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The Pennant Group, Inc.

pntg · NASDAQ Healthcare
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Industry Medical - Care Facilities
Employees 7000
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FY2023 Annual Report · The Pennant Group, Inc.
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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, 2023. 

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. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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 27, 2024, 30,012,588 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, 2023) was approximately $352,279,000 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 officers
and directors of the registrant.

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

2024 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, 2023
TABLE OF CONTENTS

Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
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 Stockholder 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.

Item 1.
Item1A.
Item 1B.
Item 1C.
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

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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. 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,  2023.  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 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.

As  of  December  31,  2023,  we  operate  multiple  lines  of  business,  including  home  health,  hospice  and  senior  living,  throughout  Arizona,  California,
Colorado,  Idaho,  Montana,  Nevada,  Oklahoma,  Oregon,  Texas,  Utah,  Washington,  Wisconsin  and  Wyoming.  We  provide  home  health  and  hospice  services
through 111 agencies, and senior living services at 51 communities with 3,588 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  is  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 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

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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 oversight, human resources, accounting, payroll,
legal, risk management, 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 The Ensign Group, Inc. (“Ensign”), which was formed in 1999 with the goal of establishing a new
level  of  quality  care  within  the  skilled  nursing  industry.  On  October  1,  2019,  Ensign  completed  the  separation  of  Pennant  (the  “Spin-Off”).  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.

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 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 are managed separately to provide greater visibility into
those operations. For

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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 Financial Statements.

Services

Home Health and Hospice. As of December 31, 2023, we provided home health and hospice services through 111 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 each 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 66.9%, 67.7% and 70.0% of
our home health and hospice revenue from Medicare during the years ended December 31, 2023, 2022 and 2021, respectively.

Senior Living. As of December 31, 2023, we provided assisted living, independent living and memory care services in 51 communities with 3,588 total
available units. 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 68.8%, 71.3% and 71.3% of our senior living revenue from private pay sources during the years ended December 31,
2023, 2022 and 2021, 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. Historically, we have successfully transitioned both turnaround and stable target businesses, transforming
them into top-quality operations preferred by referral 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 also operate joint ventures with leading
health systems, which allows us to expand our partnership in the space, and may undertake additional joint ventures in the future. We will continue to

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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 2014 to 2023, we grew our home health and hospice services and senior living services revenue by 502.8% or a compounded annual growth rate of

22.1%.

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From December 31, 2014 to December 31, 2023, we grew the number of our home health and hospice agencies and senior living units by 344.0% and

126.1%, respectively.

Agency and Unit Growth Since 2014

Home health and hospice agencies
Senior living communities
Senior living units
Total number of home health, hospice, and
senior living operations

(a)

(a)

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

25 
15 
1,587 

32 
36 
3,184 

39 
36 
3,184 

46 
43 
3,434 

54 
50 
3,820 

63 
52 
3,963 

76 
54 
4,127 

88
54
4,127 

95 
49 
3,500 

111 
51 
3,588 

40 

68 

75 

89 

104 

115 

130 

142 

144 

162 

(a)

During  January  2022,  affiliates  of  the  Company  entered  into  certain  operations  transfer  agreements  with  affiliates  of  Ensign,  providing  for  the  transfer  of  the  operations  of  five  senior  living
communities.

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 17.3% of GDP, or $4.5 trillion, in 2022. CMS
projects national healthcare spending will grow by an average of 5.1% annually from 2021 through 2030, accounting for approximately 19.6% of U.S. GDP, or
approximately $6.8 trillion, in 2030.

The home health and hospice segment is growing within the overall healthcare landscape in the United States. According to Grandview Research, Inc.,
the home health market is estimated at approximately $142.9 billion and is expected to grow at a compounded annual growth rate (“CAGR”) of 7.5% from 2022 to
2030. The hospice industry is estimated at approximately $34.5 billion and is projected to grow at an estimated CAGR of 8.2% from 2022 to 2030. The senior
living market is estimated at approximately $91.8 billion and is expected to expand at an estimated CAGR of 5.5% between 2022 to 2030. 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

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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 fewer 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.

