
prohibition that mirrors or tracks the federal FCA. Federal law also provides that the Office of the Inspector General for HHS (“OIG”) has the authority to exclude
individuals and entities from federally funded health care programs on a number of grounds, including, but not limited to, certain types of criminal offenses,
licensure revocations or suspensions, and exclusion from state or other federal healthcare programs. In addition, CMS can recover overpayments from health care
providers up to five years following the year in which payment was made.
Monitoring Compliance in our Operations. As a healthcare provider, we have a compliance program to help us comply with various requirements of
federal, state and private healthcare programs. Our compliance program includes, among other things, (1) policies and procedures modeled after applicable laws,
regulations, government manuals and industry practices and customs that govern the clinical, reimbursement and operational aspects of our subsidiaries; (2)
training about our compliance process for the employees of our independent operating subsidiaries, our directors and officers; (3) training about Medicare and
Medicaid laws, fraud and abuse prevention, clinical standards and practices, and claim submission and reimbursement policies and procedures for appropriate
employees; and (4) internal controls that monitor, for example, the accuracy of claims, reimbursement submissions, cost reports and source documents, provision
of patient care, services, and supplies as required by applicable standards and laws, accuracy of clinical assessment and treatment documentation, and
implementation of judicial and regulatory requirements (e.g., background checks, licensing and training).
Additionally, governmental agencies and other authorities periodically inspect our operations to assess our compliance with various standards, rules and
regulations. The robust regulatory and enforcement environment continues to impact healthcare providers, especially in connection with responses to any alleged
noncompliance identified in periodic surveys and other inspections by governmental authorities. Unannounced surveys or inspections generally occur at least
annually at our independent operating subsidiaries and may also follow a government agency's receipt of a complaint about an operation. We
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are also subject to regulatory reviews relating to Medicare services, billings and potential overpayments resulting from the Recovery Audit Contractors, Zone
Program Integrity Contractors, Program Safeguard Contractors, Unified Program Integrity Contractors, Supplemental Medical Review Contractors and Medicaid
Integrity Contributors programs in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify
potential improper payments under the Medicare programs. We must pass these inspections to maintain our licensure under state law, to obtain or maintain
certification under the Medicare and Medicaid programs, to continue participation in the Veterans Administration (VA) program at some operations, and/or to
comply with our provider contracts with managed care clients at many operations. From time to time, we, like others in the healthcare industry, may receive
notices from federal and state regulatory agencies alleging that we failed to substantially comply with applicable standards, rules or regulations. These notices may
require us to take corrective action, may impose CMPs for noncompliance, and may threaten or impose other operating restrictions. If our operations fail to comply
with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and regulations, we could lose our certification as a
Medicare or Medicaid provider, lose our state licenses to operate and be subject to imposed fines and penalties.
Healthcare operations in our industries with otherwise acceptable regulatory histories are generally given an opportunity to correct deficiencies and
continue their participation in the Medicare and Medicaid programs by a certain date, usually within nine months, although where denial of payment or similar
remedies are asserted, such interim remedies go into effect much sooner. Operations with poor regulatory histories continue to be classified by CMS as poor
performing operations notwithstanding any intervening change in ownership, unless the new owner obtains a new Medicare provider agreement instead of
assuming the operation's existing agreement. However, new owners (including us, historically) nearly always assume the existing Medicare provider agreement
due to the difficulty and time delays generally associated with obtaining new Medicare certifications, especially in previously-certified locations with sub-par
operating histories. Accordingly, operations that have poor regulatory histories before we acquire them may be more likely to have sanctions imposed upon them
by CMS or state regulators.
Regulations Regarding Financial Arrangements. We are also generally subject to federal and state laws that regulate financial arrangements by
healthcare providers, such as the federal and state anti-kickback laws, the Stark laws, and various state anti-referral laws.
The Anti-Kickback Statute, Section 1128B of the Social Security Act (the “Anti-Kickback Statute”) prohibits the knowing and willful offer, payment,
solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in-kind, to induce the referral of an individual, in return for
recommending, or to arrange for, the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or
Medicaid. The OIG has issued regulations that create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-
Kickback Statute. In order to receive safe harbor protection, all of the requirements of a safe harbor must be met. The fact that a given business arrangement does
not fall within one of these safe harbors, however, does not render the arrangement per se illegal. Business arrangements of healthcare service providers that fail to
satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible
sanctions by enforcement authorities.
Violations of the Anti-Kickback Statute can result in criminal penalties of up to $100,000 and ten years’ imprisonment. Violations of the Anti-Kickback
Statute can also result in CMPs of over $100,000 per violation (adjusted annually for inflation) and an assessment of up to three times the total amount of
remuneration offered, paid, solicited, or received. Violation of the Anti-Kickback Statute may also result in an individual’s or organization’s exclusion from future
participation in Medicare, Medicaid and other state and federal healthcare programs. State Medicaid programs are required to enact an anti-kickback statute. Many
states in which we operate have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the
payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care. We believe that business practices of providers and
financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue at the federal and state levels.
In addition to these regulations, we may face adverse consequences if we violate the federal Stark laws related to certain Medicare physician referrals.
Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a
“designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement
meets an exception under the Stark Law or its regulations. Any funds collected for an item or service resulting from a referral that violates the Stark Law must be
repaid to Medicare or Medicaid, any other third-party payor, and the patient. In addition, CMPs, which are adjusted for annual inflation, and treble damages may
be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. These CMPs include a penalty of over $25,000
per prohibited claim, and over $170,000 for knowingly entering into certain prohibited cross-referral schemes (adjusted annually for inflation), and potential
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exclusion from Medicare for any person who presents or causes to be presented a bill or claim the person knows or should know is submitted in violation of the
Stark laws. Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the
designated health services under the Stark Law.
Regulations Regarding Patient Record Confidentiality. We are also subject to laws and regulations enacted to protect the confidentiality of patient health
information. For example, HHS has issued rules pursuant to HIPAA as amended by the Health Information Technology for Economic and Clinical Health
(“HITECH”) Act, which relate to the privacy of certain patient information and provide patients with the right of access to their health information. These rules
govern our use and disclosure of protected health information. We have established policies and procedures to comply with HIPAA privacy, security and breach
notification requirements at our facilities and operations subject to HIPAA. We maintain a company-wide HIPAA compliance plan, which we believe complies
with the HIPAA regulations. The HIPAA regulations have and will continue to impose significant costs on our facilities in order to comply with these standards.
Our operations are also subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws
vary and could impose additional penalties for privacy and security breaches.
Antitrust Laws. We are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare providers is common, and
antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, joint venture, merger, affiliation and
acquisition activities. In some respects, the application of federal and state antitrust laws to healthcare is still evolving, and enforcement activity by federal and
state agencies appears to be increasing. At various times, healthcare providers and insurance and managed care organizations may be subject to an investigation by
a governmental agency charged with the enforcement of antitrust laws or may be subject to administrative or judicial action by a federal or state agency or a
private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.
Regulations Specific to Senior Living Communities. Senior living services revenue is primarily derived from private pay residents at rates we establish
based upon the needs of the resident, the amount of services we provide the resident, and market conditions in the area of operation. In addition, Medicaid or other
state-specific programs may supplement payments for board and care services provided in senior living communities. A majority of states provide, or are approved
to provide, Medicaid payments for personal care and medical services to some residents in licensed senior living communities under waivers granted by or under
Medicaid state plans approved by CMS. State Medicaid programs control costs for assisted living and other home- and community-based services by various
means such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists. States that administer Medicaid programs for services in
senior living communities are responsible for monitoring the services at, and physical conditions of, the participating communities. As a result of the growth of
assisted living in recent years, states have adopted licensing standards applicable to assisted living communities. Most state licensing standards apply to assisted
living communities regardless of whether they accept Medicaid funding.
Our senior living segment is subject to a variety of federal, state and local environmental laws and regulations. As a senior living services provider, we
face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste management and disposal, asbestos management,
response to mold and lead-based paint in our facilities and employee safety.
As an operator of our communities, we also may be required to investigate and remediate hazardous substances that are located on and/or under the
property, including any such substances that may have migrated off, or may have been discharged or transported from the property. Part of our operations involves
the handling, use, storage, transportation, disposal and discharge of medical, biological, infectious, toxic, flammable and other hazardous materials, wastes,
pollutants or contaminants. In addition, we are sometimes unable to determine with certainty whether prior uses of our communities and properties or surrounding
properties may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making such determinations is
not deemed cost-effective. These activities, as well as the possible presence of such materials in, on and under our properties, may result in damage to individuals,
property or the environment; may interrupt operations or increase costs; may result in legal liability, damages, injunctions or fines; may result in investigations,
administrative proceedings, penalties or other governmental agency actions. Associated costs may not be covered by insurance.
Available Information
We are subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act). Consequently, we are required
to file reports and information with the Securities and Exchange Commission (“SEC”), including reports on the following forms: annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
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Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports and other information
concerning our company may be accessed through the SEC’s website at http://www.sec.gov.
You may also find on our website at www.pennantgroup.com electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such filings are placed on
our website as soon as reasonably possible after they are filed with the SEC. All such filings are available free of charge. Information contained in our website is
not deemed to be a part of this Annual Report on Form 10-K.
Item 1A. Risk Factors -
Based on the information currently known to us, we believe that the following information identifies material risk factors affecting our company. However,
the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties may also adversely affect our business. If any of the
following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of
operations. In such case, the trading price of our common stock could decline.
Risks Related to Our Business and Industry
Our revenue could be impacted by federal changes to reimbursement and other aspects of Medicare. We derived 49.3% of our revenue from the Medicare
program for the year ended December 31, 2021, which is typical. In addition, other payors may use published Medicare rates as a basis for reimbursements. The
Medicare program and its reimbursement rates, caps, deductibles and rules are subject to frequent change for a variety of reasons, each of which is discussed in
Item 1., Government Regulation. Budget pressures also frequently lead the federal government to reduce or limit reimbursement rates under Medicare.
Additionally, Medicare payments can be delayed or declined (including retroactively) due to determinations that certain costs, services or providers are not
covered. Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the way these programs pay
for services or what services or providers are covered, our business and results of operations would be adversely affected. CMS has also introduced in the past, and
will likely introduce in the future, new payment models, such as value-based arrangements, in markets in which we operate. Those models may depend on the
formation of preferred provider relationships among payors and providers. Our operations may not successfully implement or adapt to these changes and our
operations could be materially impacted. As discussed below, Medicare reimbursement and participation may also be tied to the vaccination of employees pursuant
to a new interim final rule published by CMS on November 5, 2021. After initial litigation, the United States Supreme Court stayed injunctions that had been
entered against CMS’ enforcement of this rule as of January 13, 2022, allowing this interim final rule requiring employees of certain Medicare-participating
facilities and services including home health agencies and hospices to be vaccinated, which affects our businesses and employees.
Reductions in Medicaid reimbursement rates or changes in the rules governing the Medicaid program could have a material, adverse effect on our revenues,
financial condition and results of operations. We derived 13.3% of our revenue from Medicaid programs for the year ended December 31, 2021, which is typical.
Medicaid is a state-administered program financed by both state funds and matching federal funds and its reimbursement rates and rules are subject to frequent
change (including retroactively) at both the federal and state level, as discussed in Item 1., Government Regulation. Any budget reductions or funding restrictions,
discontinuance or reduction of federal matching, change in payment methodology or delays in states in which we operate could adversely affect our net patient
service revenue and profitability. We can expect continuing cost containment pressures on Medicaid outlays for our services.
Reforms to the U.S. healthcare system continue to impose new requirements upon us and may lower our reimbursements. The ACA included sweeping changes
to how healthcare is paid for and furnished in the United States. The ACA continues to face legal challenges and calls for repeal or amendment. We cannot predict
what effect these challenges, or other legislative or regulatory changes (including, for instance, proposals for Medicare for All or public option insurers operated by
one or more individual states), will have on our business, including the demand for our services or the amount of reimbursement available for those services. It is
possible new laws may lower reimbursement or increase the cost of doing business and adversely affect our business.
We are subject to various government reviews, audits and investigations that could adversely affect our business, including an obligation to refund amounts
previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of our right to participate in Medicare and Medicaid programs. As
discussed in greater detail in Item 1., Government Regulation, as a result of our participation in the Medicaid and Medicare programs, we are frequently subject to
various governmental reviews, audits and investigations to verify our compliance with these programs. Private pay sources also reserve the right to conduct audits.
Disagreements about billing and reimbursement are common in our industry due in part to the subjectivity
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inherent in patient diagnosis and care, record keeping, claims processing and other aspects of the patient service and reimbursement processes. An adverse review,
audit or investigation could result in (1) an obligation to refund amounts previously paid to us by payors in amounts that could vastly exceed the revenue derived
from claims actually reviewed in the audit, and could be material to our business; (2) state or federal agencies imposing fines, penalties and other sanctions on us;
(3) suspension of Medicare or Medicaid payments (4) loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks;
(5) an increase in private litigation against us; and (6) damage to our reputation in various markets.
In cases where claim and documentation review by any CMS contractor results in repeated poor performance, an operation can be subjected to protracted
oversight, and sustained failure to demonstrate improvement towards meeting all claim filing and documentation requirements could ultimately lead to Medicare
decertification. Additionally, both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of
numerous ongoing investigations of healthcare companies. The focus of these investigations includes, among other things: cost reporting and billing practices;
quality of care; financial relationships with referral sources; and medical necessity of services provided. If any of our affiliated operations is decertified, loses its
licenses, or is subject to criminal charges or civil claims, administrative sanctions or penalties, our revenue, financial condition or results of operations would be
adversely affected. We or some of the key personnel of our independent operating subsidiaries could also be temporarily or permanently excluded from future
participation in state and federal healthcare reimbursement programs such as Medicaid and Medicare. In addition, the report of such issues at any of our affiliated
operations could harm our reputation for quality care and could cause us to be in default under some of our agreements, including agreements governing
outstanding indebtedness. Responding to audits, litigation or enforcement efforts diverts material time, resources and attention, and could have a materially
detrimental impact on our results of operations during and after any such investigation or proceedings, regardless of whether we prevail.
If we do not operate in compliance with the extensive laws and regulations to which we are subject, or if these laws and regulations change, we could be
required to make significant expenditures or change our operations to bring our operations into compliance. We, like other companies in the healthcare
industry, are required to comply with extensive and complex laws and regulations at the federal, state and local government levels as discussed in greater detail in
Item 1., Government Regulation. These laws and regulations are subject to frequent and unpredictable change. If we fail to comply with these applicable laws and
regulations, we could suffer civil or criminal penalties and other detrimental consequences, including denial of reimbursement, imposition of fines, temporary
suspension of admission of new patients, suspension or decertification from the Medicaid and Medicare programs, restrictions on our ability to acquire new
operations or expand or operate existing operations, the loss of our licenses to operate and the loss of our ability to participate in federal and state reimbursement
programs. These laws and regulations are complex, and we do not always have the benefit of significant regulatory or judicial interpretation of these laws and
regulations. Changing interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or
illegality or could require us to change our operations, equipment, personnel, services, capital expenditure programs and operating expenses.
Public and government calls for increased survey and enforcement efforts toward our industries could result in increased scrutiny and potential sanctions or
costly remedies. Government authorities have increased the scope or number of inspections or surveys and the severity of consequent citations for alleged failure
to comply with regulatory requirements. As discussed in Item 1., Government Regulation, from time to time in the ordinary course of business, we receive
deficiency reports from state and federal regulatory bodies resulting from such inspections or surveys. Although most inspection deficiencies are resolved through
an agreed-upon plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified operation, which
could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension of new admission or bed
holds, loss of certification as a provider under state or federal healthcare programs, or imposition of other sanctions, including criminal penalties. Furthermore, in
some states, citations in one operation can impact other operations in the state. Revocation of a license or decertification at a given operation could therefore
impair our ability to obtain new licenses or to renew existing licenses at other operations, which may also trigger defaults or cross-defaults under our leases and
our credit arrangements, or adversely affect our ability to operate in the future. If state or federal regulators were to determine, formally or otherwise, that one
operation’s regulatory history ought to impact another of our existing or prospective communities, this could also increase costs, result in increased scrutiny by
state and federal survey agencies, and impact our expansion plans. In addition, from time to time, we may opt to voluntarily stop accepting new patients pending
completion of a new state survey, to avoid straining staff and other resources while retraining staff, upgrading operating systems or making other operational
improvements, all of which can impact our financial results.
Future cost containment initiatives undertaken by payors may limit our future revenue and profitability. Our Managed Care revenue and profitability may be
affected by continuing efforts of third-party payors to maintain or reduce costs of healthcare by lowering payment rates, narrowing the scope of covered services
and network providers, increasing case management review of services and negotiating pricing. In addition, sustained unfavorable economic conditions may affect
the number of
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patients enrolled in managed care programs and the profitability of managed care companies, which could result in reduced revenue. There can be no assurance
that third-party payors will make timely payments for our services, or that we will continue to maintain our current payor or revenue mix. We are continuing our
efforts to develop our private pay sources of revenue. Any changes in payment levels from current or future third-party payors could have a material adverse effect
on our business and combined financial condition, results of operations and cash flows.
Increased competition for, or a shortage of, nurses and other skilled personnel could increase our staffing and labor costs and negatively impact our
operations. Our success depends upon our ability to retain and attract nurses, certified nurse assistants, social workers and speech, physical and occupational
therapists, as well as skilled personnel who are responsible for the day-to-day operations of each of our affiliated operations. If we fail to attract and retain
qualified and skilled personnel, or if the associated costs increase, our independent operating subsidiaries’ ability to conduct their business operations effectively
could be harmed. Staffing challenges have increased during the pandemic due to health care worker burnout, COVID exposures, vaccine mandates, and wage
inflation, increasing the competition for qualified staff and cost of retaining personnel.
We depend on our management team and local leaders, and the loss of their services could harm our business. We believe that our success depends in part on
the continued services of our executive management and local leadership teams. The loss of, or failure to recruit, such key personnel could have a material adverse
effect on our business and could adversely affect our strategic relationships and impede our ability to execute our business strategies. The market for qualified
individuals is highly competitive and finding and recruiting suitable replacements for our leaders may be difficult, time consuming and costly.
Our hospice independent operating subsidiaries are subject to annual Medicare caps calculated by Medicare. With respect to our hospice independent operating
subsidiaries, overall payments made by Medicare for each Medicare beneficiary are subject to caps calculated by Medicare, as discussed in greater detail in Item
1., Government Regulation. If payments received by any one of our hospice provider numbers exceeds the caps for the beneficiary, we are required to reimburse
Medicare for payments received in excess of the caps, which could have a material adverse effect on our business.
Security breaches and other cyber-security incidents could subject us to significant liability. Our business is dependent on the proper functioning and availability
of our computer systems and networks. Our safety and security measures designed to protect our information systems, data and patient health information and
disaster recovery plan may not prevent damage, interruption, or breach of our information systems and operations. In addition, hardware, software or applications
we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our
information systems. Unauthorized parties may attempt to gain access to our systems or operations, or those of third parties with whom we do business, through
fraud or other forms of deceiving our employees or contractors. In addition, costs and potential problems and interruptions associated with the implementation of
new or upgraded systems and technology or with maintenance or adequate support of existing systems also could disrupt or reduce the efficiency of our operations.
If a cyber-security attack or other unauthorized attempt to access our systems or operations were to be successful, it could result in the theft, destruction, loss,
misappropriation or release of confidential information or intellectual property, and could cause operational or business delays or disruptions that may materially
impact our ability to provide various healthcare services. Any successful cyber-security attack or other unauthorized attempt to access our systems or operations
also could result in negative publicity which could damage our reputation or brand with our patients, referral sources, payors or other third parties and could
subject us to substantial regulatory, civil or criminal penalties, fines, investigations and enforcement actions, including under HIPAA and other federal and state
privacy laws, including, for example, the California Consumer Privacy Act, which includes a private right of action that may expose us to private litigation
regarding our privacy practices and significant damages awards or settlements in civil litigation.
State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of the number of home health, hospice or senior living
operations could impair our ability to expand or result in increased competition. As discussed in greater detail in Item 1., Government Regulation, our ability to
acquire or establish new home health, hospice or senior living operations or expand or provide new services at existing operations would be adversely affected if
we are unable to obtain the necessary approvals, if there are changes in the standards applicable to those approvals, or if we experience delays and increased
expenses associated with obtaining those approvals. We may not be able to obtain licensure, CON approval, Medicare or Medicaid certification, Attorney General
approval or other necessary approvals for future expansion projects. Conversely, and specific to the highly competitive senior living industry, the elimination or
reduction of state regulations that limit the construction, expansion or renovation of new or existing communities could result in increased competition to us. In
general, regulatory and other barriers to entry in the senior living industry are not prohibitive. Over the last several years, there has been a significant increase in
the construction of new senior living communities, including in the markets where we provide services. This has resulted in increased competition in many of our
markets. Such new competition may limit our ability to attract new residents, raise rents or otherwise expand our senior living business, which could have a
material adverse effect on our revenues, results of operations and cash flow.
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Changes in federal and state employment-related laws and regulations could increase our cost of doing business. Our independent operating subsidiaries are
subject to a variety of federal and state employment-related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act which governs
such matters as minimum wages, overtime and other working conditions, the Americans with Disabilities Act (the “ADA”) and similar state laws that provide civil
rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, the National Labor Relations Act,
regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of state Attorneys General, family leave
mandates and a variety of similar laws. Because labor represents a large portion of our operating costs, changes in federal and state employment-related laws and
regulations could increase our cost of doing business. We also may be subject to employee-related claims such as wrongful discharge, discrimination or violation
of equal employment law. Employment claims, such as wage and hour claims, frequently are the subject of class action lawsuits in many states in which our
independent affiliates operate, including, for example, California.
Required regulatory approvals could delay or prohibit transfers of our healthcare operations, which could result in periods in which we are unable to receive
reimbursement for such properties. Our independent operating subsidiaries must be licensed under applicable state law and, depending upon the type of
operation, certified or approved as providers under the Medicare and/or Medicaid programs. In the process of acquiring or transferring operating assets, our
operations must receive change of ownership approvals from state licensing agencies, Medicare and Medicaid, and third party payors. If there are any delays in
receiving regulatory approvals from the applicable federal, state or local government agencies, or the inability to receive such approvals, such delays could result
in delayed or lost reimbursement related to periods of service prior to the receipt of such approvals.
Compliance with federal and state fair housing, fire, safety and other regulations may require us to make unanticipated expenditures, which could be costly to
us. We must incur the expense of complying with the federal Fair Housing Act and similar state laws, and applicable fire and safety regulations, building codes
and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time and
the expense may be substantial. Changes to these laws may require us to close operations, limit occupancy, or make other costly changes.
Our revenue, financial condition and results of operations could be negatively impacted by any changes in the acuity mix of patients in our affiliated
operations as well as payor mix and payment methodologies. Our revenue is determined in part by the acuity of home health and hospice patients and senior
living residents. Changes in the acuity level of patients we attract, as well as our payor mix among Medicare, Medicaid, managed care organizations and private
payors, significantly affect our profitability because we generally receive higher reimbursement rates for high acuity patients and because the payors reimburse us
at different rates. For the year ended December 31, 2021, 62.6% of our revenue was provided by government payors that reimburse us at predetermined rates,
which is typical. If we fail to maintain our proportion of high acuity patients or if there is any significant increase in the percentage of the patients of our
independent operating subsidiaries for whom we receive Medicaid reimbursement, our results of operations may be adversely affected. Among other initiatives,
these payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend will
continue and may limit reimbursements for healthcare services. If insurers or managed care companies from whom we receive substantial payments were to reduce
the amounts they pay for services, we may lose patients if we choose not to renew our contracts with these insurers at lower rates.
We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards. Our business involves a significant risk
of liability given the age and health of the patients and residents of our independent operating subsidiaries and the services we provide. The frequency and severity
of litigation in the healthcare industry has increased, due in part to large verdicts and punitive damage awards. Claims are filed based upon a wide variety of
assertions and theories, including deficiencies in conditions of participation under certain state and federal healthcare programs and wage and hour class actions.
Plaintiffs’ attorneys have become increasingly aggressive in their pursuit of claims against healthcare providers, including home health, hospice and senior living
providers, employing a wide variety of advertising and solicitation activities to generate more claims. The defense of lawsuits may result in significant legal costs,
regardless of the outcome. Additionally, such litigation may result in increased liability insurance premiums and/or a decline in available insurance coverage
levels, which could materially and adversely affect our business, financial condition and results of operations.
Instances of noncompliance can decrease our revenue. As discussed under Item 1., Monitoring Compliance in our Operations, we have internal compliance
policies and procedures, including ongoing monitoring and controls, pursuant to which we have identified, and may in the future identify, deficiencies in the
assessment of and recordkeeping for patients and residents. We must accrue liabilities for claim costs and interest and repay any amounts due in normal course.
Failure to refund overpayments within required time frames (as described in greater detail under Item 1., Government Regulation) could result in FCA liability.
Additionally, federal and state mandates for vaccination of employees—or in some cases, state actions
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prohibiting vaccination—differ and may be difficult to comply with, and non-compliance may result in sanctions or other penalties assessed upon the Company. If
future investigations ultimately result in findings of significant billing and reimbursement noncompliance, which require us to record significant additional
provisions or remit payments, our business, financial condition and results of operations could be materially and adversely affected.
We may be unable to complete future acquisitions at attractive prices or at all, which may adversely affect our revenue growth. To date, our revenue growth has
been significantly accelerated by our acquisition of new operations. Subject to general market conditions and the availability of essential resources and leadership
within our company, we continue to seek home health, hospice and senior living acquisition opportunities that are consistent with our geographic, financial and
operating objectives. We face competition for the acquisition of operations and businesses and expect this competition to increase. Based upon factors such as our
ability to identify suitable acquisition candidates, the purchase price of the operations, prevailing market conditions, the availability of leadership to manage new
operations and our own willingness to take on new operations, the rate at which we have historically acquired home health, hospice and senior living operations
has fluctuated and we anticipate similar fluctuation in the future. Further, acquisitions may require financing, which may not be available to us or may be available
to us only on terms that are not favorable. If funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders
would be diluted, and any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. We may acquire
operations that prove to be non-strategic or less desirable, and we may consider disposing of such operations or exchanging them for operations which are more
desirable.
We may not be able to successfully integrate acquired operations, and we may not achieve the benefits we expect from our acquisitions. We may not be able to
successfully or efficiently integrate new acquisitions with our existing independent operating subsidiaries, culture and systems. We also may determine that
renovations of acquired operations and changes in staff and operating management personnel are necessary to successfully integrate those acquisitions into our
existing operations. We may not be able to recover the costs incurred to reposition or renovate newly independent operating subsidiaries. The financial benefits we
expect to realize from many of our acquisitions are largely dependent upon our ability to improve clinical performance, overcome regulatory deficiencies,
rehabilitate or improve the reputation of the operations in the community, increase and maintain census, control costs, and in some cases change the patient acuity
mix. Growth also places significant demands on our leaders and operational, financial and management information systems. If we are unable to accomplish any of
these objectives at the independent operating subsidiaries we acquire, we will not realize the anticipated benefits and we may experience lower than anticipated
profits, or even losses.
In undertaking acquisitions, we may be impacted by costs, liabilities and regulatory issues that may adversely affect our operations. In undertaking acquisitions,
we also may be adversely impacted by unforeseen liabilities attributable to the prior providers who operated the acquired operations, against whom we may have
little or no recourse. Many operations we have historically acquired were underperforming prior to the acquisition. Even where operations have been improved, we
still may face post-acquisition regulatory issues related to pre-acquisition events. These may include, without limitation, payment recoupment related to our
predecessors’ prior noncompliance, the imposition of fines, penalties, operational restrictions or special regulatory status. Further, we may incur post-acquisition
compliance risk due to the difficulty or impossibility of immediately or quickly bringing non-compliant operations into full compliance. Diligence materials
pertaining to acquisition targets, especially the underperforming operations that often represent the greatest opportunity for return, are often inadequate, inaccurate
or impossible to obtain, sometimes requiring us to make acquisition decisions with incomplete information. Operations that we have acquired or may acquire in the
future may generate unexpectedly low returns, may cause us to incur substantial losses, may require unexpected levels of management time, expenditures or other
resources, or may otherwise not meet a risk profile that our investors find acceptable. We also incur regulatory risk in acquiring certain operations due to the
licensing, certification and other regulatory requirements affecting our right to operate the acquired operations, which are frequently obtained post-closing. If we
were denied licensure or certification for any reason, we might not realize the expected benefits of the acquisition and would likely incur unanticipated costs and
other challenges which could cause our business to suffer.
If our referral sources fail to view us as an attractive provider, or if our referral sources otherwise refer fewer patients or residents, our patient or resident base
may decrease. We rely on appropriate referrals from physicians, hospitals and other healthcare providers in the communities we serve to attract appropriate
residents and patients to our affiliated operations. Our referral sources are not obligated to refer business to us and may refer business to other healthcare providers.
If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships, or if we are perceived by our referral sources as
not providing high quality patient care, our census could decline and our patient mix could change. In addition, if any of our referral sources have a reduction in
patients whom they can refer due to a decrease in their business, our census could decline and patient mix could change.
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If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, our
business may be negatively affected. Providing quality patient care is the cornerstone of our business. We believe that referral sources, residents and patients select
us in large part because of our reputation for delivering quality care. If we should fail to attain our goals regarding acute care hospitalization readmission rates and
other quality metrics, we expect our ability to generate referrals would be adversely impacted, which could have a material adverse effect upon our business and
combined financial condition, results of operations and cash flows.
If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely affected. It may become more
difficult and costly for us to obtain coverage for patient care liabilities and other risks, including property and casualty insurance. Our claims history, asset mix, or
other factors may adversely affect our ability to obtain insurance at favorable rates. Our insurance carriers may require us to pay substantially higher premiums for
the same or reduced coverage for insurance, including workers compensation, property and casualty, automobile, employment practices liability, directors and
officers liability, employee healthcare and general and professional liability coverages. Further, many claims and other risks we face are not insurable. Attributable
to the COVID-19 pandemic, insurers may increase their exclusions of infectious diseases or raise costs of coverage significantly affecting our ability to obtain
insurance coverage.
We retain certain risks related to our insurance coverage. Under its insurance policies, the Company bears the risk of loss up to specified deductible limits, which
may be substantial if there is a surge in the volume of claims subject to the deductible. The Company recognizes obligations associated with these costs in the
period in which a claim is incurred, including with respect to both reported claims and claims incurred but not reported. These costs generally are estimated based
on our historical claims experience. Projections of self-insured retention losses are estimates that are subject to significant variability, and as a result, actual losses
and expenses may be more or less than recorded liabilities.
The unionization of our workers may adversely affect our revenue and profitability. To date, our employees have chosen not to unionize. If they decide to
unionize, our cost of doing business could increase, our operations could experience disruption, and affected operations may no longer be economical to continue
operating.
Because we lease all of our affiliated senior living communities, we could experience risks associated with leased property, including risks relating to lease
termination, lease extensions and special charges, which could adversely affect our business, financial position or results of operations. As of December 31,
2021, we leased all of our senior living communities and administrative offices. Most of our leases are triple-net leases, which means that, in addition to rent, we
are required to pay for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). Under certain 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 provider requirements is a default under several of the leases and master lease agreements. In addition, lease defaults could trigger cross-default provisions in
our outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the
lease without the consent of the landlord.
A housing downturn could decrease demand for assisted living services. Seniors often use the proceeds of home sales to fund their admission to assisted living
communities. A downturn in the housing markets could adversely affect seniors’ ability to afford our resident fees and entrance fees. If national or local housing
markets enter a persistent decline, our occupancy rates, revenues, results of operations and cash flow could be negatively impacted.
Failure to generate sufficient cash flow to cover required payments or meet operating covenants under our long-term debt and operating leases could result in
defaults under such agreements and cross-defaults under other debt or operating lease arrangements, which could harm our independent operating
subsidiaries and cause us to lose operations or experience foreclosures. We have significant future operating lease obligations. We intend to continue financing
operations through long-term operating leases, mortgage financing and other types of financing, including borrowings under our future credit facilities we may
obtain. We may not generate sufficient cash flow from operations to cover required interest, principal and lease payments. If we are unable to generate sufficient
cash flow from operations in the future to service our debt or to make lease payments on our operating leases, we may be required, among other things, to seek
additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital
expenditures or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our debt or to make lease payments on our
operating leases. The failure to make required payments on our debt or operating leases or the delay or abandonment of our planned growth strategy could result in
an adverse effect on our future ability to generate revenue and sustain profitability and subject us to foreclosure. In addition, any such financing, refinancing or sale
of assets might not be available on terms that are economically favorable to us, or at all. Our financing arrangements contain restrictions, covenants and events of
default that, among other things, could limit our ability to respond to market conditions, provide for capital investment needs or take advantage of business
opportunities by restricting our ability to incur or guarantee additional
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indebtedness or requiring us to offer to repurchase such indebtedness in the event of a change of control or a change of control triggering event; pay dividends or
make distributions; make investments or acquisitions; sell, transfer or otherwise dispose of certain assets; create liens; consolidate or merge; enter into transactions
with affiliates; and prepay and repurchase or redeem certain indebtedness.
The condition of the financial markets, including volatility and deterioration in the capital and credit markets, could limit the availability of debt and equity
financing sources to fund the capital and liquidity requirements of our business, as well as negatively impact or impair the value of our future portfolio of
cash, cash equivalents and investments. Credit markets are cyclical. Volatility in financial and credit markets may reduce the availability of certain types of debt
financing and restrict the availability of credit. Further, we anticipate that our future cash, cash equivalents and investments may be held in a variety of interest-
bearing instruments. As a result of the uncertain domestic and global political, credit and financial market conditions, investments in these types of instruments
pose risks arising from liquidity and credit concerns.
Inflation may negatively impact profitability. The annual inflation rate of 7% in 2021 has impacted our operations, placing upward pricing pressure on all things
from wages to supplies to energy costs. Inflation is expected to continue in 2022 and may affect the Company’s profit in providing services. We have historically
derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs.
Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually. These adjustments may not continue in the
future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. Labor and supply expenses make
up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the
marketplace.
Delays in reimbursement may cause liquidity problems. If we experience problems with our billing information systems or if issues arise with Medicare,
Medicaid or other payors, we may encounter delays in our payment cycle. From time to time, we have experienced such delays as a result of government payors
instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment reviews. Some states in which we operate are operating with
budget deficits or could have a budget deficit in the future, which may delay reimbursement in a manner that would adversely affect our liquidity. In addition, from
time to time, procedural issues require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Unanticipated delays in
receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely impact our liquidity and working
capital. As discussed in Item 1., Government Regulation, with the elimination in fiscal year 2021 of RAPs and introduction of the NOA submission procedure, we
may experience higher receivables and reduced cash flows as collections are delayed upon implementation. Beginning in fiscal year 2022, CMS is replacing the
RAP process with the filing of a single NOA by home health agencies, which will cover continuous 30-day periods of care until the patient is discharged. This
transition may cause delays in payment from CMS or even denial of payment, as the NOA process will be new for both CMS and the Company.
Compliance with the regulations of the Department of Housing and Urban Development (“HUD”) may require us to make unanticipated expenditures which
could increase our costs. Seventeen of our affiliated senior living communities are currently subject to regulatory agreements with HUD that give the
Commissioner of HUD broad authority to require us to be replaced as the operator of those communities in the event that the Commissioner determines there are
operational deficiencies at such communities under HUD regulations. Compliance with HUD’s requirements can often be difficult because these requirements are
not always consistent with the requirements of other federal and state agencies and, in some instances, may require us to make additional capital expenditures to
meet HUD’s heightened requirements. Appealing a failed inspection can be costly and time-consuming and, if we do not successfully remediate the failed
inspection, we could be precluded from obtaining HUD financing in the future or we may encounter limitations or prohibitions on our operation of HUD-insured
communities.
Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our asset value.
Our independent operating subsidiaries are subject to regulations under various federal, state and local environmental laws, primarily those relating to the handling,
storage, transportation, treatment and disposal of medical waste; the identification and warning of the presence of asbestos-containing materials in buildings, as
well as the encapsulation or removal of such materials; and the presence of other substances in the environment. The presence of such materials may be unknown
and could result in remediation costs, fines, damages and other material harm to our business.
We are a holding company with no operations and rely upon our independent operating subsidiaries to provide us with the funds necessary to meet our
financial obligations. We are a holding company with no direct operating assets, employees or revenues. Each of our affiliated operations is operated through a
separate, independent subsidiary, which has its own management, employees and assets. Our principal assets are the equity interests we directly or indirectly hold
in our independent operating subsidiaries. As a result, we are dependent upon distributions from our subsidiaries to generate the funds necessary to meet our
financial obligations. Our subsidiaries are legally distinct from us and have no obligation to make funds
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available to us. The ability of our subsidiaries to make distributions to us will depend substantially on their respective operating results and will be subject to
restrictions under, among other things, the laws of their jurisdiction of organization, which may limit the amount of funds available for distribution to investors or
stockholders, agreements of those subsidiaries, the terms of our financing arrangements and the terms of any future financing arrangements of our subsidiaries.
Two of our directors continues to serve as a director on the Ensign board of directors, and ownership of shares of Ensign common stock or equity awards of
Ensign by our directors and executive officers may create conflicts of interest or the appearance of conflicts of interest. Two of our directors continues to serve
on the Ensign board of directors and substantially all of our executive officers and some of our non-employee directors own shares of Ensign common stock. This
could create, or appear to create, potential conflicts of interest when our or Ensign’s management or directors face decisions that could have different implications
for us and Ensign, including the resolution of any dispute regarding the terms of the agreements governing the Spin-Off and the relationship between us and
Ensign after the Spin-Off, any commercial agreements entered into in the future between us and Ensign and the allocation of such directors’ time between us and
Ensign.
Risks Related to Ownership of Our Common Stock
Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider
favorable. Our amended and restated certificate of incorporation and amended and restated bylaws may make the merger or acquisition of our company more
difficult without the approval of our board of directors. Among other things, these provisions: allow us to authorize the issuance of undesignated preferred stock,
the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval,
dividend, or other rights or preferences superior to the rights of the holders of common stock; establish advance notice requirements for nominations for elections
to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; create a classified board of directors whose members serve
staggered three-year terms; and limit the ability of our stockholders to call and bring business before special meetings. Further, as a Delaware corporation, we are
also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These provisions could discourage,
delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect
the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of
their choosing and to cause us to take other corporate actions desired.
Risks Related to COVID-19
COVID-19 has created new regulatory risks that impact our operations. COVID-19 has generated, and will likely continue to generate, dramatic and rapid
changes in the laws affecting our operations. U.S. Federal, state, and local regulators have implemented new laws, rules, regulations, and orders, or waived or
modified existing laws, rules and regulations for the duration of the COVID-19 public health emergency. Most of these changes have been made without following
typical regulatory or legislative processes and procedures and have been announced via website postings or fact sheets with limited notice and without full
regulations or guidance in place. While many of the changes are beneficial in that they reduce or eliminate statutory or regulatory requirements for healthcare
providers during the COVID-19 public health emergency, we remain subject to the risk of inadvertent non-compliance due to the quantity, ambiguity and
frequency of changes. The regulatory changes may also adversely effect our operations through increased legal and operational costs related to compliance with
changes and monitoring for future changes. Further, the resumption of pre-COVID-19 regulatory requirements at the conclusion of the public health emergency
may require significant operational changes on short notice.
COVID-19 and related risks have affected and could materially affect our results of operations, financial position and/or liquidity. The global spread of
COVID-19 and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. See “Part I—Item 2—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—COVID-19” herein. Now two years into the COVID-19 pandemic, many of the direct
and indirect consequences of COVID-19 on our business are known, although new developments such as waves of COVID-19 variants and second-order effects
such as supply chain issues are ongoing and the full range of their direct and indirect consequences on our business are not yet known. Risks presented by the
ongoing effects of COVID-19 include the following:
•
In addition to the hazards posed by COVID-19 itself, the disruption caused by repeated waves of COVID-19 variants, including breakthrough infections
of fully vaccinated individuals, poses a risk to the Company for the foreseeable future due to the potential consequences of such variants on Company
personnel, labor pool participants, availability of necessary supplies, continued adverse impact on move-in rates within senior living, and consequences
for the broader economy.
• Decreased home health and hospice volumes and senior living occupancy, which has led to decreased revenue.
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•
•
•
Increased costs and staffing requirements related to implementation of COVID-19 infection prevention protocols, including increased utilization of
personal protective equipment (“PPE”), COVID-19 diagnostic testing and vaccination for staff and residents, and additional labor and cleaning supplies to
frequently sterilize equipment and surfaces.
Increased labor costs due to increased overtime or premium pay, paid leave, reduced labor force participation, wage pressure from competitors, workers
becoming ineligible for employment due to COVID-19 vaccination requirements, mandatory testing costs, and the increased need for temporary labor to
supplement our existing staffing as our front-line employees may become unable to work while awaiting the results of COVID-19 tests or as they recover
from a COVID-19 infection.
Increased scrutiny by regulators of infection control and prevention measures, including imposition of new COVID-19 disease and mortality reporting
requirements, and increased enforcement of resident rights’ violations related to visitation.
• Disruptions to supply chains which could negatively impact consistent and reliable delivery of PPE, sanitizing supplies, food, pharmaceuticals, and other
goods.
•
•
•
•
•
COVID-19 related illnesses in staff may impact the quality of care, which could lead to temporary staffing shortages or reliance on less experienced
personnel.
Employee concerns related to workplace safety, including potential for increase in workers’ compensation claims.
Potential increase in insurance premiums and COVID-19 related claims.
Inconsistent application or interpretation of modifications to regulatory requirements by surveyors.
Potential for continued inflation resulting from changes in economic conditions and steps taken by the federal government and the Federal Reserve in
response to COVID-19, which could lead to higher inflation rates or longer-lasting inflation than anticipated, which could in turn lead to an increase in
expenses, including rent expense under our triple net leases. All of the triple net leases in our senior living business contain annual rent escalators tied to
year-over-year increases in various consumer price indices. While these leases contain provisions capping the increased rent expense each year, increased
inflation could cause our rent expense in our senior living business to increase at a greater rate than in prior years.