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 11,600 Medicare-certified home health agencies operating
in 2022, with the top ten largest operators accounting for approximately 26.6% of the market. There are approximately 6,000 hospice agencies in the U.S. with the
top ten largest operators accounting for about 19.1% 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 owning approximately 35% of the licensed beds within the US. We believe that our strategy of acquiring
strategic and underperforming operations in these highly fragmented markets will be an instrumental to 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”). In fiscal year 2022, CMS replaced 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. We
believe our unique operating model has allowed us to effectively transition to PDGM as local operations and clinical leaders, supported by our expert resources,
have adapted to the new reimbursement environment.

Payor Sources

We derive revenue primarily from Medicare and Medicaid programs, managed care and private insurance, and private and other 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.

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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.

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, 2023:

Medicare
Medicaid

Subtotal
Managed care
Private and other

(a)

Total revenue

Home Health and Hospice Services

Year Ended December 31, 2023

Home Health Services
48.1 %
4.8 
52.9 
34.2 
13.0 
100.0 %

Hospice Services

86.2 %
10.7 
96.9 
2.8 
0.3 
100.0 %

Senior Living Services
— %

31.2 
31.2 
— 
68.8 
100.0 %

Total Revenue

48.4 %
14.2 
62.6 
13.5 
23.9 
100.0 %

(a)

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

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.

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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  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 objectives.

We seek to compete effectively in each market by establishing a reputation within the local community as the “provider 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 senior living communities, 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 innovative operating model, described in Part

1, Item 1 - “Our Innovative Operating Model”, is one of our key competitive strengths.

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 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

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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 succeed 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 4.1 out of 5 stars across all agencies for the for the year ended
December 31, 2023, 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,  2023,  we  operated  111  home  health  and  hospice  agencies  and  51  senior  living
communities across 13 states. Because of this diversified portfolio, our blended payor mix was 48.4% Medicare, 14.2% Medicaid, 13.5% managed care and 23.9%
private pay for the year ended December 31, 2023. 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,  2023,  we  generated  72.4%  of  our  revenue  from  home  health  and
hospice services and 27.6% 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  participate  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, 2023, we had 5,791 employees who were employed by our independent operating subsidiaries or our Service Center.

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  Part  1,  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, 2023, 58.3% of our total expenses were payroll related. 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.

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Government Regulation

Recent Updates

We have disclosed under the heading “Government Regulation” in the 2022 Annual Report a summary of regulations that we believe materially affect our

business, financial condition or results of operations. Since the time of the filing of the 2022 Annual Report, the following regulations have been updated.

On  July  28,  2023,  CMS  issued  the  Hospice  Payment  Rate  Update  final  rule  (the  “Hospice  Payment  Final  Rule”)  for  fiscal  year  2024.  The  Hospice
Payment Final Rule’s hospice payment update percentage is 3.1%, which is an estimated increase of $780 million in payments from fiscal year 2023. The payment
update percentage of 3.1% is based on a 3.3% market basket percentage increase, which is reduced by a 0.2% productivity adjustment. The Hospice Payment Final
Rule makes permanent the Hospice Quality Reporting Program (“HQRP”) data submission threshold policy adopted in the 2016 Hospice Payment Rule Update
final rule, which is that hospices must submit at least 90 percent of required data within 30 days of the relevant reporting event. Hospices that fail to meet quality
reporting requirements will receive a 4% reduction to the annual hospice payment update percentage increase for that year, which would more than negate the
payment update percentage for fiscal year 2024 contained in the Hospice Payment Final Rule for hospices that fail to submit required quality reporting data to
CMS.

On October 7, 2023, California enacted SB 253 and SB 261, which require new climate disclosures from companies doing business in California. SB 253
requires companies with annual revenues of $1 billion or more to disclose their greenhouse gas emissions. SB 261 requires companies with annual revenues of
$500 million or more to disclose their climate-related risks and the measures they use to reduce and adapt to those risks. These reports are first due from companies
in 2026. Additional details regarding the application and requirements of these laws will be included in future regulations.