COVID-19 could lead to future litigation. COVID-19 has affected virtually all businesses in the country, and healthcare providers have been acutely impacted due
to direct involvement with the virus. The challenges of dealing with a global pandemic have been amplified by supply shortages, lack of available tests, and
constantly evolving information. It is likely that healthcare companies, including those in the post-acute care and senior living industries in which we operate,
could become targets of plaintiffs’ litigation, alleging negligence, wrongful death, and similar claims resulting from where cases of COVID-19 occurred in senior
living communities and through the direct contact with COVID-19 positive patients of our home health and hospice providers . If we or our operations are subject
to litigation of this nature, such litigation may result in legal fees, damages, fines or settlements in amounts that could be material.
Rules mandating COVID-19 vaccination may subject us to penalties and other challenges. Various federal, state and local governments have issued, or indicated
an intention to issue, COVID-19 vaccination requirements for health care workers and other workers. Most notably, on November 4, 2021, CMS issued an interim
final rule requiring full vaccination of personnel working for operations reimbursed by Medicare or Medicaid. The United States Supreme Court upheld this
mandate on January 13, 2022, and the compliance deadline for full vaccination ranges from February 28 (in states that did not challenge the mandate) to March 15,
2022 (in most other states) to March 21, 2022 (in Texas).
States where we operate have imposed their own vaccine mandates as well. During 2021, California, Colorado, Oregon and Washington each issued orders
requiring that all or some employees and contractors of our independent operating subsidiaries be fully vaccinated. In addition, on December 22, 2021 California
ordered that health care workers who are booster-eligible must receive a vaccine booster by February 1, 2022.
The Company may be subject to fines, penalties or judgments, or may otherwise be negatively impacted, if it is found not to have complied with any such current
or future vaccination requirements. Current or prospective employees may oppose vaccination, making it more difficult to recruit or retain staff.
Additionally, as of January 2022, the FDA and CDC approved the use of COVID-19 vaccine booster shots for most individuals. The Company may be subject to
fines, penalties, judgments, or otherwise be negatively impacted based on loss of skilled
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workers or increased competition and cost to acquire skilled workers in the event of worker hesitancy or aversion to vaccine booster shots, or a change in the
definition or understanding of “fully vaccinated” under CMS, OSHA or other state regulations that currently, or may in the future, require employees to have
received booster shots to maintain their fully vaccinated status.
Expiration of Certain Waivers and Changes in CMS Reporting Practices. In response to the COVID-19 pandemic, CMS issued numerous blanket waivers
effective March 20, 2020, to ease reporting requirements and other administrative burdens on health care providers during the COVID-19 public health emergency.
Certain of these waivers have begun to expire, and more waivers may expire in 2022. The expiration of these waivers may affect our operating costs due to the
reinstitution of reporting regarding staffing data and other information that was not required to be reported during the COVID-19 public health emergency until the
expiration of those waivers; the expiration of these waivers may additionally affect our ability to use certain billing codes when seeking reimbursement from
Medicare or Medicaid, which may affect our financial performance.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Service Center
We lease two office locations to accommodate our Service Center. We lease approximately 14,287 square feet of office space located at 1675 East
Riverside Drive, Suite 150, Eagle, ID 83616, pursuant to a lease that expires March 31, 2025. Our principal executive offices are located at the Service Center in
Eagle, Idaho. We have two options to extend our lease term at this location for an additional five-year term for each option. In addition, we currently lease 6,209
rentable square feet of office space located at 1600 West Broadway Road, Suite 100, Tempe, Arizona 85282, pursuant to a lease that expires September 30, 2024.
We have one option to extend our lease term at this location for one additional five-year term.
Home Health and Hospice Agencies and Senior Living Communities
As of December 31, 2021, we operated 88 home health, hospice and home care agencies in Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada,
Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. Office space is leased within geographies served by our agencies.
As of December 31, 2021, we operated 54 affiliated senior living communities in Arizona, California, Nevada, Texas, Washington and Wisconsin, with
4127 Senior Living units. We lease all of our communities through long-term, triple-net lease arrangements.
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The following table provides summary information regarding the locations of our home health and hospice agencies and our senior living communities
and operational units as of December 31, 2021:
State
Arizona
California
Colorado
Idaho
Iowa
Montana
Nevada
Oklahoma
Oregon
Texas
Utah
Washington
Wisconsin
Wyoming
Total
Home Health
Agencies
Hospice Agencies
Senior Living
Communities
4
6
6
4
1
—
1
2
2
5
9
6
1
1
48
8
5
1
3
1
1
2
1
1
8
4
3
1
1
40
Senior Living Units
1,249
761
—
164
—
—
385
—
—
712
—
98
758
—
4,127
7
9
—
2
—
—
4
—
—
12
—
1
19
—
54
Item 3. Legal Proceedings
We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to
have a material adverse effect on our results of operations or financial condition. However, the results of such matters cannot be predicted with certainty and we
cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial
condition, results of operations and cash flows. See Note 15, Commitments and Contingencies, to the Audited Consolidated and Combined Financial Statements
for a description of claims and legal actions arising in the ordinary course of our business.
Item 4. Mine Safety Disclosures
None.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Part II.
Our Common stock has traded under the symbol “PNTG” on the NASDAQ Global Select Market since our Spin-Off on October 1, 2019. Prior to that
date we were a subsidiary of Ensign, which trades under the ticker “ENSG” on the NASDAQ Global Select Market. As of February 28, 2022, there were
approximately 60 holders of record of our stock.
Dividend Policy
We do not intend to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to
support our operations and to finance the growth and development of our business.
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Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor should such
information be incorporated by reference into any future filings under the Securities Act or the Exchange Act except to the extent that we specifically incorporate it
by reference in such filing.
The graph below compares the cumulative total stockholder return on our common stock, $0.001 par value per share, during the period from the date of
the Spin-Off on October 1, 2019, through December 31, 2021, with the cumulative total return on the NASDAQ composite index and an industry peer group over
the same period (assuming the investment of $100 in our common stock, the NASDAQ composite index and the industry peer group on October 1, 2019 and the
reinvestment of dividends). The peer group we selected is comprised of: Amedysis, Inc. (“AMED”), Addus Homecare Corporation (“ADUS”), Chemed
Corporation (“CHE”), Encompass Health Corporation (“EHC”), LHC Group, Inc. (“LHCG”), Sonida Senior Living Inc., formerly known as Capital Senior Living
Corporation (“SNDA”), and Brookdale Senior Living, Inc. (“BKD”). The cumulative total stockholder return on the following graph is historical and is not
necessarily indicative of future stock price performance. No cash dividends have been paid on our common stock.
10/1/2019
12/31/2019
3/31/2020
6/30/2020
9/30/2020
12/31/2020
3/31/2021
6/30/2021
9/30/2021
12/31/2021
PNTG
NASDAQ
Peer Group
100
100
100
219
113
113
94
97
105
150
127
116
256
141
129
385
163
147
304
167
134
271
183
134
186
183
113
152
199
120
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated and combined financial statements and accompanying notes, which appear
elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual
Report. See Item 1A., Risk Factors and Cautionary Note Regarding Forward-Looking Statements.
Overview
We are a leading provider of high-quality healthcare services to patients and residents of all ages, including the growing senior population, in the United
States. We strive to be the provider of choice in the communities we serve through our innovative operating model. We operate in multiple lines of businesses
including home health, hospice and senior living services across Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah,
Washington, Wisconsin and Wyoming. As of December 31, 2021, our home health and hospice business provided home health, hospice and home care services
from 88 agencies operating across 14 states, and our senior living business operated 54 senior living communities throughout seven states.
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The following table summarizes our affiliated home health and hospice agencies and senior living communities as of:
Home health and hospice agencies
Senior living communities
Senior living units
Total number of home health, hospice, and senior
living operations
COVID-19
2013
2014
2015
2016
16
12
1,256
25
15
1,587
32
36
3,184
39
36
3,184
December 31,
2017
2018
2019
2020
2021
46
43
3,434
54
50
3,820
63
52
3,963
76
54
4,127
88
54
4,127
28
40
68
75
89
104
115
130
142
We have been, and we expect to continue to be, impacted by several factors related to the viral disease known as COVID-19 that may cause actual results
to differ from our historical results or current expectations. Due to the COVID-19 pandemic, the results presented in this report are not necessarily indicative of
future operating results. The situation surrounding COVID-19 remains fluid. We are actively managing our response in collaboration with government officials,
team members and business partners, and we are assessing potential impacts to our financial position and operating results, as well as adverse developments in our
business.
Home Health and Hospice
During the year ended December 31, 2021, the labor challenges experienced throughout the COVID-19 pandemic were exacerbated as cases rose sharply,
leading to further wage pressure, increased overtime and greater use of agency and registry staffing resulting in challenges to properly staff referrals. Home health
admissions during the second half of the year were impacted as more staff entered the quarantine protocol and by a significant decline in elective procedures,
particularly in a few key markets and states that re-imposed temporary halts on such procedures.
Senior Living
COVID-19 continues to impact all aspects of our senior living business and geographies, including impacts on our residents, team members, vendors and
business partners. We experienced a decline in occupancy during the first quarter of the year followed by several months of increased occupancy that began in the
second quarter and continued into the third quarter. Our occupancy began to decline in the latter part of September and our overall senior living occupancy has
decreased since the onset of the COVID-19 pandemic due to a greater number of move outs net of move ins. We cannot be sure if or when the occupancy levels in
our senior living communities will improve over multiple measurement periods or return to pre-pandemic levels.
Labor
We have experienced and expect to continue to see increased labor costs due to greater competition for skilled workers, worker burnout, increased wage
rates, increased overtime and premium pay, and the increased need for temporary labor to supplement our existing staffing. We are monitoring the ongoing impact
of our COVID-19 response actions on our revenue and expenses, including labor acquisition and turnover costs that may be imposed by existing and anticipated
state and federal vaccination mandates imposed for workers in home health agencies, senior living communities and other health care service providers. However,
the extent to which COVID-19 will continue to impact our operations will depend on future developments, which remain uncertain and cannot be predicted with
confidence, including the pace of spread and impact of other potential variant strains, and the actions taken to contain COVID-19 or treat its impact, among others.
Recent Activities
Acquisitions. During 2021, we expanded our operations with the addition of five home health agencies, four hospice agencies and two home care
agencies. We entered into a separate operations transfer agreement with the prior operator as part of each transaction. The aggregate value for these acquisitions
was $14.1 million. For further discussion of our acquisitions, see Note 7, Acquisitions, in the Notes to the consolidated and combined financial statements.
Amended Credit Facility. On February 23, 2021, we amended our existing revolving credit facility to increase our aggregate principal amount available
from $75.0 million to $150.0 million.
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Subsequent Transaction. On January 27, 2022, certain of our affiliates entered into operations transfer agreements (collectively, the “Transfer
Agreements”) with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the “Transaction”). The Transfer
Agreements require one of the transferors to place in escrow $6.5 million to cover post-closing capital expenditures and operating losses related to one of the
communities. The closing of the Transaction is anticipated to occur in the first half of 2022, subject to receipt of applicable regulatory approvals and satisfaction of
other customary closing conditions set forth in the Transfer Agreements. For further details about the impact of the transaction see Note 16, Subsequent Event.
Trends
Since the pandemic began and until the first quarter of 2021, we experienced a steady decline in senior living occupancy as move-ins declined relative to
move-outs due to the pandemic. Beginning in the second quarter of 2021, and continuing into the third quarter, we experienced a slight increase in our senior living
occupancy; however with the emergence of the “Omicron” variant strain of COVID-19 in the fourth quarter we experienced a slight decrease in occupancy during
the year ended December 31, 2021. We cannot be sure when the occupancy levels in our senior living communities will return to pre-pandemic levels. As
uncertainty regarding the COVID-19 pandemic persists and with the resurgence in cases due to variant strains aggressively emerging, we could see a more
prolonged recovery.
When we acquire turnaround or start-up operations, we expect that our combined metrics may be impacted. We expect these metrics to vary from period
to period based upon the maturity of the operations within our portfolio. We have generally experienced lower occupancy rates at our senior living communities
and lower census at our home health and hospice agencies for recently acquired operations; as a result, we generally anticipate lower consolidated and segment
margins during years of high acquisition growth. We established three start-up hospice agencies in Arizona, Texas and Washington, and one home care agency in
Arizona during the year ended December 31, 2021.
Regulation
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States and subsequent
regulatory actions. The CARES Act contained provisions for accelerated or advance Medicare payments (“AAP”) to provide supporting cash flow to providers and
suppliers combating the effects of the COVID-19 pandemic. We applied for and received $28.0 million in 2020. These funds are subject to automatic recoupment
through offsets to new claims beginning one year after payment were issued. In April, 2021, CMS began to automatically recoup 25% of Medicare payments from
individual agencies, which will continue for 11 months. At the end of the 11 months assuming full repayment has not occurred, recoupment will increase to 50%
for another six months. Any balance outstanding after these two recoupment periods will be subject to repayment at a 4% interest rate. As of the year ended
December 31, 2021, the Company had repaid $21.8 million of the AAP funds, with the remaining balance of $6.2 million recorded in other accrued liabilities on
the consolidated balance sheets. We anticipate completing repayment of the AAP within the allotted recoupment periods.
The CARES Act temporarily suspended the 2% sequestration payment adjustment on Medicare fee-for-service payment beginning May 1, 2020 and was
extended through December 31, 2021. We recognized $3.6 million and $2.8 million in revenue related to the suspension of sequestration for the years ended
December 31, 2021 and 2020, respectively, exclusive of our start-up operations. Further, the CARES Act payroll tax deferral program allowed employers to defer
the deposit and payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020, and December 31, 2020. The
CARES Act permits employers to deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022. We deferred approximately
$7.8 million of employer-paid portion of social security tax. In the fourth quarter of the current year, we repaid $3.7 million and approximately $4.1 million of the
balance remains deferred and is recorded in accrued wages and related liabilities on the consolidated balance sheets.
The American Rescue Plan Act of 2021 (the “ARP Act”) was enacted on March 11, 2021 in the United States. The ARP Act was designed to assist the
country with the effects of the COVID-19 pandemic and included a number of tax components. The ARP Act’s primary tax impact on us is a new revenue raising
provision that requires us to include the next five highest paid employees to the list of covered officers already subject to the IRC Section 162(m) wage limitation
beginning in the 2027 tax year.
Segments
We have two reportable segments: (1) home health and hospice services, which includes our home health, home care and hospice businesses; and (2)
senior living services, which includes the operation of assisted living, independent living and
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memory care communities. Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), reviews financial information at the operating
segment level using segment adjusted EBITDAR from operations. We also report an “all other” category that includes general and administrative expense from our
Service Center.
Key Performance Indicators
We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. These indicators and their
definitions include the following:
Home Health and Hospice Services
•
•
•
•
•
Total home health admissions. The total admissions of home health patients, including new acquisitions, new admissions and readmissions.
Total Medicare home health admissions. Total admissions of home health patients, who are receiving care under Medicare reimbursement programs,
including new acquisitions, new admissions and readmissions.
Average Medicare revenue per completed 60-day home health episode. The average amount of revenue for each completed 60-day home health
episode generated from patients who are receiving care under Medicare reimbursement programs.
Total hospice admissions. Total admissions of hospice patients, including new acquisitions, new admissions and recertifications.
Average hospice daily census. The average number of patients who are receiving hospice care during any measurement period divided by the number
of days during such measurement period.
• Hospice Medicare revenue per day. The average daily Medicare revenue recorded during any measurement period for services provided to hospice
patients.
The following table summarizes our overall home health and hospice statistics for the periods indicated:
Home health services:
Total home health admissions
Total Medicare home health admissions
Average Medicare revenue per 60-day completed episode
(a)
Hospice services:
Total hospice admissions
Average hospice daily census
Hospice Medicare revenue per day
Year Ended December 31,
2020
2021
37,366
17,356
3,405 $
8,613
2,291
174 $
26,670
12,974
3,290
8,186
2,083
166
$
$
(a)
The year to date average for Medicare revenue per 60-day completed episode includes post period claim adjustments for prior periods.
Senior Living Services
• Occupancy. The ratio of actual number of days our units are occupied during any measurement period to the number of units available for occupancy
during such measurement period.
•
Average monthly revenue per occupied unit. The revenue for senior living services during any measurement period divided by actual occupied
senior living units for such measurement period divided by the number of months for such measurement period.
The following table summarizes our senior living statistics for the periods indicated:
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Occupancy
Average monthly revenue per occupied unit
Revenue Sources
Home Health and Hospice Services
Year Ended December 31,
2021
2020
$
72.7 %
3,207
$
77.7 %
3,188
Home Health. We derive the majority of our home health revenue from Medicare and managed care. The Medicare payment is adjusted for differences
between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other
reasons unrelated to credit risk. For Medicare episodes that began prior to January 1, 2020, home health agencies were reimbursed under the Medicare HH PPS,
while Medicare periods of care that began on or after that date are reimbursed under the PDGM methodology. Under PDGM, Medicare provides agencies with
payments for each 30-day period of care provided to beneficiaries. If a beneficiary is still eligible for care after the end of the first 30-day payment period, a second
30-day payment period can begin. There are no limits to the number of periods of care a beneficiary who remains eligible for the home health benefit can receive.
While payment for each 30-day period of care is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure
appropriate payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted for certain
variables including, but not limited to: (a) a low utilization payment adjustment if the number of visits is below an established threshold that varies based on the
diagnosis of a beneficiary; (b) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before
completing the period of care; (c) adjustment to the admission source of claim if it is determined that the patient had a qualifying stay in a post-acute care setting
within 14 days prior to the start of a 30-day payment period; (d) the timing of the 30-day payment period provided to a patient in relation to the admission date,
regardless of whether the same home health provider provided care for the entire series of episodes; (e) changes to the acuity of the patient during the previous 30-
day period of care; (f) changes in the base payments established by the Medicare program; (g) adjustments to the base payments for case mix and geographic
wages; and (h) recoveries of overpayments.
Hospice. We derive the majority of our hospice business revenue from Medicare reimbursement. The estimated payment rates are calculated as daily rates
for each of the levels of care we deliver. Rates are set based on specific levels of care, are adjusted by a wage index to reflect healthcare labor costs across the
country and are established annually through federal legislation. The following are the four levels of care provided under the hospice benefit:
•
Routine Home Care (“RHC”). Care that is not classified under any of the other levels of care, such as the work of nurses, social workers or home health
aides.
• General Inpatient Care. Pain control or acute or chronic symptom management that cannot be managed in a setting other than an inpatient Medicare-
certified facility, such as a hospital, skilled nursing facility or hospice inpatient facility.
•
•
Continuous Home Care. Care for patients experiencing a medical crisis that requires nursing services to achieve palliation and symptom control, if the
agency provides a minimum of eight hours of care within a 24-hour period.
Inpatient Respite Care. Short-term, inpatient care to give temporary relief to the caregiver who regularly provides care to the patient.
CMS has established a two-tiered payment system for RHC. Hospices are reimbursed at a higher rate for RHC services provided from days of service 1
through 60 and a lower rate for all subsequent days of service. CMS also provided for a Service Intensity Add-On, which increases payments for certain RHC
services provided by registered nurses and social workers to hospice patients during the final seven days of life.
Medicare reimbursement is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other
reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap, we monitor our provider
numbers and based upon empirical experience estimate amounts due back to Medicare to the extent that the cap has been exceeded.
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Senior Living Services. Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from
Medicaid or other state-specific programs.
Primary Components of Expense
Cost of Services (excluding rent, general and administrative expense and depreciation and amortization). Our cost of services represents the costs of
operating our independent operating subsidiaries, which primarily consists of employee wages and related benefits, supplies, purchased services, and ancillary
expenses such as the cost of pharmacy and therapy services provided to patients or residents. Cost of services also includes the cost of general and professional
liability insurance and other general cost of services specifically attributable to our operations.
Rent—Cost of Services. Rent—cost of services consists solely of base minimum rent amounts payable under lease agreements to our landlords. Our
subsidiaries lease and operate but do not own the underlying real estate at our operations, and these amounts do not include taxes, insurance, impounds, capital
reserves or other charges payable under the applicable lease agreements.
General and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits and travel expenses for our
Service Center personnel in providing training and other operational support. General and administrative expense also includes professional fees (such as
accounting and legal fees), costs relating to our information systems, share-based compensation and rent for our Service Center offices.
Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the depreciable assets (ranging from three to 15 years). Leasehold improvements are amortized on a straight-line basis
over the shorter of their estimated useful lives or the remaining lease term.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated and combined financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements and related
disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review
our judgments and estimates, including but not limited to those related to revenue, cost allocations, leases, intangible assets, goodwill, and income taxes. We base
our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available
information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an
inherent degree of uncertainty, and actual results could differ materially from the amounts reported. While we believe that our estimates, assumptions, and
judgments are reasonable, they are based on information available when the estimate was made. Refer to Note 2, Basis of Presentation and Summary of Significant
Accounting Policies, within the Consolidated and Combined Financial Statements for further information on our critical accounting estimates and policies, which
are as follows:
•
•
•
•
•
Self-insurance reserves - The valuation methods and assumptions used in estimating costs up to retention amounts to settle open claims of insureds and
an estimate of the cost of insured claims up to retention amounts that have been incurred but not reported;
Revenue recognition - The amounts owed by private pay individuals for services and estimate of variable considerations to arrive at the transaction price,
including methods and assumptions, used to determine settlements with Medicare and Medicaid adjustments due to audits and reviews;
Cost allocation - The Consolidated and Combined Financial Statements include allocations of costs for certain shared services provided to the Company
by Ensign subsidiaries prior to the spin-off on October 1, 2019. These costs were allocated to the Company on a basis of revenue, location, employee
count, or other measures;
Leases - We use our estimated incremental borrowing rate based on the information available at lease commencement date in determining the present
value of future lease payments;
Acquisition accounting - The assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our
acquisitions; and
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•
Income taxes - The estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.
Recent Accounting Pronouncements
Information concerning recently issued accounting pronouncements which are not yet effective is included in Note 2, Basis of Presentation and Summary of
Significant Accounting Policies in the Consolidated and Combined Financial Statements. As of December 31, 2021, there were no recently issued accounting
pronouncements that were expected to have an impact on the Company.
Results of Operations
The following table sets forth details of our expenses and earnings as a percentage of total revenue for the periods indicated:
Total revenue
Expense:
Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Total expenses
Income from operations
Other income (expense):
Other income
Interest expense, net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Less: net income/ (loss) attributable to noncontrolling interest
(a)
Net income attributable to Pennant
Year Ended December 31,
2020
2021
2019
100.0 %
100.0 %
100.0 %
80.3
9.3
8.2
1.1
98.9
1.1
—
(0.5)
(0.5)
0.6
0.1
0.5
(0.1)
0.6 %
75.9
10.1
8.0
1.2
95.2
4.8
0.1
(0.3)
(0.2)
4.6
0.6
4.0
—
4.0 %
76.5
10.3
10.4
1.1
98.3
1.7
—
(0.1)
(0.1)
1.6
0.6
1.0
0.2
0.8 %
(a)
Net loss attributable to noncontrolling interest for the year ended December 31, 2020 was less than 0.1% and thus not meaningful as a percentage of total revenue.
Consolidated and Combined GAAP Financial Measures:
Total revenue
Total expenses
Income from operations
34
2021
Year Ended December 31,
2020
(In thousands)
2019
$
$
$
439,694 $
434,999 $
4,695 $
390,953 $
372,036 $
18,917 $
338,531
332,861
5,670
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The following table presents certain financial information regarding our reportable segments. General and administrative expenses are not allocated to the
reportable segments and are included in “All Other”:
Segment GAAP Financial Measures:
Year Ended December 31, 2021
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2020
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2019
Revenue
Segment Adjusted EBITDAR from Operations
Home Health and
Hospice Services
Senior Living
Services
All Other
Total
(In thousands)
$
$
$
$
$
$
309,570 $
55,565 $
253,659 $
49,501 $
206,624 $
33,354 $
130,124 $
37,517 $
137,294 $
48,309 $
131,907 $
47,344 $
— $
(26,208) $
— $
(22,762) $
— $
(18,591) $
439,694
66,874
390,953
75,048
338,531
62,107
The table below provides a reconciliation of Segment Adjusted EBITDAR from Operations above to income from operations:
Segment Adjusted EBITDAR from Operations
Less: Depreciation and amortization
Rent—cost of services
Other (expense)/ income
(a)
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations
(b)
(c)
(d)
Share-based compensation expense
Acquisition related costs
Spin-Off related transaction costs
Transition services costs
COVID-19 related costs and supplies
Impairment of long-lived assets
(h)
(e)
(f)
(g)
Add: Net income/ (loss) attributable to noncontrolling interest
Income from operations
35
2021
Year Ended December 31,
2020
(In thousands)
2019
$
$
66,874 $
4,784
40,863
(24)
1,045
10,040
80
—
2,008
—
2,835
(548)
4,695 $
75,048 $
4,675
39,191
225
1,787
8,335
99
—
1,181
447
—
(191)
18,917 $
62,107
3,810
34,975
—
483
3,382
665
13,219
532
—
—
629
5,670
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)
)
)
d)
)
)
g)
h)
Segment Adjusted EBITDAR from Operations is net income/ (loss) attributable to the Company's reportable segments excluding interest expense, provision for income taxes, depreciation and
amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2)
share-based compensation, (3) acquisition related costs, (4) Spin-Off transaction costs, (5) redundant and nonrecurring costs associated with the transition services agreement, (6) net income/
(loss) attributable to noncontrolling interest, (7) net COVID-19 related costs and (8) impairment of long-lived assets. General and administrative expenses are not allocated to the reportable
segments, and are included as “All Other”, accordingly the segment earnings measure reported is before allocation of corporate general and administrative expenses. The Company's segment
measures may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
Share-based compensation expense incurred which is included in cost of services and general and administrative expense.
Acquisition related costs that are not capitalizable.
Costs incurred related to the Spin-Off are included in general and administrative expense.
A portion of the costs incurred under the Transition Services Agreement identified as redundant or nonrecurring that are included in general and administrative expense. Fees incurred under the
Transition Services Agreement, net of the Company’s payroll reimbursement, were $3,124, $5,536, and $2,982, for the years ended December 31, 2021, 2020 and 2019, respectively.
Beginning in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of
sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief was extended through
December 31, 2021. Sequestration relief was $3,555 for the year ended December 31, 2021.
The 2020 amount represents incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $2,765 in
increased revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the year ended December 31, 2020.
On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of
the operations of certain senior living communities (the “Transaction”). The closing of the Transaction is anticipated to occur in the first half of 2022. The Company impaired certain leasehold
improvements included in property and equipment primarily related to the operations included in the transaction with Ensign.
Performance and Valuation Measures:
Consolidated and Combined Non-GAAP Financial Measures:
Performance Metrics
Consolidated and Combined EBITDA
Consolidated and Combined Adjusted EBITDA
Valuation Metric
Consolidated and Combined Adjusted EBITDAR
Segment Non-GAAP Measures:
Segment Adjusted EBITDA from Operations
(a)
Home health and hospice services
Senior living services
(a)
General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss.
36
2021
Year Ended December 31,
2020
(In thousands)
2019
$
$
$
$
$
10,003 $
26,407 $
24,008 $
36,080 $
8,851
27,157
66,874
2021
Year Ended December 31,
2020
(In thousands)
2019
51,045 $
1,570 $
46,015 $
12,827 $
30,415
15,333
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The table below reconciles Consolidated and Combined Net Income to Consolidated and Combined EBITDA, Consolidated and Combined Adjusted
EBITDA and Consolidated and Combined Adjusted EBITDAR for the periods presented:
Consolidated and Combined Net income
Less: Net (loss) income attributable to noncontrolling interest
Add: Provision for income taxes (benefit)
Net interest expense
Depreciation and amortization
Consolidated and Combined EBITDA
Adjustments to Consolidated and Combined EBITDA
Add: Costs at start-up operations
(a)
(b)
(c)
Share-based compensation expense
Acquisition related costs
Spin-Off related transaction costs
Transition services costs
Net COVID-19 related costs
Impairment of long-lived assets
Rent related to items (a) above
(d)
(g)
(e)
(f)
Consolidated and Combined Adjusted EBITDA
Rent—cost of services
Rent related to items (a) above
Adjusted rent—cost of services
Consolidated and Combined Adjusted EBITDAR
2021
Year Ended December 31,
2020
(In thousands)
2019
$
$
2,148 $
(548)
582
1,941
4,784
10,003
15,553 $
(191)
2,350
1,239
4,675
24,008
1,045
10,040
80
—
2,008
—
2,835
396
26,407
40,863
(396)
40,467
66,874
1,787
8,335
99
—
1,181
447
—
223
36,080
39,191
(223)
38,968
3,175
629
2,085
410
3,810
8,851
483
3,382
665
13,219
532
—
—
25
27,157
34,975
(25)
34,950
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
Share-based compensation expense incurred which is included in cost of services and general and administrative expense.
Acquisition related costs that are not capitalizable.
Costs incurred related to the Spin-Off are included in general and administrative expense.
A portion of the costs incurred under the Transition Services Agreement identified as redundant or nonrecurring that are included in general and administrative expense. Fees incurred under the
Transition Services Agreement, net of the Company’s payroll reimbursement, were $3,124, $5,536, and $2,982, for the years ended December 31, 2021, 2020 and 2019, respectively.
Beginning in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of
sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief was extended through
December 31, 2021. Sequestration relief was $3,555 for the year ended December 31, 2021.
The 2020 amount represents incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $2,765 in increased
revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the year ended December 31, 2020.
On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of
the operations of certain senior living communities (the “Transaction”). The closing of the Transaction is anticipated to occur in the first half of 2022. The Company impaired certain leasehold
improvements included in property and equipment primarily related to the operations included in the transaction with Ensign.
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The table below reconciles Segment Adjusted EBITDAR from Operations to Segment Adjusted EBITDA from Operations for the periods presented:
Year Ended December 31,
Home Health and Hospice
2020
2019
2021
Senior Living
2020
2021
2019
Segment Adjusted EBITDAR from Operations
Less: Rent—cost of services
Rent related to start-up operations
Segment Adjusted EBITDA from Operations
$
$
55,565 $
4,906
(386)
51,045 $
49,501 $
3,629
(143)
46,015 $
(In thousands)
33,354 $
2,964
(25)
30,415 $
37,517 $
35,957
(10)
1,570 $
48,309 $
35,562
(80)
12,827 $
47,344
32,011
—
15,333
The following discussion includes references to certain performance and valuation measures, which are non-GAAP financial measures, including
Consolidated and Combined EBITDA, Consolidated and Combined Adjusted EBITDA, Segment Adjusted EBITDA from Operations, and Consolidated Adjusted
EBITDAR (collectively, “Non-GAAP Financial Measures”). Non-GAAP Financial Measures are used in addition to, and in conjunction with, results presented in
accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Non-GAAP Financial Measures reflect an additional way of
viewing aspects of our operations and company that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial
measures, we believe can provide a more comprehensive understanding of factors and trends affecting our business.
We believe these Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of
operations because:
•
•
•
•
•
•
•
•
•
they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry
without regard to items such as interest expense, rent expense and depreciation and amortization, which can vary substantially from company to company
depending on the book value of assets, the length of the lease to which the asset applies, the method by which assets were acquired, and differences in
capital structures;
they help investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base and capital structure
from our operating results; and
Consolidated and Combined Adjusted EBITDAR is used by investors and analysts in our industry to value the companies in our industry without regard
to capital structures.
We use Non-GAAP Financial Measures:
as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis from period to period;
to allocate resources to enhance the financial performance of our business;
to assess the value of a potential acquisition;
to assess the value of a transformed operation’s performance;
to evaluate the effectiveness of our operational strategies; and
to compare our operating performance to that of our competitors.
We typically use Non-GAAP Financial Measures to compare the operating performance of each operation from period to period. We find that Non-GAAP
Financial Measures are useful for this purpose because they do not include such costs as interest expense, income taxes, depreciation and amortization expense,
which may vary from period-to-period depending upon various factors, including the method used to finance operations, the date of acquisition of a community or
business, and the tax law of the state in which a business unit operates.
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Non-GAAP Financial Measures have no standardized meaning defined by GAAP. Therefore, our Non-GAAP Financial Measures have limitations as
analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. Some of these
limitations are:
•
•
•
•
•
•
•
they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, our working capital needs;
they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
in the case of Consolidated and Combined Adjusted EBITDAR, it does not reflect rent expenses, which are normal and recurring operating expenses that
are necessary to operate our leased operations;
they do not reflect any income tax payments we may be required to make;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and
these non-cash charges do not reflect any cash requirements for such replacements; and
other companies in our industry may calculate the same Non-GAAP Financial Measures differently than we do, which may limit their usefulness as
comparative measures.
We compensate for these limitations by using Non-GAAP Financial Measures only to supplement net income on a basis prepared in accordance with
GAAP in order to provide a more complete understanding of the factors and trends affecting our business.
We strongly encourage investors to review our Consolidated and Combined Financial Statements, included in this report in their entirety and to not rely
on any single financial measure. Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures
with other companies’ Non-GAAP financial measures having the same or similar names. These Non-GAAP Financial Measures should not be considered a
substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. We strongly urge you to review the reconciliation
of income from operations to the Non-GAAP Financial Measures in the table presented above, along with our Financial Statements and related notes included
elsewhere in this report.
We believe the following Non-GAAP Financial Measures are useful to investors as key operating performance measures and valuation measures:
Performance Measures:
Consolidated and Combined EBITDA
We believe Consolidated and Combined EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and
compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating
results.
We calculate Consolidated and Combined EBITDA as net income, adjusted for net income/ (loss) attributable to noncontrolling interest, before
(a) interest expense (b) provision for income taxes and (c) depreciation and amortization.
Consolidated and Combined Adjusted EBITDA
We adjust Consolidated and Combined EBITDA when evaluating our performance because we believe that the exclusion of certain additional items
described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of
Consolidated and Combined Adjusted EBITDA, when considered with Consolidated and Combined EBITDA and GAAP net income is beneficial to an investor’s
complete understanding of our operating performance.
We calculate Consolidated and Combined Adjusted EBITDA by adjusting Consolidated and Combined EBITDA to exclude the effects of non-core
business items, which for the reported periods includes, to the extent applicable:
•
•
•
costs at start-up operations;
share-based compensation expense;
acquisition related costs;
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•
•
•
•
Spin-Off related transaction costs;
redundant or nonrecurring costs incurred as part of the Transition Services Agreement (as defined in Note 3, Related Party Transactions and Net Parent
Investment);
COVID-19 related costs and supplies; and
impairment of long-lived assets.
Segment Adjusted EBITDA from Operations
We calculate Segment Adjusted EBITDA from Operations by adjusting Segment Adjusted EBITDAR from Operations to include rent-cost of services.
We believe that the inclusion of rent-cost of services provides useful supplemental information to investors regarding our ongoing operating performance for each
segment.
Valuation Measure:
Consolidated and Combined Adjusted EBITDAR
We use Consolidated and Combined Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a measure
commonly used by us, research analysts and investors to compare the enterprise value of different companies in the healthcare industry, without regard to
differences in capital structures. Additionally, we believe the use of Consolidated and Combined Adjusted EBITDAR allows us, research analysts and investors to
compare operational results of companies without regard to operating or financed leases. A significant portion of financed lease expenditures are recorded in
interest, whereas operating lease expenditures are recorded in rent expense.
This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense and, as such, does
not reflect our cash requirements for leasing commitments. Our presentation of Consolidated and Combined Adjusted EBITDAR should not be construed as a
financial performance measure.
The adjustments made and previously described in the computation of Consolidated and Combined Adjusted EBITDA are also made when computing
Consolidated and Combined Adjusted EBITDAR. We calculate Consolidated and Combined Adjusted EBITDAR by excluding rent-cost of services and rent
related to start up operations from Consolidated and Combined Adjusted EBITDA.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Revenue
Home health and hospice services
Home health
Hospice
Home care and other
Total home health and hospice services
(a)
Senior living services
Total revenue
Year Ended December 31,
2021
2020
Revenue Dollars
Revenue Percentage
Revenue Dollars
Revenue Percentage
$
$
136,505
151,612
21,453
309,570
130,124
439,694
(In thousands)
31.0 % $
34.5
4.9
70.4
29.6
100.0 % $
98,267
134,075
21,317
253,659
137,294
390,953
25.1 %
34.3
5.5
64.9
35.1
100.0 %
(a)
Home care and other revenue is included with home health revenue in other disclosures in this report.
Our consolidated and combined revenue increased $48.7 million, or 12.5% driven by the net organic growth of existing operations across all segments of
$36.8 million or 9.4% as well as increased revenue from acquired operations of $11.9 million or 3.1% during the year ended December 31, 2021.
40
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Home Health and Hospice Services
Home health and hospice revenue
Home health services
Hospice services
Home care and other
Total home health and hospice revenue
Home health services:
Total home health admissions
Total Medicare home health admissions
Average Medicare revenue per 60-day completed episode
(a)
Hospice services:
Total hospice admissions
Average daily census
Hospice Medicare revenue per day
Number of home health and hospice agencies at period end
Year Ended December 31,
2020
2021
(In thousands)
Change
% Change
136,505 $
151,612
21,453
309,570 $
98,267 $
134,075
21,317
253,659 $
38,238
17,537
136
55,911
38.9 %
13.1
0.6
22.0 %
Year Ended December 31,
2020
2021
Change
% Change
37,366
17,356
26,670
12,974
3,405 $
3,290 $
8,613
2,291
174 $
88
8,186
2,083
166 $
76
10,696
4,382
115
427
208
8
12
40.1 %
33.8
3.5
5.2
10.0
4.8
15.8 %
$
$
$
$
(a)
The year to date average for Medicare revenue per 60-day completed episode includes post period claim adjustments for prior periods.
Home health and hospice revenue increased $55.9 million, or 22.0%. Revenue grew due to an increase in all key performance indicators including an
increase in total home health admissions of 40.1%, an increase in Medicare home health admissions of 33.8%, an increase in average Medicare revenue per 60-day
completed episode of 3.5%, an increase of 5.2% in total hospice admissions, and an increase of 10.0% in hospice average daily census. The improvement in these
metrics resulted in organic revenue growth of $44.0 million for the year ended December 31, 2021. Growth was also driven by the acquisition of 11 home health,
hospice and home care operations, between December 31, 2020 and December 31, 2021, resulting in an increase in revenue of $11.9 million or 4.7% overall.
Revenue attributable to sequestration suspension accounted for $3.6 million in the current year.
Senior Living Services
Year Ended December 31,
2020
2021
Change
% Change
Revenue (in thousands)
Number of communities at period end
Occupancy
Average monthly revenue per occupied unit
$
$
130,124
54
72.7 %
3,207
$
$
137,294
54
77.7 %
3,188
$
$
(7,170)
—
(5.0)%
19
(5.2)%
— %
0.6 %
Senior living revenue decreased $7.2 million, or 5.2%, for the year ended December 31, 2021 when compared to the same period in the prior year
primarily due to a 5.0% decrease in occupancy related to the COVID-19 pandemic between December 31, 2020 and December 31, 2021.
41
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Cost of Services
The following table sets forth total cost of services by each of our reportable segments for the periods indicated:
Year Ended December 31,
2021
2020
Change
% Change
Home Health and Hospice
Senior Living
Total cost of services
$
$
257,251
95,842
353,093
206,094
90,780
296,874
$
$
51,157
5,062
56,219
24.8
5.6
18.9
%
%
$
(In thousands)
$
Consolidated and combined cost of services increased $56.2 million or 18.9% for the year ended December 31, 2021 when compared to the year ended
December 31, 2020. Cost of services as a percentage of revenue increased by 4.4% from 75.9% to 80.3% over the same time period. The increase in cost of
services was driven by the increase in revenue, new acquisitions in the current year, an increase in wages and benefits, and additional costs related to the impact of
the COVID-19 pandemic.
Home Health and Hospice Services
Year Ended December 31,
2020
2021
(In thousands)
Change
% Change
Cost of service
Cost of services as a percentage of revenue
$
257,251
$
206,094
$
83.1 %
81.2 %
51,157
1.9 %
24.8 %
Cost of services related to our home health and hospice services segment increased $51.2 million, or 24.8%, primarily due to increased volume of services
provided. Cost of services as a percentage of revenue for the year ended December 31, 2021 increased 1.9% compared to the year ended December 31, 2020,
primarily due to wage costs increased over the prior year in per hour wages, increase in overtime, and reduced staff availability due to the impact of COVID-19 on
the staffing environment, resulting in higher overtime and per hour wages.
Senior Living Services
Cost of service
Cost of services as a percentage of revenue
Year Ended December 31,
2020
2021
Change
% Change
$
(In thousands)
95,842
$
73.7 %
90,780
$
66.1 %
5,062
7.6 %
5.6 %
Cost of services related to our senior living services segment increased $5.1 million, or 5.6% for the year ended December 31, 2021 when compared to the year
ended December 31, 2020. As a percentage of revenue, costs of service increased by 7.6% as a result of a decrease in occupancy while wage costs increased.
Rent—Cost of Services. Rent increased 4.3% from $39.2 million to $40.9 million for the year ended December 31, 2021 compared to the year ended December 31,
2020, primarily as a result of acquisitions and CPI adjustments. Rent as a percentage of total revenue decreased from 10.1% to 9.3% in the year ended December
31, 2021, as the growth in revenue outpaced the increase in rent expense.
General and Administrative Expense. Our general and administrative expense increased $5.0 million or 15.9% from $31.3 million to $36.3 million and as a percent
of revenue from 8.0% to 8.2% for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in general and administrative
costs was primarily driven by an increase of $4.8 million in wages and benefits, of which stock-based compensation accounted for $0.7 million, during the year
ended December 31, 2021.
Depreciation and Amortization. Depreciation and amortization expense decreased slightly as a percentage of total revenue.
42
Table of Contents
Provision for Income Taxes. Our effective tax rate for the year ended December 31, 2021 was 21.3% of earnings before income taxes compared with an effective
tax rate of 13.1% for the year ended December 31, 2020. The increase in the effective tax rate was due to an increase in non-deductible expenses. See Note 14,
Income Taxes, to the Consolidated and Combined Financial Statements included elsewhere in this report filed on Form 10-K for further discussion.
Comparison of Prior Year Information
For a comparison of our results of operations of the fiscal year ended December 31, 2020 as compared to the year ended December 31, 2019 refer to Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operation on Form 10-K filed with the SEC on February 24, 2021.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated through operating activities and borrowings under our revolving credit facility.
Revolving Credit Facility
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 $150.0 million (the “Revolving Credit Facility”). The Revolving Credit
Facility is not subject to interim amortization and the Company will not be required to repay any loans under the Revolving Credit Facility prior to maturity in
2026. The Company is permitted to prepay all or any portion of the loans under the Revolving Credit Facility prior to maturity without premium or penalty, subject
to reimbursement of any LIBOR breakage costs of the lenders.
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 December 31, 2021, we were in compliance with all covenants.
As of December 31, 2021 we had $5.2 million of cash and $92.3 million of available borrowing capacity on our Revolving Credit Facility.
We believe that our existing cash, cash generated through operations and our access to financing facilities, together with funding through third-party
sources such as commercial banks, will be sufficient to fund our operating activities and growth needs, and provide adequate liquidity for the next twelve months.
The following table presents selected data from our combined statement of cash flows for the periods presented:
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Year Ended December 31,
2021
2020
(In thousands)
(18,223) $
(20,120)
43,490
5,147
43
5,190 $
50,204
(41,616)
(8,947)
(359)
402
43
$
$
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Our net cash from operating activities for the year ended December 31, 2021 decreased by $68.4 million when compared to the year ended December 31,
2020 . The decrease was primarily related to the repayment of $21.8 in the current year related to AAP from the CARES Act resulting in a change of $49.8 million
in operating cash flow. Exclusive of the repayment of AAP, our net cash flow from operations would have been $3.6 million positive for the year ended December
31,
43
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2021. Other factors that contributed to the net cash used in operating activities was a decrease in net income of $13.4 million when compared to the year ended
December 31, 2021.
Our net cash used in investing activities for the year ended December 31, 2021 decreased by $21.5 million compared to the year ended December 31,
2020. The decrease in funds used for investing activities was primarily due to a decrease of $19.6 million in cash paid for acquisitions during the year ended
December 31, 2021.
Our net cash provided by financing activities increased by approximately $52.4 million for the year ended December 31, 2021 when compared to the year ended
December 31, 2020 primarily due to an increase in borrowing on our revolving credit facility, partially offset by payments on our deferred financing costs related
to the refinance of our credit facility in the first quarter 2021.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. We are exposed to risks associated with market changes in interest rates. Our Revolving Credit Facility exposes us to variability in
interest payments due to changes in LIBOR. A 1.0% interest rate change would cause interest expense to change by approximately $0.5 million annually based
upon our outstanding long-term debt as of December 31, 2021. We manage our exposure to this market risk by monitoring available financing alternatives.
LIBOR Phase-Out. LIBOR is in the process of being wound down. As of December 31, 2021 all CHF and EUR LIBOR settings, the 1 Week and 2
Months USD LIBOR settings, and the Overnight/Spot Next, 1 Week, 2 Months and 12 Months GBP and JPY LIBOR settings have ceased to be published.
However, the Overnight and the 1-, 3-, 6- and 12-Months USD LIBOR settings will continue until June 2023. We are required to pay interest on borrowings under
our Credit Facility at floating rates based on the 1-month LIBOR and thus, we do not expect to transition away from the LIBOR benchmark until June 2023.
Future debt that we may incur may also require that we pay interest based upon LIBOR, or a “synthetic” benchmark equivalent such as the Standard
Overnight Financing Rate or (“SOFR”). We currently expect that the determination of interest under our credit agreement would be revised as provided under the
agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR for similar
types of loans. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under
our agreement would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out
or transitioned.
Item 8. Financial Statements and Supplementary Data
The consolidated and combined financial statements and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K are
included elsewhere in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in
SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the
criteria set forth in “Internal Control-Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2021 based on those
criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements included in this Annual
Report on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the effectiveness of our internal control over financial reporting.
Their report is set forth below.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended December 31, 2021, there were no material changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of The Pennant Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Pennant Group, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on
criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial
statements as of and for the year ended December 31, 2021 of the Company and our report dated February 28, 2022 expressed an unqualified opinion on those
financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
February 28, 2022
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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None
Item 10. Directors, Executive Officers and Corporate Governance
Part III.
The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2022 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2022 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2022 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2022 Annual Meeting of
Stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2022 Annual Meeting of
Stockholders.
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Table of Contents
Item 15. Exhibits, Financial Statements and Schedules
The following documents are filed as a part of this report:
(a)(1) Financial Statements:
Part IV.
The following Consolidated and Combined Financial Statements of the Company are included in Part II, Item 8 of this Annual Report on Form 10-K.
•
•
•
•
•
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated and Combined Statements of Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated and Combined Statements of Changes in Shareholders' Equity and Net Parent Investment for the Years Ended December 31, 2021,
2020 and 2019
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
• Notes to the Consolidated and Combined Financial Statements
(a)(2) Financial Statement Schedules:
There are no financial schedules included in this Report as they are either not applicable or included in the financial statements.
(a) (3) Exhibits: The following exhibits are filed with this Report or incorporated by reference:
Exhibits
Exhibit No.
2.1#
3.1
3.2
4.1
10.1
10.2
10.3
10.4
Exhibit Description
Master Separation Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc. and The Pennant Group, Inc. (incorporated
by reference to Exhibit 2.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3,
2019).
Second Amended and Restated Certificate of Incorporation of The Pennant Group, Inc., effective as of February 21, 2022 (incorporated by
reference to Exhibit 3.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC February 22, 2022).
Amended and Restated By-laws of The Pennant Group, Inc. (incorporated by reference to Exhibit 3.2 to The Pennant Group, Inc.’s Current
Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3, 2019).
Description of Securities of The Pennant Group, Inc. (incorporated by reference to Exhibit 4.1 to The Pennant Group, Inc.’s Annual Report on
Form 10-K (File No. 001-389000) filed with the SEC on March 4, 2020).
Transition Services Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc. and The Pennant Group, Inc. (incorporated
by reference to Exhibit 10.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3,
2019).
Tax Matters Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc. and The Pennant Group, Inc. (incorporated by
reference to Exhibit 10.2 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3,
2019).
Employee Matters Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc. and The Pennant Group, Inc. (incorporated
by reference to Exhibit 10.3 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3,
2019).
Form of Lease Agreement by and among subsidiaries of The Ensign Group, Inc. and subsidiaries of The Pennant Group, Inc. (incorporated by
reference to Exhibit 10.4 to The Pennant Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No. 001-38900) filed
with the SEC on August 19, 2019).
48
Table of Contents
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11
10.12
10.13+
10.14+
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
The Pennant Group, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.12 to The Pennant Group, Inc.’s Current Report
on Form 8-K (File No. 001-38900) filed with the SEC on October 3, 2019).
Form of Options Granted Under The Pennant Group, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to The
Pennant Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on August 19,
2019).
Form of RSUs Granted Under The Pennant Group, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.7 to The Pennant
Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on August 19, 2019).
Form of RS Granted Under The Pennant Group, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.8 to The Pennant
Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on August 19, 2019).
The Pennant Group, Inc. 2019 Long Term Incentive Plan (incorporated by reference to Exhibit 10.11 to The Pennant Group, Inc.’s Current
Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3, 2019).
Form of LTIP RS Granted Under The Pennant Group, Inc. 2019 Long Term Incentive Plan (incorporated by reference to Exhibit 10.10 to The
Pennant Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on August 19,
2019).
Form of Indemnification Agreement to be entered into between The Pennant Group, Inc. and each of its directors and executive officers
(incorporated by reference to Exhibit 10.11 to The Pennant Group, Inc.’s Amendment No. 2 to the Registration Statement on Form 10 (File No.
001-38900) filed with the SEC on August 19, 2019).
Credit Agreement, dated February 23, 2021, by and among the Company and certain of its subsidiaries, the lenders named therein, and Truist
Bank (successor by merger to SunTrust Bank), as administrative agent for the lenders (incorporated by reference to Exhibit 10.1 to The Pennant
Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on February 24, 2021).
Cornerstone Healthcare, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.13 to The Pennant Group, Inc.’s Amendment
No. 3 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on September 3, 2019).
The Ensign Group, Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.14 to The Pennant Group, Inc.’s Amendment No.
3 to the Registration Statement on Form 10 (File No. 001-38900) filed with the SEC on September 3, 2019).
Subsidiaries of The Pennant Group, Inc.
Consent of Deloitte & Touche LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Label Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
49
Table of Contents
104*
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document.
* Filed with this report.
** Furnished with this report.
+ Exhibit constitutes a management contract or compensatory plan or agreement.
# Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The Pennant Group Inc. agrees to furnish a supplemental copy of any omitted
schedule to the SEC upon request.
Item 16. Form 10-K Summary
Not applicable.
50
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
SIGNATURES
undersigned thereunto duly authorized.
Dated: February 28, 2022
The Pennant Group, Inc.
BY:
/s/ JENNIFER L. FREEMAN
Jennifer L. Freeman
Chief Financial Officer (Principal Financial Officer, Principal
Accounting Officer and Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DANIEL H WALKER
Daniel H Walker
/s/ JENNIFER L. FREEMAN
Jennifer L. Freeman
/s/ CHRISTOPER R. CHRISTENSEN
Christopher R. Christensen
/s/ JOHN G. NACKEL, Ph.D.
John G. Nackel, Ph.D.
/s/ STEPHEN M. R. COVEY
Stephen M. R. Covey
/s/ JOANNE STRINGFIELD
JoAnne Stringfield
/s/ SCOTT E. LAMB
Scott E. Lamb
/s/ GREGORY K. MORRIS
Gregory K. Morris
/s/ BARRY M. SMITH
Barry M. Smith
Chairman and Chief Executive Officer (Principal
Executive Officer)
February 28, 2022
Chief Financial Officer (Principal Financial Officer,
Principal Accounting Officer and Duly Authorized
Officer)
Director
Director
Director
Director
Director
Director
Director
51
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
Table of Contents
THE PENNANT GROUP, INC.
INDEX TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated and Combined Financial Statements:
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated and Combined Statements of Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated and Combined Statements of Stockholders' Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to the Consolidated and Combined Financial Statements
53
55
56
57
58
60
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of The Pennant Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Pennant Group, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020,
the related consolidated and combined statements of income, stockholders' equity and net parent investment, and cash flows for each of the three years in the
period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America .
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal
controls over financial reporting as of December 31, 2021, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commissions and our report dated February 28, 2022 expressed an unqualified opinion on the
Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Self-Insurance Reserves— Refer to Notes 2 to the financial statements
Critical Audit Matter Description
The Company is self-insured for general and professional liability and workers’ compensation. The self-insurance liability is undiscounted and determined
actuarially based on historical data of the Company’s claims experience. The Company has established retention amounts that limit the Company’s exposure. Self-
insurance liabilities recorded as of December 31, 2021 were $6,906 thousand.
We identified the evaluation of the Company’s self-insurance liabilities as a critical audit matter because the projected settlement value of reported and unreported
claims involves significant estimation by management. This required a high degree of auditor judgment and an increased extent of effort, including the need to
involve our actuarial specialists when performing audit procedures to evaluate whether the self-insurance liabilities were appropriately recorded as of December
31, 2021.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the self-insurance liabilities included the following among others:
• We tested the effectiveness of controls over the reserve for general and professional liability and workers’ compensation, including those over the
determination of the case reserves for known claims.
Reading the Company’s insurance policies and comparing the coverage and terms by plan year to the assumptions used by management.
Testing the completeness and accuracy of the underlying data, including historical claims, used to determine the assumptions for loss development.
Involving actuarial specialists with specialized skill, industry knowledge, and relevant experience who assisted in:
•
•
•
– Comparing prior-year expected development and ultimate loss to actuals incurred during the current year to identify potential bias in the
determination of the self-insurance reserves.
– Developing an independent range of estimates of the insurance reserves, utilizing paid and reported loss development factors from the
–
Company’s historical data and industry loss development factors.
Evaluating qualifications of the Company’s actuaries by assessing the certifications and determining whether they meet the Qualification
Standards of the American Academy of Actuaries to render the statements of actuarial opinion in their analyses.
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
February 28, 2022
We have served as the Company's auditor since 2019.
54
Table of Contents
Assets
Current assets:
THE PENNANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
December 31, 2021
December 31, 2020
Cash
Accounts receivable—less allowance for doubtful accounts of $902 and $643, respectively
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Escrow deposits
Deferred tax assets
Restricted and other assets
Goodwill
Other indefinite-lived intangibles
Total assets
Liabilities and equity
Current liabilities:
Accounts payable
Accrued wages and related liabilities
Operating lease liabilities—current
Other accrued liabilities
Total current liabilities
Operating lease liabilities—long-term
Other long-term liabilities
Long-term debt, net
Total liabilities
Commitments and contingencies
Equity:
Common stock, $0.001 par value; 100,000 shares authorized; 28,826 and 28,499 shares issued and
outstanding at December 31, 2021, respectively, and 28,696 and 28,243 shares issued and outstanding
at December 31, 2020, respectively
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 3 shares at December 31, 2021 and 2020
Total Pennant Group, Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
$
$
$
5,190 $
53,940
16,711
75,841
16,788
300,997
—
3,848
4,828
74,265
53,730
530,297 $
10,553 $
23,480
16,118
21,484
71,635
287,753
5,293
51,372
416,053
28
95,595
14,641
(65)
110,199
4,045
114,244
530,297 $
43
47,221
12,335
59,599
17,884
308,650
525
2,097
4,289
66,444
47,488
506,976
9,761
26,873
14,106
38,275
89,015
296,615
11,897
8,277
405,804
28
84,671
11,945
(65)
96,579
4,593
101,172
506,976
See accompanying notes to consolidated and combined financial statements.
55
THE PENNANT GROUP, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(In thousands, except for per-share amounts)
Table of Contents
Revenue
Expense:
Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Total expenses
Income from operations
Other income (expense):
Other (expense) income
Interest expense, net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Less: net (loss)/ income attributable to noncontrolling interest
Net income and other comprehensive income attributable to The Pennant Group, Inc.
Earnings per common share (Note 4):
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated and combined financial statements.
56
Year Ended December 31,
2020
2019
2021
$
439,694 $
390,953 $
338,531
353,093
40,863
36,259
4,784
434,999
4,695
(24)
(1,941)
(1,965)
2,730
582
2,148
(548)
2,696 $
296,874
39,191
31,296
4,675
372,036
18,917
225
(1,239)
(1,014)
17,903
2,350
15,553
(191)
15,744 $
0.09 $
0.09 $
0.56 $
0.52 $
258,941
34,975
35,135
3,810
332,861
5,670
—
(410)
(410)
5,260
2,085
3,175
629
2,546
0.11
0.11
28,406
30,642
28,029
30,228
27,838
29,586
$
$
$
Table of Contents
THE PENNANT GROUP, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
AND NET PARENT INVESTMENT
(In thousands)
Retained
Earnings/
(Accumulated
Deficit)
Additional
Paid-In
Capital
Common Stock
Treasury Stock
Amount
Amount
Shares
Shares
Net Parent
Investment
Non-
Controlling
Interest
Total
Balance at December 31, 2018
Noncontrolling interest attributable to
subsidiary equity plan
Share repurchase related to subsidiary
equity plan
Net income attributable to
noncontrolling interest
Net transfer from parent
Net income attributable to The Pennant
Group, Inc.
Cash Dividend to Parent
Reclassification of Invested Equity
Issuance of Common Stock after spin-
off
Share-based Compensation after spin-off
Exercise of Stock Options, issuance of
other awards after spin-off
Balance at December 31, 2019
Noncontrolling interests assumed related
to acquisitions
Sale of noncontrolling interests, net of
tax
Net loss attributable to Non-Controlling
interests
Net income attributable to The Pennant
Group, Inc.
Share-based compensation
Issuance of common stock from the
exercise of stock options
Issuance/ (cancellation) of restricted
stock
Shares of common stock withheld to
satisfy tax withholding obligations
Balance at December 31, 2020
Net income/ (loss) attributable to The
Pennant Group, Inc.
Net loss attributable to Non-Controlling
interests
Share-based compensation
Issuance of common stock from the
exercise of stock options
Net issuance of restricted stock
Balance at December 31, 2021
— $
— $
— $
—
—
—
—
—
—
—
27,834
—
601
28,435
—
—
—
—
—
238
26
(3)
28,696
—
—
—
—
—
—
—
—
—
—
28
—
—
28
—
—
—
—
—
—
—
—
28
—
—
—
—
—
—
—
—
—
72,893
(28)
1,987
30
74,882
—
313
—
—
8,335
1,141
—
—
84,671
—
—
10,040
115
15
28,826 $
—
—
28 $
884
—
95,595 $
—
—
—
—
—
(3,799)
—
—
—
—
—
(3,799)
—
—
—
15,744
—
—
—
—
11,945
2,696
—
—
—
—
14,641
— $
— $
55,856 $
9,432 $
65,288
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(65)
(65)
—
—
—
(2,991)
—
—
11,894
6,345
(11,600)
(59,504)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3 $
—
—
(65) $
—
—
— $
3,585
(394)
629
—
—
(13,252)
—
—
—
—
594
(394)
629
11,894
2,546
(11,600)
137
—
1,987
30
71,111
4,646
4,646
138
(191)
—
—
—
—
451
(191)
15,744
8,335
1,141
—
—
4,593
(65)
101,172
—
2,696
(548)
—
(548)
10,040
—
—
884
—
4,045 $ 114,244
See accompanying notes to consolidated and combined financial statements.
57
Table of Contents
THE PENNANT GROUP, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
2021
Year Ended December 31,
2020
2019
$
2,148 $
15,553 $
Depreciation and amortization
Amortization of deferred financing fees
Provision for doubtful accounts
Share-based compensation
Deferred income taxes
Impairment of long-lived assets
Change in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Operating lease obligations
Accounts payable
Accrued wages and related liabilities
Other accrued liabilities
Advance payments
Other long-term liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Cash payments for business acquisitions
Escrow deposits
Restricted and other assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sale of subsidiary shares
Repurchase of subsidiary shares
Net investment from parent
Cash distribution to parent in connection with Spin-Off
Sale of noncontrolling interest
Proceeds from revolver agreement
Payments on revolver agreement
Repurchase of shares of common stock to satisfy tax withholding obligations
Payments for deferred financing costs
Issuance of common stock upon the exercise of options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash beginning of period
Cash end of period
4,784
488
616
10,040
(1,752)
2,835
(7,335)
(4,624)
803
562
(3,864)
2,570
(21,786)
(3,708)
(18,223)
(6,303)
(13,550)
—
(267)
(20,120)
—
—
—
—
—
125,500
(81,500)
—
(1,394)
884
43,490
5,147
43
5,190 $
4,675
330
560
8,335
(2,201)
—
(15,712)
(7,435)
2,068
993
10,538
2,427
27,997
2,076
50,204
(7,253)
(33,193)
(525)
(645)
(41,616)
—
—
—
—
555
52,700
(63,200)
(65)
(78)
1,141
(8,947)
(359)
402
43 $
$
3,175
3,810
78
858
3,382
79
—
(8,571)
(2,746)
(1,861)
4,069
3,376
1,720
—
2,185
9,554
(6,714)
(18,760)
(1,400)
409
(26,465)
2,293
(2,687)
10,788
(11,600)
—
42,500
(22,500)
—
(1,552)
30
17,272
361
41
402
See accompanying notes to consolidated and combined financial statements.
58
Table of Contents
THE PENNANT GROUP, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - (Continued)
(In Thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease obligations
Net non-cash adjustment to right-of-use assets and lease liabilities from lease modifications
Non-cash investing activity:
Capital expenditures in accounts payable
2021
Year Ended December 31,
2020
2019
$
$
$
$
$
$
1,448 $
2,616 $
39,151 $
3,230 $
4,674 $
1,116 $
7,865 $
35,853 $
5,451 $
1,939 $
730 $
560 $
156
120
37,088
9,059
77,462
946
See accompanying notes to consolidated and combined financial statements.
59
Table of Contents
THE PENNANT GROUP INC.
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars 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 December 31,
2021, the Company’s subsidiaries operated 88 home health, hospice and home care agencies and 54 senior living communities located in Arizona, California,
Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming.
On October 1, 2019, The Ensign Group, Inc. (NASDAQ: ENSG) (“Ensign” or the “Parent”) completed the separation of Pennant from Ensign through a
tax-free distribution of substantially all of Pennant’s issued and outstanding common stock to the stockholders of Ensign (the “Spin-Off”). To accomplish the Spin-
Off, Ensign contributed the Company’s assets and liabilities into Pennant and each Ensign stockholder received a distribution of one share of Pennant common
stock for every two shares of Ensign’s common stock, plus cash in lieu of fractional shares. Additionally, the noncontrolling interest was converted into shares of
Pennant at the established conversion ratio. As a result of the Spin-Off on October 1, 2019, Pennant began trading as an independent company on the NASDAQ
under the symbol “PNTG.”
Certain of the Company’s subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information
technology, legal, risk management, and other services to the operations through contractual relationships.
Each of the Company’s affiliated operations are operated by separate, independent subsidiaries that have their own management, employees and assets.
References herein to the consolidated “Company” and “its” assets and activities is not meant to imply, nor should it be construed as meaning, that Pennant has
direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by Pennant.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated and combined financial statements of the Company (the “Financial Statements”) reflect the
Company’s financial position for the years ended December 31, 2021 and 2020, and the Company’s results of operations and cash flows for the years ended
December 31, 2021, 2020 and 2019 and 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”). Prior to the Spin-Off, the combined financial statements were prepared on a
stand-alone basis and derived from the consolidated financial statements and accounting records of Ensign. Management believes that the 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 applicable to the annual period.
All intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. The
consolidated and combined statements of income reflect income that is attributable to the Company and the noncontrolling interest.
The Company consists of various limited liability companies and corporations established to operate home health, hospice, home care, and senior living
operations. The Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. Revenue
was derived from transactional information specific to the Company’s services provided. The costs in the consolidated and combined statements of income reflect
direct costs and allocated costs prior to the Spin-Off.
Estimates and Assumptions - The preparation of the 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 Financial Statements and
the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Financial Statements relate to self-insurance
reserves, revenue, cost allocations from prior to the Spin-Off, intangible assets and goodwill, right-of-use assets and lease liabilities for leases greater than 12
months, and income taxes. Actual results could differ from those estimates.
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Revenue Recognition - Revenues are recognized when services are provided to the patients at the amount that reflects the consideration to which the
Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in
exchange for providing patient care. 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 effect net service revenue in the period such variances become known.
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. See Note 5, Revenue and Accounts Receivable.
CARES Act: The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States. During
the second quarter of 2020 the Company applied for and received $27,997 in funds under the Accelerated and Advance Payment (“AAP”) Program. For the year
ended December 31, 2021, the Company repaid $21,786 of the AAP funds, with the remaining balance of $6,211 recorded in other accrued liabilities on the
consolidated balance sheets. The CARES Act allowed for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with
approximately 50% due on December 31, 2021 and the remainder due on December 31, 2022. The Company deferred approximately $7,836 of employer-paid
portion of social security tax. In the fourth quarter of the current year, we repaid $3,707 and approximately $4,129 of the balance remains deferred and is recorded
in accrued wages and related liabilities. The CARES Act temporarily suspended the 2% sequestration payment adjustment on Medicare fee-for-service payment
beginning May 1, 2020 and was extended through December 31, 2021. The Company recognized $3,555 and $2,765 in revenue related to the suspension of
sequestration for the years ended December 31, 2021 and 2020, respectively, exclusive of our start-up operations. The Company will continue to assess the effect
of the CARES Act and ongoing other government legislation related to the COVID-19 pandemic that may be issued.
Cash - Cash consists of petty cash and bank deposits and therefore approximates fair value. The Company places its cash with high credit quality
financial institutions.
Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable consist primarily of amounts due from Medicare and Medicaid
programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. The allowance for
doubtful accounts is the Company’s best estimate of current expected credit losses in the accounts receivable balance.
Property and Equipment - Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred.
Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 15 years). Leasehold
improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.
Impairment of Long-Lived Assets - The Company reviews the carrying value of long-lived assets that are held and used in the independent operating
subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiary to which the assets relate, utilizing management’s
best estimate, appropriate assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the
asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company
estimates the fair value of assets based on the estimated future discounted cash flows of the asset. For the year ended December 31, 2021, management evaluated
its long-lived assets and the Company identified $2,835 in long-lived asset impairment related to six senior living communities. Management did not identify any
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
asset impairment during the years ended December 31, 2020 and 2019. See further discussion at Note 8, Property and Equipment, Net.
Intangible Assets and Goodwill - The Company’s indefinite-lived intangible assets consist of trade names and Medicare and Medicaid licenses. The
Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the
carrying amount of the intangible asset may not be recoverable. The Company did not identify any indefinite-lived intangible asset impairment during the years
ended December 31, 2021, 2020 and 2019.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to
annual test for impairment as of the beginning of the fourth quarter or more frequently if events or changes indicate that the Company's goodwill might be
impaired. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform a
quantitative impairment test by comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair
value, then the Company records an impairment of goodwill equal to the amount that the carrying amount of a reporting unit exceeds its fair value.
As of December 31, 2021, we evaluated potential triggering events that might be indicators that our goodwill and indefinite lived intangibles were
impaired. As a result of our evaluation, no goodwill or indefinite intangible asset impairments were recorded during the years ended December 31, 2021, 2020 and
2019. See further discussion at Note 9, Goodwill and Intangible Assets, Net.
Self-Insurance Reserve - The Company retains risk for a substantial portion of potential claims for general and professional liability and workers’
compensation. Beginning on January 1, 2022 the Company transitioned its employee health plans to a self insurance model. Prior to that date the Company did not
retain risk related to its employee health plans.
The Company recognizes obligations associated with these costs, up to specified deductible limits in the period in which a claim is incurred, including
with respect to both reported claims and claims incurred but not reported. The Company evaluates the adequacy of the self insurance reserves in conjunction with
an independent actuarial assessment.As of December 31, 2021 the general and professional liability insurance has a retention limit of $150 per claim with a $500
corridor as an additional out-of-pocket retention we must satisfy for claims within the policy year before the carrier will reimburse losses. The workers’
compensation insurance has a retention limit of $250 per claim, except for policies held in Texas and Washington which are subject to state insurance and possess
their own limits.
These costs have generally been estimated based on historical data of our claims experience. Such estimates, and the resulting reserves, are reviewed and
updated by us on a quarterly basis. Additionally, the Company has partially indemnified Ensign for general and professional liabilities incurred prior to the Spin-
off but not reported until after that date and included that amount in its accrual below.
The following table presents details of the Company's insurance programs, including amounts accrued for the periods indicated in other accrued liabilities
and other long-term liabilities in our accompanying balance sheets. The amounts accrued below represent the total estimated liability for individual claims that are
less than our noted insurance coverage amounts, which includes outstanding claims and claims incurred but not reported. The amounts are reported gross of
reinsurance receivable of $927 and $704 included in restricted and other assets for the years ended December 31, 2021 and 2020, respectively.
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Type of Insurance
General and professional liability
Workers’ compensation
Total estimated liability
Less: long-term portion, included in other long-term liabilities
Current portion of estimated liability, included in other accrued liabilities
December 31, 2021
2021
2020
$
$
2,007 $
4,899
6,906
(5,293)
1,613 $
1,063
2,783
3,846
(2,492)
1,354
Fair Value of Financial Instruments - The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued
liabilities, and debt. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short
durations. The Company determines fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers
include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs for which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
Income Taxes - Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the
Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. The Company generally expects to fully utilize its
deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely
than not to be realized.
In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain
estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely
future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with the Company’s
estimates and assumptions, actual results could differ.
Noncontrolling Interest - The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented
within total equity in the Company's consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income/
(loss) attributable to The Pennant Group, Inc. in its consolidated and combined statements of income. Net income per share is calculated based on net income/
(loss) attributable to The Pennant Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary
earnings based on ownership interest.
Share-Based Compensation -The Company measures and recognizes compensation expense for all share-based payment awards, including employee
stock options and restricted stock, made to employees and Pennant’s directors based on estimated fair values, ratably over the requisite service period of the award.
The Company accounts for forfeitures as they occur. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted
stock awards issued, the amount of which is contingent upon the number of future grants and other variables. The total amount of share-based compensation was
$10,040, $8,335, and $3,382 for the years ended December 31, 2021, 2020 and 2019, respectively, of which $7,964, $7,222 and $2,769, respectively, was recorded
in general and administrative expense, with the difference being recorded in cost of services. For further discussion see Note 12, Options and Awards.
Earnings Per Share - In connection with the Spin-Off, shares of existing equity awards were replaced with shares under the new Pennant awards and are
reflected in basic and diluted net income per share for the years ended December 31, 2021, 2020 and 2019, respectively. For further discussion see Note 4,
Computation of Net Income Per Common Share
Prior to Spin-Off
Cost Allocation - The Financial Statements include allocations of costs for certain shared services provided to the Company by Ensign subsidiaries prior
to the Spin-Off on October 1, 2019. Such allocations include, but are not limited to, executive management, accounting, human resources, information technology,
compliance, legal, payroll, insurance, tax,
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
treasury, and other general and administrative items. These costs were allocated to the Company on a basis of revenue, location, employee count, or other
measures. These cost allocations are reflected within general and administrative expense in the consolidated and combined statements of income for the year ended
December 31, 2019, including for share-based compensation expenses disclosed in Note 12, Options and Awards. The amount of general and administrative costs
allocated from January 1, 2019 to October 1, 2019, the date of the Spin-Off, inclusive of share-based compensation expense, was $23,710. Management believes
the basis on which the expenses were allocated to be a reasonable reflection of the services provided to the Company during the periods.
Insurance - Prior to the Spin-Off Ensign was partially self-insured for healthcare, general and professional liability, and workers’ compensation, and
historically allocated premium expense to all subsidiaries of Ensign in its accounting records. To reflect all of the insurance costs, quarterly actuary determined
adjustments were allocated to the Company based on the proportional historical premium expense. No self-insurance accruals were allocated to the Company as
these accruals represent the obligations of Ensign. In connection with the Spin-Off, the Company purchased insurance through a third-party to replace the coverage
provided by Ensign’s self-insured policies.
Debt - Ensign’s external debt and related interest expense were not allocated to the Company for any of the periods presented as no portion of the
borrowings were assumed by the Company as part of the Spin-Off. All interest incurred by the Company was subsequent to the Spin-Off.
Income Taxes - Prior to the date of the Spin-off, the Company’s operations have been included in Ensign’s U.S. federal and state income tax returns and
all income taxes have been paid by subsidiaries of Ensign. Also prior to the date of the Spin-off, income tax expense and other income tax related information
contained in these Financial Statements were presented using a separate tax return approach. Under this approach, the provision for income taxes represents
income tax paid or payable for the current year plus the change in deferred taxes during the year calculated as if the Company was a stand-alone taxpayer filing
hypothetical income tax returns. Management believes that the assumptions and estimates used to determine these tax amounts are reasonable. However, the
Company’s Financial Statements may not necessarily reflect its income tax expense or tax payments in the future, or what tax amounts would have been if the
Company had been a stand-alone company for the entire period presented.
Invested Capital - The net parent investment on the consolidated and combined statement of stockholders equity and statement of cash flows represents
Ensign’s historical investment in the Company, the net effect of transactions with, and allocations from, Ensign and the Company’s accumulated earnings. Invested
capital was reclassified into additional paid-in-capital at the date of the Spin-Off.
Noncontrolling Interest - Prior to the Spin-Off, the Company presented the noncontrolling interest and the amount of consolidated net income/ (loss)
attributable to the Company in its Financial Statements. The carrying amount of the noncontrolling interest was adjusted by an allocation of subsidiary earnings
based on ownership interest prior to the Spin-Off. The noncontrolling subsidiary interest included in the Financial Statements was converted into common shares
of Pennant concurrent with the distribution to Ensign stockholders at the date of the Spin-Off and thus, does not receive an allocated portion of earnings.
Share-based compensation - Prior to the Spin-Off, employees of the Company’s subsidiaries participated in Ensign’s equity-based incentive plans (the
“Ensign Plans”) and the Cornerstone Subsidiary Equity plan (the “Subsidiary Equity Plan”). Share-based compensation includes the expense attributable to
employees of the Company’s subsidiaries who participated in the Ensign Plans, as well as the allocated cost related to Ensign subsidiaries’ employees that
participated in the Ensign Plans. Share-based compensation related to Ensign subsidiaries’ employees that participated in the Ensign Plans were allocated on the
basis of revenue. All share-based compensation related to the Subsidiary Equity Plan was recognized in the Financial Statements and, therefore, no cost allocation
was necessary.
Prior to the Spin-Off, share-based compensation costs associated with the Subsidiary Equity Plan awards was initially measured at fair value at the grant
date and was expensed as non-cash compensation over the vesting term. Historically, these awards were granted once per year. The fair value has been determined
by an independent valuation of the subsidiary shares. The valuation incorporated a discounted cash flow analysis combined with a market-based approach to
determine the fair value of the subsidiary equity.
Recent Accounting Standards Adopted by the Company
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP literature recognized by
the FASB and applicable to the Company. For any new pronouncements, the Company considers whether the new pronouncements could alter previous generally
accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company’s reported financial position or
operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management and certain standards are
under consideration.
FASB Accounting Standards Update, or ASU, ASU 2021-01 “Reference Rate Reform (Topic 848): Scope” or ASU 2020-4 - On January 7, 2021, the FASB
issued ASU 2021-01 to amend the scope of the guidance in ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting” or ASU 2020-4. Specifically, the amendments in ASU 2021-01 clarify that “certain optional expedients and exceptions in Topic
848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.” The amendment in ASU 2021-1 is
available to all entities: (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020
through the date that the final update to the standard was issued or (ii) on a prospective basis for new contract modifications through December 31, 2022. The
Company has adopted ASU 2021-01 on a prospective basis effective as of January 7, 2021. There was no material impact to the Company’s Consolidated and
Combined Financial Statements or related disclosures as a result of the adoption of ASU 2021-01.
3. RELATED PARTY TRANSACTIONS AND NET PARENT INVESTMENT
Prior to the Spin-Off, our businesses were included as subsidiaries of Ensign. As a result, our transactions were considered related party transactions. On
October 1, 2019, in connection with the Spin-Off, Pennant entered into several agreements with Ensign that set forth the principal actions taken or to be taken in
connection with the Spin-Off and govern the relationship of the parties following the Spin-Off. On October 1, 2021 the company concluded its Transition Services
Agreement with Ensign.
The Company has incurred $3,124, $5,536, and $2,982 in costs related to the Transitions Services Agreement for the years ended December 31, 2021,
2020 and 2019, respectively. Additionally, the Company has recognized $208, $578, and $291 in tax benefits related to the Tax Matters Agreement for the years
ended December 31, 2021, 2020 and 2019, respectively, and has recorded a payable to Ensign in connection with any unpaid portion of these amounts. See
“Certain Relationships and Related Party Transactions—Agreements with Ensign Related to the Spin-Off,” contained within the Information Statement as well as
the Form 8-K filed with the SEC on October 3, 2019 for further discussion of the agreements entered into in connection with the Spin-Off.
The Company leases 32 of its senior living communities from subsidiaries of Ensign, each of the leases have a term of between 14 and 20 years from the
lease commencement date. The total amount of rent expense included in Rent - cost of services paid to subsidiaries of Ensign was $12,773, $12,536, and $11,292
for the years ended December 31, 2021, 2020 and 2019, respectively.
Certain related party activity occurred as the Company’s subsidiaries received services from Ensign’s subsidiaries. Services included in cost of services
were $3,084, $4,205, and $3,166 for the years ended December 31, 2021, 2020 and 2019, respectively.
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.
Prior to Spin-Off
Net income attributable to the noncontrolling interest has been included in the numerator for the year ended December 31, 2019, as the non-controlling
subsidiary interest that existed prior to the Spin-Off was converted into common shares of Pennant concurrent with the distribution to Ensign stockholders at the
date of the Spin-Off.
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the computation of basic and diluted net income per share for the periods presented:
Numerator:
Net income
Add: net (loss)/ income attributable to noncontrolling interests
Net income attributable to The Pennant Group, Inc.
Denominator:
Weighted average shares outstanding for basic net income per share
Plus: incremental shares from assumed conversion
(a)
Adjusted weighted average common shares outstanding for diluted income per share
Earnings Per Share:
Basic net income per common share
Diluted net income per common share
(b)
(b)
Year Ended December 31,
2020
2019
2021
2,148 $
(548)
2,696 $
15,553 $
(191)
15,744 $
3,175
629
2,546
28,406
2,236
30,642
28,029
2,199
30,228
27,838
1,748
29,586
0.09 $
0.09 $
0.56 $
0.52 $
0.11
0.11
$
$
$
$
(a)
(b)
The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the
period) because their inclusion would have been antidilutive. Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were
478, 93, and 15 for the years ended December 31, 2021, 2020 and 2019, respectively.
For the year ended December 31, 2019 basic and diluted earnings per share were calculated based on net income as the numerator, which included the conversion of the noncontrolling interest in
connection with the Spin-Off. For the years ended December 31, 2021 and 2020, basic and diluted earnings per share were calculated based on net income attributable to The Pennant Group, Inc.
as the numerator.
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 62.6%, 60.1%, and 55.6% of the Company’s revenue for the years ended December
31, 2021, 2020 and 2019, 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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Disaggregation of Revenue
THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The Company disaggregates revenue from contracts with its patients or residents 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. A reconciliation of disaggregated revenue to segment revenue as well as revenue by payor is provided in
below.
The Company’s service specific revenue recognition policies are as follows:
Home Health Revenue
Medicare Revenue
For Medicare episodes that began after January 1, 2020, net service revenue is recognized in accordance with the Patient Driven Groupings Model
(“PDGM”). This new reimbursement structure involves case mix calculation methodology refinements, changes to low-utilization payment adjustment (“LUPA”)
thresholds, the elimination of therapy thresholds, a change to the unit of payment from a 60-day episode to a 30-day payment period, and reduction of requests for
anticipated payments (“RAPs”) to 20% of the estimated payment for a patient’s initial or subsequent period of care up-front (after the initial assessment is
completed and upon initial billing). The RAPs were completely phased out effective January 1, 2021. Under PDGM, Medicare provides agencies with payments
for each 30-day payment period provided to beneficiaries. If a beneficiary is still eligible for care after the end of the first 30-day payment period, a second 30-day
payment period can begin. There are no limits to the number of periods of care a beneficiary who remains eligible for the home health benefit can receive. While
payment for each 30-day payment period is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate
payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted for certain variables including,
but not limited to: (a) a LUPA if the number of visits is below an established threshold that varies based on the diagnosis of a beneficiary; (b) a partial payment if
the patient transferred to another provider or the Company received a patient from another provider before completing the period of care; (c) adjustment to the
admission source of claim if it is determined that the patient had a qualifying stay in a post-acute care setting within 14 days prior to the start of a 30-day payment
period; (d) the timing of the 30-day payment period provided to a patient in relation to the admission date, regardless of whether the same home health provider
provided care for the entire series of episodes; (e) changes to the acuity of the patient during the previous 30-day payment period; (f) changes in the base payments
established by the Medicare program; (g) adjustments to the base payments for case mix and geographic wages; and (h) recoveries of overpayments.
For all episodes that began prior to January 1, 2020, net service revenue was recorded under the Medicare prospective payment system based on a 60-day
episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if the patient’s care was unusually
costly; (b) a LUPA if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or transferred from another
provider before completing the episode; (d) a payment adjustment based upon the level of covered therapy services; (e) the number of episodes of care provided to
a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established
by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.
The Company adjusts Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to
obtain appropriate billing documentation and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and
patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.
In addition to revenue recognized on completed episodes and periods, the Company also recognizes a portion of revenue associated with episodes and
periods in progress. Episodes in progress are 30-day payment periods, if the episode started after January 1, 2020, or 60-day episodes of care, if the episode started
prior to January 1, 2020, that begin during the reporting period but were not completed as of the end of the period. As such, the Company estimates revenue and
recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected
Medicare revenue per period of care or episode of care and the Company’s estimate of the average percentage complete based on the scheduled end of period and
end of episode dates.
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Non-Medicare Revenue
THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
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; however, 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 Medicare 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, we record 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 for the years ended December 31, 2021, 2020 and 2019, is summarized in the following tables:
Home Health and Hospice Services
Year Ended December 31, 2021
Medicare
Medicaid
Subtotal
Managed care
Private and other
(a)
Total revenue
Home Health Services
$
80,849 $
8,935
89,784
46,167
22,007
157,958 $
Hospice Services
Senior Living Services
Total Revenue
Revenue %
135,939 $
12,103
148,042
3,196
374
151,612 $
— $
37,317
37,317
—
92,807
130,124 $
216,788
58,355
275,143
49,363
115,188
439,694
49.3 %
13.3
62.6
11.2
26.2
100.0 %
$
Private and other payors in our home health and hospice services segment includes revenue from all payors generated in our home care operations.
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Medicare
Medicaid
Subtotal
Managed care
Private and other
(a)
Total revenue
Medicare
Medicaid
Subtotal
Managed care
Private and other
(a)
Total revenue
$
$
THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Home Health and Hospice Services
Year Ended December 31, 2020
Home Health Services
$
58,399 $
7,645
66,044
31,572
21,968
119,584 $
Hospice Services
Senior Living Services
Total Revenue
Revenue %
119,873 $
12,462
132,335
1,546
194
134,075 $
— $
36,780
36,780
—
100,514
137,294 $
178,272
56,887
235,159
33,118
122,676
390,953
45.6 %
14.5
60.1
8.5
31.4
100.0 %
Private and other payors in our home health and hospice services segment includes revenue from all payors generated in our home care operations.
Home Health and Hospice Services
Year Ended December 31, 2019
Home Health Services
$
47,819 $
6,575
54,394
27,711
18,837
100,942 $
Hospice Services
Senior Living Services
Total Revenue
Revenue %
93,933 $
10,061
103,994
1,536
152
105,682 $
— $
29,819
29,819
—
102,088
131,907 $
141,752
46,455
188,207
29,247
121,077
338,531
41.9 %
13.7
55.6
8.6
35.8
100.0 %
Private and other payors in our home health and hospice services segment includes revenue from all payors generated in our home care operations.
Balance Sheet Impact
Included in the Company’s consolidated balance sheets are contract assets, comprised of billed accounts receivable and unbilled receivables, which are
the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company
receives in advance of services provided. As of December 31, 2021, the Company had contract liabilities in the amount of $6,211 related to Advance Payments
received in connection with the CARES Act. As further discussed in Note 10, Other Accrued Liabilities, the repayment terms for Medicare advance payments
were modified through the passage of the Continuing Appropriations Act, 2021 and Other Extensions Act on October 1, 2020.
Accounts receivable as of December 31, 2021 and December 31, 2020 is summarized in the following table:
Medicare
Medicaid
Managed care
Private and other
Accounts receivable, gross
Less: allowance for doubtful accounts
Accounts receivable, net
December 31, 2021
December 31, 2020
31,327 $
11,793
7,901
3,821
54,842
(902)
53,940 $
28,569
7,669
7,590
4,036
47,864
(643)
47,221
$
$
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the activity for our allowance for doubtful accounts for the years ended December 31, 2021, 2020 and 2019:
Balance at beginning of period
Additions to bad debt expense
Write-offs of uncollectible accounts
Balance at end of period
6. BUSINESS SEGMENTS
Year Ended December 31,
2020
2021
2019
$
$
643 $
616
(357)
902 $
677 $
560
(594)
643 $
616
858
(797)
677
The Company classifies its operations into the following reportable operating segments: (1) home health and hospice services, which includes the
Company’s home health, hospice and home care businesses; and (2) senior living services, which includes the operation of assisted living, independent living and
memory care communities. The reporting segments are business units that offer different services and are managed separately to provide greater visibility into
those operations. Our Chief Executive Officer and President, who is our Chief Operating Decision Maker “CODM”, reviews financial information at the operating
segment level. We also report an “all other” category that includes general and administrative expense from our Service Center.
As of December 31, 2021, the Company provided services through 88 affiliated home health, hospice and home care agencies, and 54 affiliated senior
living operations. The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize
the quality of care provided and profitability. The Company’s Service Center provides various services to all lines of business. The Company does not review
assets by segment and therefore assets by segment are not disclosed below.
The CODM uses Segment Adjusted EBITDAR from Operations as the primary measure of profit and loss for the Company's reportable segments and to
compare the performance of its operations with those of its competitors. Segment Adjusted EBITDAR from Operations is net income/ (loss) attributable to the
Company's reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the
operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation,
(3) acquisition related costs, (4) Spin-Off transaction costs, (5) redundant and nonrecurring costs associated with the transition services agreement, (6) net income/
(loss) attributable to noncontrolling interest, (7) net COVID-19 related costs and (8) impairment of long-lived assets. General and administrative expenses are not
allocated to the reportable segments, and are included as “All Other”, accordingly the segment earnings measure reported is before allocation of corporate general
and administrative expenses. The Company's segment measures may be different from the calculation methods used by other companies and, therefore,
comparability may be limited.
The following table presents certain financial information regarding our reportable segments, general and administrative expenses are not allocated to the
reportable segments and are included in “All Other”.
Year Ended December 31, 2021
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2020
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2019
Revenue
Segment Adjusted EBITDAR from Operations
Home Health and
Hospice Services
Senior Living
Services
All Other
Total
$
$
$
$
$
$
309,570 $
55,565 $
253,659 $
49,501 $
206,624 $
33,354 $
130,124 $
37,517 $
137,294 $
48,309 $
131,907 $
47,344 $
— $
(26,208) $
— $
(22,762) $
— $
(18,591) $
439,694
66,874
390,953
75,048
338,531
62,107
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The table below provides a reconciliation of Segment Adjusted EBITDAR from Operations above to income from operations:
Segment Adjusted EBITDAR from Operations
Less: Depreciation and amortization
Rent—cost of services
Other income
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations
(a)
(b)
(c)
Share-based compensation expense
Acquisition related costs
Spin-off related transaction costs
Transition services costs
COVID-19 Related costs and supplies
Impairment of long-lived assets
(g)
(d)
(e)
(f)
Add: Net income/ (loss) attributable to noncontrolling interest
Consolidated and Combined Income from operations
Year Ended December 31,
2020
2021
2019
66,874 $
4,784
40,863
(24)
1,045
10,040
80
—
2,008
—
2,835
(548)
4,695 $
75,048 $
4,675
39,191
225
1,787
8,335
99
—
1,181
447
—
(191)
18,917 $
62,107
3,810
34,975
—
483
3,382
665
13,219
532
—
—
629
5,670
$
$
Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
Share-based compensation expense incurred which is included in cost of services and general and administrative expense.
Acquisition related costs that are not capitalizable.
Costs incurred related to the Spin-Off are included in general and administrative expense.
A portion of the costs incurred under the Transition Services Agreement identified as redundant or nonrecurring that are included in general and administrative expense. Fees incurred under the
Transition Services Agreement, net of the Company’s payroll reimbursement, were $3,124, $5,536, and $2,982, for the years ended December 31, 2021, 2020 and 2019, respectively.
Beginning in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of
sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief was extended through
December 31, 2021. Sequestration relief was $3,555 for the year ended December 31, 2021.
The 2020 amount represents incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $2,765 in increased
revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the year ended December 31, 2020.
On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of
the operations of certain senior living communities (the “Transaction”). The closing of the Transaction is anticipated to occur in the first half of 2022. The Company impaired certain
leasehold improvements included in property and equipment primarily related to the operations included in the transaction with Ensign.
7. ACQUISITIONS
The Company’s acquisition focus is to purchase or lease 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
Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting.
2021 Acquisitions
During the year ended December 31, 2021, the Company expanded its operations with the addition of five home health agencies, four hospice agencies,
and two home care agencies. The aggregate purchase price for these acquisitions was $14,135. A subsidiary of the Company entered into a separate operations
transfer agreement with the prior operator of each acquired operation as part of each transaction. The goodwill was primarily attributable to intangible assets that
do not qualify for separate recognition and to synergies the Company expects to achieve related to the acquisition and was allocated to the Company's operating
segments which are its reporting units. The Company anticipates that the total goodwill recognized
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
will be fully deductible for tax purposes. Acquisition costs related to the business combinations of home health, hospice, and home care acquisitions of $80 were
expensed related to the business combinations during the year ended December 31, 2021.
Two of the hospice agencies were acquired Medicare licenses and are considered asset acquisitions. The fair value of assets for the hospice licenses
acquired totaled $585 and was allocated to indefinite-lived intangible assets.
2020 Acquisitions
During the year ended December 31, 2020, the Company expanded its operations with the addition of six home health agency, six hospice agencies, and
two senior living communities. The aggregate purchase price for these acquisitions was $39,239. In connection with the addition of the senior living communities,
the Company entered into a new long-term “triple-net” lease with a subsidiary of Ensign. The addition of these operations added a total of 164 operational senior
living units to be operated by the Company’s independent operating subsidiaries. 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 goodwill was primarily attributable intangible assets that do not
qualify for separate recognition and to synergies the Company expects to achieve related to the acquisition and was allocated to the Company's operating segments
which are its reporting units. The Company anticipates that the total goodwill recognized will be fully deductible for tax purposes. Acquisition costs related to the
business combinations of home health, hospice, and home care acquisitions of $99 were expensed related to the business combinations during the year ended
December 31, 2020.
In October 2020, the Company announced it closed on a home health joint venture and hospice joint venture with Scripps Health (“Scripps”), a leading
nonprofit integrated health system based in San Diego, California. The closing was effective October 1, 2020. The resulting joint ventures, which combined certain
assets and the operations of Scripps’ home health business and the assets and operations of the local Pennant-affiliated home health and hospice agencies, are
majority-owned and managed by an independent operating subsidiary of the Company and provide home health and hospice services to patients throughout San
Diego County. The fair value of assets contributed by Scripps to the home health joint venture were included in the total value of assets acquired as described
above and in the summary table below. The Company paid Scripps $6,200 in cash and contributed assets from the local Pennant-affiliated home health agency
with a net book value of $614. The Company acquired 60.0% ownership interest in the joint venture. The contributions of assets by Scripps to the joint venture,
resulted in the Company recording a noncontrolling interest with a fair value of $4,646. The fair value of the noncontrolling interest was determined using
discounted cash flow models. As part of the transaction with Scripps, the Company contributed the assets of the local Pennant-affiliated hospice agency to another
joint venture. The Company sold Scripps a noncontrolling interest in the hospice joint venture for $555 in cash. The company retained an 80.0% ownership interest
in the hospice joint venture. The transaction resulted in the Company recognizing a noncontrolling interest of $138 and a contribution to additional paid in capital
of $313, net of $104 of the income tax effect.
2019 Acquisitions
During the year ended December 31, 2019, the Company expanded its operations with the addition of two home health agencies, five hospice agencies,
two home care agencies and two senior living operations. In connection with the acquisition of one of the senior living communities, the Company entered into a
new long-term “triple-net” lease with a subsidiary of Ensign. The Company did not acquire any material assets or assume any liabilities. 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 addition of these
operations added a total of 143 operational senior living units to be operated by the Company’s independent operating subsidiaries. The aggregate purchase price
for these acquisitions was $18,760. Acquisition costs related to the business combinations of home health, hospice, and home care was $611 during the year ended
December 31, 2019.
The fair value of assets for home health and hospice acquisitions was mostly concentrated in goodwill and as such, these transactions were classified as
business combinations in accordance with ASC Topic 805, Business Combinations (“ASC
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
805”). The table below presents the allocation of the purchase price for the operations acquired in acquisitions during the years ended December 31, 2021, 2020
and 2019 as noted above:
Equipment, furniture, and fixtures
Goodwill
Other indefinite-lived intangible assets
Other assets
Liabilities assumed
Total acquisitions
Less: noncontrolling interest and additional paid in capital
Less: cash paid in prior year (held in escrow)
(b)
(a)
Total cash paid for acquisitions
2021
December 31, 2021
2020
2019
$
$
$
62 $
7,821
6,242
10
—
14,135 $
—
(585)
13,550 $
174 $
25,211
14,026
—
(172)
39,239 $
(4,646)
(1,400)
33,193 $
(a)
(b)
Consists of the of noncontrolling interest related to Scripps contribution of assets to the joint venture.
Total cash paid for acquisitions for the year ended December 31, 2021 includes $585 as an escrow deposit that was paid in the prior year.
8. PROPERTY AND EQUIPMENT—NET
Property and equipment, net consist of the following:
Leasehold improvements
Equipment
Furniture and fixtures
Less: accumulated depreciation
Property and equipment, net
December 31, 2021
2021
2020
$
$
11,660 $
22,415
1,199
35,274
(18,486)
16,788 $
91
10,341
8,326
2
—
18,760
—
—
18,760
9,984
22,420
1,186
33,590
(15,706)
17,884
Depreciation expense was $4,751, $4,661 and $3,757 for the years ended December 31, 2021, 2020 and 2019, respectively.
Asset Impairment
The Company reviews the carrying value of long-lived assets impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements with affiliates of Ensign,
providing for the transfer of the operations of certain senior living communities (the “Transaction”). The closing of the Transaction is anticipated to occur in the
first half of 2022. As of the year ended December 31, 2021, management determined that the long-lived assets for the impacted communities were not recoverable
and the Company recognized a non-cash long-lived asset impairment charge of $2,835 in cost of services in the Consolidated and Combined Statements of
Income.
9. GOODWILL AND INTANGIBLE ASSETS—NET
The Company tests goodwill during the fourth quarter of each year and also if events or changes in circumstances indicate the occurrence of a triggering
event which might indicate there may be impairment. The Company performs its goodwill impairment analysis for each reporting unit that constitutes a component
for which (1) discrete financial information is available and (2) segment management regularly reviews the operating results of that component, in accordance with
the provisions of ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”).
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The Company reviews goodwill for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If
it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify
goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary
to perform a quantitative analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis.
Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. An impairment loss is recognized for the amount that
the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The
Company did not identify any impairment charge during the years ended December 31, 2021, 2020 and 2019.
The following table represents activity in goodwill by segment as of and for the year ended December 31, 2021:
December 31, 2019
Additions
December 31, 2020
Additions
December 31, 2021
Other indefinite-lived intangible assets consist of the following:
Home Health and
Hospice Services
Senior Living Services
Total
$
$
37,591 $
25,211
62,802
7,821
70,623 $
3,642 $
—
3,642
—
3,642 $
41,233
25,211
66,444
7,821
74,265
1,355
46,133
47,488
December 31, 2021
2021
2020
1,355 $
52,375
53,730 $
Trade name
Medicare and Medicaid licenses
Total
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
Refunds payable
Deferred revenue
Resident deposits
Contract liabilities (CARES Act advance payments)
Property taxes
Accrued insurance retention - current portion
Other
Other accrued liabilities
$
$
$
$
December 31, 2021
December 31, 2020
3,095 $
1,456
5,111
6,211
1,102
1,613
2,896
21,484 $
2,664
1,271
5,647
22,771
982
1,354
3,586
38,275
Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Deferred revenue occurs
when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to residents and a small portion consists of
non-refundable deposits recognized into revenue over a period of time. The CARES Act also expanded the Centers for Medicare & Medicaid Services’ (“CMS”)
ability to provide accelerated/advance payments intended to increase the cash flow of healthcare providers and suppliers impacted by COVID-19. During the
second quarter of 2020, the Company applied for and received $27,997 in funds under the AAP Program. On October 1, 2020, the Continuing Appropriations Act,
2021 and Other Extensions Act (the “CA Act”) was signed into law. Among other things, the CA Act significantly changed the repayment terms for AAP. These
funds are subject to
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
automatic recoupment through offsets to new claims beginning one year after funds were issued beginning in April 2021, at which time, Medicare began to
automatically recoup 25% of Medicare payments for 11 months. At the end of the 11 months and assuming full repayment has not occurred, recoupment will
increase to 50% for another six months. Any balance outstanding after these two recoupment periods will be subject to repayment at a 4% interest rate. For the
year ended December 31, 2021, the Company repaid $21,786 of the AAP funds. The Company reclassified $5,226 of AAP to other long-term liabilities for the
year ended December 31, 2020. The Company anticipates completing repayment of the AAP within the allotted recoupment periods.
11. DEBT
Long-term debt, net consists of the following:
Revolving credit facility
Less: unamortized debt issuance costs
(a)
Long-term debt, net
(a)
December 31, 2021
2021
2020
$
$
53,500 $
(2,128)
51,372 $
9,500
(1,223)
8,277
Amortization expense for debt issuance costs was $488, $330, and $78 for the years ended December 31, 2021, 2020 and 2019, respectively, and is recorded in interest
net on the Consolidated and Combined Statements of Income.
On February 23, 2021, Pennant entered into an amendment to its existing credit agreement (as amended, the “Credit Agreement”), which provides for an
increased revolving credit facility with a syndicate of banks with a borrowing capacity of $150,000 (the “Revolving Credit Facility”). The interest rates applicable
to loans under the Revolving Credit Facility are, at the Company’s election, either (i) Adjusted LIBOR (as defined in the Credit Agreement) plus a margin ranging
from 2.3% to 3.3% per annum or (ii) Base Rate plus a margin ranging from 1.3% to 2.3% per annum, in each case based on the ratio of Consolidated Total Net
Debt to Consolidated EBITDA (each, as defined in the Credit Agreement). In addition, Pennant pays a commitment fee on the undrawn portion of the
commitments under the Revolving Credit Facility which ranges from 0.35% to 0.50% per annum, depending on the Consolidated Total Net Debt to Consolidated
EBITDA ratio of the Company and its subsidiaries. The Company is not required to repay any loans under the Credit Agreement prior to maturity in 2026, other
than to the extent the outstanding borrowings exceed the aggregate commitments under the Credit Agreement. As of December 31, 2021, the Company’s weighted
average interest rate on its outstanding debt was 2.64%. As of December 31, 2021, the Company had available borrowing on the Revolving Credit Facility of
$92,314, 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 December 31, 2021, the Company was compliant with all such financial covenants.
12. OPTIONS AND AWARDS
Share-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options,
restricted stock awards (“RSA”), and restricted stock units (“RSU” and together with RSA, “Restricted Stock”), based on estimated fair values, ratably over the
requisite service period of the award. The Company accounts for forfeitures as they occur.
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
In connection with the Spin-Off, the Company issued new options and restricted stock awards to Pennant and Ensign employees under the 2019 Omnibus
Incentive Plan (the “OIP”) and Long-Term Incentive Plan (the “LTIP”, together referred to as the “Pennant Plans”).
Prior to Spin-Off
For all periods prior to the Spin-Off, employees of the Company participated in Ensign's share-based compensation plans. The compensation expense
recorded by the Company included the expense associated with these employees, as well as an allocation of share-based compensation of certain Ensign
employees who provided general and administrative services on our behalf.
Outstanding options held by employees of the Company under the Ensign stock plans (collectively the “Ensign Plans”) and outstanding options and
restricted stock awards under the Company Subsidiary Equity Plan (together with the Ensign Plans the “Pre-Spin Plans”) were modified and replaced with Pennant
awards under the Pennant Plans at the Spin-Off date.
Share-Based Compensation
The following disclosures represent share-based compensation expense relating to the Ensign and Pennant Plans, including awards to employees of the
Company’s subsidiaries and an allocation of costs from employees in the Service Center prior to the Spin-Off, and total share-based compensation after the Spin-
Off.
Total share-based compensation expense for all of the Plans for the years ended December 31, 2021, 2020 and 2019:
Prior to the Spin-Off:
Total share-based compensation
Following the Spin-Off:
Share-based compensation expense related to stock options
Share-based compensation expense related to Restricted Stock
Share-based compensation expense related to Restricted Stock to non-employee directors
Total share-based compensation
2021
Year Ended December 31,
2020
2019
— $
— $
1,395
3,093
6,141
806
10,040 $
1,660
6,200
475
8,335 $
315
1,589
83
3,382
$
$
In future periods, the Company estimates it will recognize the following share-based compensation expense for unvested stock options and unvested
Restricted Stock, which were unvested as of December 31, 2021:
Unvested stock options
Unvested Restricted Stock
Total unrecognized share-based compensation expense
Stock Options
Unrecognized Compensation
Expense
$
$
12,620
4,780
17,400
Weighted Average
Recognition Period (in years)
3.8
0.9
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 share-based compensation expense for share-based payment awards
under the Plans. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable
judgment, including estimating stock price volatility and
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
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 after the Spin-Off:
Grant Year
2021
2020
2019
Options
Granted
Risk-Free Interest
Rate
Expected Life
(a)
Expected
(b)
Volatility
Dividend Yield
454
693
667
1.1 %
0.5 %
1.6 %
6.5
6.5
6.5
38.4 %
35.9 %
34.6 %
Weighted
Average Fair
Value of Options
13.84
11.05
5.70
— % $
— % $
— % $
(a)
(b)
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.
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 year ended December 31, 2021:
December 31, 2020
Granted
Exercised
Forfeited/ Expired
December 31, 2021
Number of
Options
Outstanding
Weighted
Average
Exercise Price
Number of
Options Vested
Weighted
Average
Exercise Price
of Options
Vested
1,982 $
454 $
(115) $
(79) $
2,242 $
17.48
35.01
7.67
21.81
21.38
615 $
7.52
840 $
12.28
The aggregate intrinsic value of options outstanding, vested, unvested and exercised as of and for the period ended December 31, 2021 is as follows:
Options
Outstanding
Vested
Unvested
Exercised
$
December 31, 2021
14,749
10,221
4,528
3,248
The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options. There
were 1,402 unvested and outstanding options at December 31, 2021. The weighted average contractual life for options outstanding, vested and expected to vest at
December 31, 2021 was 7.39 years.
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Restricted Stock
THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Under the Pennant Plans, the Company granted Restricted Stock to Pennant employees, Ensign employees, and to non-employee directors. All awards
generally vest between three to five years. A summary of the status of Pennant’s non-vested Restricted Stock, and changes during the period ended December 31,
2021, is presented below:
December 31, 2020
Granted
Vested
Forfeited
December 31, 2021
13. LEASES
Non-Vested Restricted
Awards
Weighted Average
Grant Date Fair Value
14.80
39.82
16.20
14.13
15.00
1,635 $
20
(157)
(5)
1,493 $
The Company’s independent operating subsidiaries lease 54 senior living communities and its administrative offices under non-cancelable operating
leases, most of which have initial lease terms ranging from five to 21 years. The Company’s independent operating subsidiaries also lease the administrative
offices of 88 home health and hospice agencies which generally range from one to seven years. Most of these leases contain renewal options, most involve rent
increases and none contain purchase options. The lease term excludes lease renewals because the renewal rents are not at a bargain, there are no economic
penalties for the Company to renew the lease, and it is not reasonably certain that the Company will exercise the extension options. As of December 31, 2021, the
Company’s independent operating subsidiaries leased 32 communities from subsidiaries of Ensign (“Ensign Leases”) under a master lease arrangement. The
existing leases with subsidiaries of Ensign are for initial terms of between 14 to 20 years. 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.
Fifteen of the Company’s affiliated senior living communities, excluding the communities that are operated under the Ensign Leases (as defined herein),
are operated under two 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.
The components of operating lease cost, are as follows:
Operating lease costs:
Facility rent—cost of services
Office rent—cost of services
Sublease income
Rent—cost of services
General and administrative expense
Variable lease cost
(a)
2021
Year Ended December 31,
2020
2019
$
$
$
$
35,958 $
4,905
—
40,863 $
276 $
6,248 $
35,562 $
3,772
(143)
39,191 $
295
5,330
32,011
2,964
—
34,975
162
4,608
(a)
Represents variable lease cost for operating leases, which costs include property taxes and insurance, common area maintenance, and consumer price index increases, incurred as part of our triple
net lease, and which is included in cost of services for the years ended December 31, 2021, 2020 and 2019.
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following table shows the lease maturity analysis for all leases as of December 31, 2021:
Year
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: present value adjustments
Present value of total lease liabilities
Less: current lease liabilities
Long-term operating lease liabilities
Amount
38,929
37,978
36,906
35,778
35,078
320,664
505,333
(201,462)
303,871
(16,118)
287,753
$
$
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 December 31, 2021, the weighted average remaining lease term is 14.1 years and the weighted average discount rate is
7.9%.
14. INCOME TAXES
The provision for income tax expense for the years ended December 31, 2021, 2020 and 2019 is summarized as follows:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
2021
Year Ended December 31,
2020
2019
$
$
1,768 $
566
2,334
(1,360)
(392)
(1,752)
582 $
5,058 $
1,478
6,536
(3,348)
(838)
(4,186)
2,350 $
562
278
840
1,070
175
1,245
2,085
79
Table of Contents
THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2021, 2020
and 2019, respectively, is comprised as follows:
(c)
Income tax expense at statutory rate
State income taxes - net of federal benefit
Non-deductible meals and entertainment
Non-deductible equity compensation
Section 162(m) limitation
Non-deductible accrued bonus
Other non-deductible expenses
Transaction costs
Tax credits
Deductible equity compensation
Noncontrolling interest
Other adjustments
(b)
(a)
Total income tax provision
(d)
2021
Year Ended December 31,
2020
2019
21.0 %
3.9
1.8
19.4
2.1
2.7
0.7
—
—
(34.1)
5.0
(1.2)
21.3 %
21.0 %
2.7
0.3
—
—
—
0.1
—
—
(10.8)
0.3
(0.5)
13.1 %
21.0 %
6.8
1.8
—
—
—
0.8
41.2
(1.6)
(30.0)
—
(0.4)
39.6 %
(a)
(b)
(c)
(d)
The Company's completion of the Spin-Off in the year ended December 31, 2019 resulted in the Company not being able to deduct approximately $10,300 of the related transaction costs, which
increased the effective tax rate significantly and affected all items that were impacted by this exclusion.
During the year ended December 31, 2021, employees exercised stock options representing approximately 115 shares. During the year ended December 31, 2020, employees exercised stock
options representing approximately 239 shares. During the year ended December 31, 2019, employees exercised stock options representing approximately 100 shares and had restricted stock
awards vest representing 960 shares. These exercises and vestings resulted in tax benefits that reduced the Company's effective tax rate significantly in all three years.
During the year ended December 31, 2021, approximately $2,528 of the share-based compensation expense related to restricted stock did not result in a deferred tax asset because it will be subject
to future limitation under IRC Section 162(m).
Certain items in the prior year have been reclassified to conform with the current year presentation.
Prior to the date of the Spin-Off, the Company's operations were included in Ensign’s U.S. federal and state income tax returns and all income taxes were
paid by subsidiaries of Ensign. Additionally, prior to the date of the Spin-Off, income tax expense and other income tax related information contained in these
Consolidated and Combined Financial Statements for the year ended 2019 were presented on a separate tax return approach. Under this approach, the provision for
income taxes represents income tax paid or payable for the current year plus the change in deferred taxes during the year calculated as if the Company were a
stand-alone taxpayer filing hypothetical income tax returns. Management believes that the assumptions and estimates used to determine these tax amounts were
reasonable. However, the Company's Consolidated and Combined Financial Statements or the year ended 2019 may not necessarily reflect the Company’s income
tax expense or tax payments in the future, or what its tax amounts would have been if the Company had been a stand-alone company during the periods presented.
80
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The Company’s deferred tax assets and liabilities for the years ended December 31, 2021 and 2020 are summarized below.
Deferred tax assets (liabilities):
Accrued expenses
Allowance for doubtful accounts
State taxes
Lease liabilities
Insurance
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
Depreciation and amortization
Prepaid expenses
Right of use asset
State taxes
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Year Ended December 31,
2020
2021
$
$
9,829 $
1,728
—
79,575
953
92,085
(25)
92,060
(8,432)
(907)
(78,656)
(217)
(88,212)
3,848 $
8,181
875
147
80,979
277
90,459
(15)
90,444
(7,512)
(780)
(80,055)
—
(88,347)
2,097
During the year ended December 31, 2020, the Company utilized all of its net operating loss ("NOL") carryforwards for federal income tax purposes. As
of December 31, 2021, the Company has $614 of NOL carryforwards in various states, which are available to reduce future state taxable income, if any. The state
NOL carryforwards, if not utilized, will expire in years ending between December 31, 2030 and December 31, 2040. The Company believes that it is more likely
than not that the benefit from the state NOL carryforwards in jurisdictions where we do not file a consolidated return will not be realized. In recognition of this
risk, as of December 31, 2021, the Company has provided a valuation allowance of $25 on the deferred tax assets related to these states for the tax effect of the
NOL carryforwards that will not be realized.
The federal statutes of limitations on the Company’s 2017, 2016, and 2015 income tax years lapsed during the third quarter of 2021, 2020, and 2019,
respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed. The lapses for the years ended December 31, 2021 and 2020
had no impact on the Company’s unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Additions for tax positions of prior years
Reductions for tax positions related to the current year
Balance at December 31
2021
Year Ended December 31,
2020
2019
$
— $
188
(123)
65 $
— $
—
—
— $
—
—
—
—
None of unrecognized tax benefits net of their state benefits would affect the Company’s effective tax rate for the years ended December 31, 2021 and
2020. The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income. Such amounts are not
material.
15. COMMITMENTS AND CONTINGENCIES
Regulatory Matters - The Company provides services in complex and highly regulated industries. The Company’s compliance with applicable federal,
state and local laws and regulations governing these industries may be subject to
81
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
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. The
Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's
businesses. The Company believes that it is presently in compliance in all material respects with all applicable laws and regulations.
Cost-Containment Measures - Government and third party payors have instituted cost-containment measures designed to limit payments made to
providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the
Company.
Indemnities - From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against
third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior
operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer
agreements, in which the Company agrees to indemnify past operators of agencies and communities the Company acquires against certain liabilities arising from
the transfer of the operation and/or the operation thereof after the transfer, (iii) certain Ensign lending agreements, and (iv) certain agreements with management,
directors and employees, under which the subsidiaries of the Company may be required to indemnify such persons for liabilities arising out of their employment
relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein.
Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no
liabilities have been recorded for these obligations on the Company’s combined balance sheets for any of the periods presented.
Litigation - The Company’s businesses involve a significant risk of liability given the age and health of the patients and residents served by its
independent operating subsidiaries. The Company, its operating companies, and others in the industry may be subject to a number of claims and lawsuits, including
professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. Healthcare
litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company is routinely subjected to
these claims in the ordinary course of business, including potential claims related to patient care and treatment, professional negligence and class actions, as well
as employment related claims. If there were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in
their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results of operations and cash flows. In
addition, the defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage
awards.
In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the False Claims Act (the “FCA”)
and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may provide
the basis for exclusion from federally funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial
performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations.
In 2009, Congress passed the Fraud Enforcement and Recovery Act ("FERA") which made significant changes to the FCA, expanding the types of
activities subject to prosecution and whistleblower liability. Following changes by FERA, healthcare providers face significant penalties for the knowing retention
of government overpayments, even if no false claim was involved. Providers can now be liable for knowingly and improperly avoiding or decreasing an obligation
to pay money or property to the government, including the retention of any government overpayment. The Patient Protection and Affordable Care Act of 2010 (the
“ACA”) supplemented FERA by imposing an affirmative obligation on healthcare providers to return an overpayment to CMS within 60 days of “identification”
or the date any corresponding cost report is due, whichever is later. Retention of any overpayment beyond this period may create liability under the FCA. In
addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents. Thus,
there is generally no need for an employment relationship in order to qualify for protection against retaliation for whistleblowing.
The Company cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to proceed, and the Company
and its operating companies are subjected to, alleged to be liable for, or agree to a settlement
82
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
of, claims or obligations under federal Medicare statutes, the FCA, or similar state and federal statutes and related regulations, the Company’s business, financial
condition and results of operations and cash flows could be materially and adversely affected. Among other things, any settlement or litigation could involve the
payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the
Company or its independent operating subsidiaries going forward under a corporate integrity agreement and/or other arrangement with the government.
Medicare Revenue Recoupments - The Company is subject to probe reviews relating to Medicare services, billings and potential overpayments by Unified
Program Integrity Contractors (UPIC), Recovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), Program Safeguard Contractors (PSC),
Supplemental Medical Review Contractors (SMRC) and Medicaid Integrity Contributors (MIC) programs, each of the foregoing collectively referred to as
“Reviews.” As of December 31, 2021, eight of the Company’s independent operating subsidiaries had Reviews scheduled, on appeal or in dispute resolution
process, both pre- and post-payment. The Company anticipates that these probe reviews will increase in frequency in the future. If an operation fails an initial or
subsequent Review, the operation could then be subject to extended Review, suspension of payment, or extrapolation of the identified error rate to all billing in the
same time period. As of December 31, 2021, and through the filing of this Annual Report on Form 10-K, the Company’s independent operating subsidiaries have
responded to the Reviews that are currently ongoing, on appeal or in dispute resolution process and the Company has no probable or estimable contingencies.
One hospice provider number is subject to a Medicare payment suspension imposed by a Uniform Program Integrity Contractor (UPIC). As of December
31, 2021 the UPIC requested for review 42 patient records covering a 4-month period to determine whether, in its view, a Medicare overpayment was made.
Subsequent to December 31, 2021 the UPIC expanded upon its initial request to cover an additional 60 patient records over an additional 6-month period.
Medicare payments to that provider number are suspended pending the conclusion of the UPIC’s review. The payments suspended as of December 31, 2021 total
$3,700. The suspended amounts represent all Medicare payments due to the provider number since the start of the suspension and are not an overpayment finding.
If the UPIC concludes that an overpayment exists, it will recover the overpayment from the suspended funds and release the excess funds, if any, to the provider.
The UPIC has not specified when the payment suspension will end or when it will reach an over-payment determination.
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 78.6% and 75.7% of its total gross accounts receivable as of December
31, 2021 and December 31, 2020, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.6%, 60.1%, and 55.6%
of the Company's revenue for the years ended December 31, 2021, 2020 and 2019, respectively.
16. SUBSEQUENT EVENT
On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with
affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the “Transaction”). The Transfer Agreements require one of
the transferors to place in escrow $6,500 to cover post-closing capital expenditures and operating losses related to one of the communities. The closing of the
Transaction is anticipated to occur in the first half of 2022, subject to receipt of applicable regulatory approvals and satisfaction of other customary closing
conditions set forth in the Transfer Agreements. As such, management determined that the long-lived assets for the impacted communities were impaired and the
Company recognized a non-cash charge of $2,613 in its operating results for the year ended December 31, 2021, included in the transaction.
83
As of December 31, 2021, The Pennant Group, Inc. has registered one class of securities under Section 12 of the Securities Exchange Act of 1934, as
DESCRIPTION OF SECURITIES
EXHIBIT 4.1
amended (the “Exchange Act”).
Description of Common Stock
The following description of our Common Stock (as defined below) is a summary and does not purport to be complete. It is subject to and qualified in its
entirety by reference to our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and our Amended and Restated By-laws (the
“Bylaws”), each of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit is a part. We encourage you to read
our Certificate of Incorporation, our Bylaws and the applicable provisions of the Delaware General Corporate Law (the “DGCL”), for additional information.
Authorized Capital Shares
Our authorized capital shares consist of 100,000,000 shares of common stock, $0.001 par value per share (“Common Stock”), and 1,000,000 shares of
preferred stock, $0.001 par value per share (“Preferred Stock”).
We have outstanding shares of Common Stock. The outstanding shares of our Common Stock are fully paid and non-assessable. This means the full
purchase price for the outstanding shares of Common Stock has been paid and the holders of such shares will not be assessed any additional amounts for such
shares. Any additional shares of Common Stock that the Company may issue in the future will also be fully paid and non-assessable.
Voting Rights
Each share of Common Stock is entitled to one vote on all matters submitted to a vote of the stockholders, including the election of directors. Our
Common Stock does not have cumulative voting rights. This means a holder of a single share of Common Stock cannot cast more than one vote for each position
to be filled on the Board of Directors. It also means the holders of a majority of the shares of Common Stock entitled to vote in the election of directors can elect
all directors standing for election and the holders of the remaining shares will not be able to elect any directors.
Dividend Rights
Subject to the rights of holders of outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to receive dividends, if any, as
may be declared from time to time by the Board of Directors in its discretion out of funds legally available for the payment of dividends. Delaware law allows a
corporation to pay dividends only out of surplus, as determined under the DGCL.
Liquidation Rights
Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the
Company legally available for distribution after we have paid or provided for all of our liabilities and all of the preferential amounts to which any holders of
Preferred Stock, if any, may be entitled.
Other Rights and Preferences
Our Common Stock has no sinking fund or redemption provisions or pre-emptive, conversion or exchange rights.
Stockholder Action by Written Consent
Our Certificate of Incorporation and Bylaws prohibit stockholder action by written consent except when the action to be taken has previously been
approved by our Board of Directors.
Exclusive Jurisdiction of Certain Actions
Our Certificate of Incorporation provides that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of
the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of
the Company, (2) action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or our
stockholders, or any claim for aiding and abetting any such alleged breach, (3) action asserting a claim against the Company or any director or officer of the
Company arising pursuant to any provision of the DGCL or the Certificate of Incorporation or our Bylaws, or (4) action asserting a claim against us or any director
or officer of the Company governed by the internal affairs doctrine except for, as to each of (1) through (4) above, any claim (A) as to which the Court of Chancery
determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal
jurisdiction of the Court of Chancery within ten days following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than
the Court of Chancery, or (C) arising under the federal securities laws, including the Securities Act of 1933, as amended, as to which the Court of Chancery and the
federal district court for the District of Delaware shall concurrently be the sole and exclusive forums. Notwithstanding the foregoing, the provisions of this
paragraph will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the
United States of America shall be the sole and exclusive forum. The foregoing may have the effect of discouraging lawsuits against the Company’s directors and
officers.
Listing
The Common Stock is traded on The Nasdaq Global Select Market under the trading symbol “PNTG.”
The following is a list of subsidiaries of The Pennant Group, Inc. as of December 31, 2021:
List of Subsidiaries of The Pennant Group, Inc.
Exhibit 21.1
Subsidiary
2410 Stillhouse Senior Living, Inc.
Alpowa Healthcare, Inc.
Arches Home Care, Inc.
Autumn Ridge Senior Living, Inc.
Beach City Senior Living LLC
Bear River Healthcare LLC
Black Mountain Healthcare LLC
Brenwood Park Senior Living, Inc.
Brookhollow Senior Living LLC
Brown Road Senior Housing LLC
Bruce Neenah Senior Living, Inc.
Cactus Heights Healthcare LLC
Canyon Healthcare, Inc.
Care Continuum Solutions LLC
Capitol Healthcare, Inc.
CCS Holding LLC
Cedar Senior Living, Inc.
Clark Fork Healthcare LLC
Clear Creek Healthcare, Inc.
Connected Healthcare, Inc.
Copper Basin Healthcare, Inc.
Cornerstone Healthcare, Inc.
Cornerstone Service Center, Inc.
Crown Point Healthcare LLC
Custom Care Healthcare, Inc.
De Soto Senior Living, Inc.
Denmark Senior Living, Inc.
Eagle Pass Senior Living LLC
Elkhorn Healthcare LLC
Emblem Healthcare, Inc.
Emerald Healthcare, Inc.
Eureka Healthcare, Inc.
Exemplar Healthcare, Inc.
Finding Home Healthcare, Inc.
Glacier Peak Healthcare, Inc.
Go Assisted, Inc.
Granite Healthcare, Inc.
Jurisdiction
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Delaware
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Granite Hills Senior Living, Inc.
Great Lakes Healthcare, Inc.
Great Plains Healthcare, Inc.
Green Bay Senior Living, Inc.
Heartland Healthcare, Inc.
Hummingbird Healthcare LLC
iCare Private Duty, Inc.
Indigo Healthcare LLC
Iron Bridge Healthcare, Inc.
Jameson Senior Living, Inc.
Jentilly Healthcare LLC
Joshua Tree Healthcare, Inc.
Kenosha Senior Living, Inc.
Keystone Hospice Care, Inc.
Lake Pointe Senior Living, Inc.
Lemon Senior Living LLC
Lowes Senior Living, Inc.
Madison Senior Living, Inc.
Manitowoc Senior Living, Inc.
McFarland Senior Living, Inc.
Mesa Grande Senior Living, Inc.
Mesa Springs Senior Living LLC
Mission Inn Senior Living LLC
Mohave Healthcare, Inc.
Monument Healthcare, Inc.
Moss Bay Senior Living, Inc.
Mountain Peak Home Care, Inc.
Mountain Vista Senior Living, Inc.
Oceano Senior Living, Inc.
Oceanside Healthcare, Inc.
Orange Senior Living, Inc.
Orangewood Senior Living, Inc.
Orchard Prairie Healthcare LLC
Painted Sky Healthcare, Inc.
Paragon Healthcare, Inc.
Park Point Healthcare LLC
Peaceful Heart Healthcare LLC
Pearl Senior Living, Inc.
Pecan Bayou Healthcare LLC
Pennant Services, Inc.
Pinnacle Senior Living LLC
Pinnacle Service Center LLC
Pleasant Run Senior Living, Inc.
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Prairie View Healthcare, Inc.
Primrose Senior Living, Inc.
Prospect Senior Living, Inc.
Racine Senior Living, Inc.
Rancho Bernardo Healthcare LLC
Red Rock Healthcare, Inc.
Riverview Village Senior Living, Inc.
Rock Garden Healthcare LLC
Rockbrook Senior Living, Inc.
Rogue River Healthcare LLC
Rolling Hills Healthcare, Inc.
Rosenburg Senior Living, Inc.
Sacramento River Healthcare LLC
Saguaro Senior Living, Inc.
San Gabriel Senior Living, Inc.
Sand Lily Healthcare, Inc.
Sandstone Senior Living, Inc.
Sentinel Healthcare LLC
Sheboygan Senior Living, Inc.
Silver Lake Healthcare, Inc.
Somers Kenosha Senior Living, Inc.
South Bay Healthcare, Inc.
South Plains Healthcare, Inc.
Southern Pines Healthcare LLC
Spanish Meadows Healthcare LLC
Spokane Healthcare, Inc.
Spring Valley Assisted Living, Inc.
Star Valley Healthcare, Inc.
Stevens Point Senior Living, Inc.
Stoughton Senior Living, Inc.
Summerlin Healthcare, Inc.
Sun Peak Healthcare LLC
Sycamore Senior Living, Inc.
Symbol Healthcare, Inc.
Terrace Court Senior Living, Inc.
Teton Healthcare, Inc.
The Pennant Group, Inc.
Thomas Road Senior Housing, Inc.
Thousand Peaks Healthcare, Inc.
Total Healtcare Services LLC
Triumph Healthcare LLC
Twin Falls Senior Living LLC
Two Rivers Senior Living, Inc.
Nevada
Nevada
Nevada
Nevada
Delaware
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Delaware
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Vesper Healthcare, Inc.
Victoria Ventura Assisted Living Community, Inc.
Virgin River Healthcare, Inc.
Whitewater Healthcare LLC
Whitetank Mountain Healthcare LLC
Willow Creek Senior Living, Inc.
Wisconsin Rapids Senior Living, Inc.
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-233937 on Form S-8 of our reports dated February 28, 2022, relating to the
financial statements of The Pennant Group, Inc. and the effectiveness of the Pennant Group, Inc.’s internal control over financial reporting appearing in this
Annual Report on Form 10-K for the year ended December 31, 2021.
EXHIBIT 23.1
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
February 28, 2022
I, Daniel H Walker, certify that:
EXHIBIT 31.1
1.
I have reviewed this annual report on Form 10-K of The Pennant Group, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 28, 2022
/s/ DANIEL H WALKER
Name: Daniel H Walker
Title:
Chairman and Chief Executive Officer (Principal
Executive Officer)
I, Jennifer L. Freeman, certify that:
EXHIBIT 31.2
1.
I have reviewed this annual report on Form 10-K of The Pennant Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 28, 2022
/s/ JENNIFER L. FREEMAN
Name:
Title:
Jennifer L. Freeman
Chief Financial Officer (Principal Financial
Officer, Principal Accounting Officer and Duly
Authorized Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Pennant Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2021, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Daniel H Walker, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
EXHIBIT 32.1
2 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ DANIEL H WALKER
Name:
Title:
Daniel H Walker
Chairman and Chief Executive Officer (Principal
Executive Officer)
A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
February 28, 2022
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of The Pennant Group, Inc. (the Company) on Form 10-K for the period ended December 31, 2021, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Jennifer L. Freeman, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ JENNIFER L. FREEMAN
Name:
Title:
Jennifer L. Freeman
Chief Financial Officer (Principal Financial
Officer, Principal Accounting Officer and Duly
Authorized Officer)
A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
February 28, 2022