On November 1, 2023, CMS finalized rules regarding the administration of a Hospice Special Focus Program (“HSFP”) beginning in CY 2024. Under
this final rule, CMS established the data sources for identifying hospices for inclusion in the HSFP, defined the scoring system, and set the criteria for selection
into the HSFP. Based on public comments, CMS is finalizing the HSFP without any modifications of the proposed rule with respect to the hospice care index
(“HCI”) score, standardization of HCI scores, and addressing how missing scores will be handled in the HSFP algorithm. Specifically, for missing scores, CMS
will replace a hospice’s missing score with a zero after standardization, which is equivalent to replacing a non-reporting hospice’s missing data with the average
value for that score or measure. This final rule mandates hospices in the HSFP to be surveyed at least semiannually over 18 months. This final rule also outlines
conditions for successful completion and exit from the HSFP, as well as termination from the Medicaid program for those hospices that cannot meet substantial
compliance for surveys conducted during the HSFP. Additionally, the final rule implements an informal resolution process for disputes between CMS and hospices
related to condition-level deficiencies, similar to the process for home health agencies.

On November 1, 2023, CMS issued the CY 2024 Home Health Prospective Payment System Final Rule (“Home Health Payment Final Rule”). The Home
Health Payment Final Rule finalizes an estimated 0.8% aggregate increase to all home health agencies in CY 2024. This increase reflects the effects of the 3.0%
home health payment update percentage ($525 million increase), an estimated 2.6% decrease that reflects the net effects of CMS’s finalized prospective permanent
behavior assumption adjustment across all payments (half of the full proposed adjustment), ($455 million decrease), and an estimated 0.4% increase that reflects
the effects of an update to the fixed-dollar loss ratio used in determining outlier payments ($70 million increase). CMS also finalized recalibrated case-mix weights
and low utilization payment adjustment thresholds using 2022 data. Overall, the Home Health Payment Final Rule estimates that Medicare payments to all home
health agencies will increase in the aggregate by $140 million based on its contents.

General. The laws and statutes affecting the regulatory landscape of the home health, hospice and senior living industries continue to expand. We expect
that these changes will continue. In addition to this changing regulatory environment, federal, state and local officials are 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 federal and state anti-fraud and abuse laws, such as
anti-kickback statutes and, physician referral laws, as well as safety and health standards set by the Occupational Safety and Health Administration (“OSHA”).
Changes in laws or regulations, 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,

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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 this CoP, 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 quality of patient care 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,
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,  as  a  3-star  rating  applies  to  most  home  health  agencies.  According  to  the  November  2023  quarterly  refresh  of  CMS  Home  Health  Compare  star
rating criteria, our home health agencies have achieved an average of 4.1 out of 5 stars across all agencies compared to the industry average of 3.0 stars.

Home Health Reimbursement Under 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.

Under PDGM, Medicare provides agencies with payments for each 30-day payment period provided to beneficiaries. There is no limit to the
number of periods of care a beneficiary who remains eligible for the home health benefit can receive. The reimbursement rate is determined by a set of
factors intended to account for the cost of providing care to each patient. Payments may be adjusted for certain variables including, but not limited to the
number of visits provided, patient transfers, and other factors.

Home Health Value Based Purchasing (“HHVBP”). The Center for Medicare and Medicaid Innovation (“Innovation Center”) implemented the
original  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-

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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 did not have their payments impacted in CY 2022.

The expanded HHVBP Model began on January 1, 2022 and includes Medicare-certified HHAs in all fifty states. Calendar Year 2022 was the
pre-implementation  year  wherein  CMS  provided  HHAs  with  resources  and  training,  which  allowed  HHAs  time  to  prepare  and  learn  about  the
expectations  and  requirements  of  the  expanded  HHVBP  Model  without  risk  to  payments.  CY  2023  (beginning  on  January  1,  2023)  was  the  first  full
performance year for the expanded HHVBP Model. Calendar Year 2025 will be the first year when payment will be adjusted determined on CY 2023
performance.  Payment  adjustments  could  be  as  high  as  5  percent  in  2025  based  on  data  obtained  in  CY  2023  and  CMS  could  increase  the  payment
adjustment percentage in future years.

Review Choice Demonstration for Home Health Services. The Review Choice Demonstration for Home Health Services (RCD) is mandatory

for our HHAs in Texas and allows them to select from three initial options for payment review:

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  post-payment  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  compliance  with  Medicare  program  requirements,  should  not  delay  care  to  Medicare  beneficiaries,  and  does  not  alter  or  reduce  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 fiscal year, measured
as 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

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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 2023 fiscal year was $32,486.92. The hospice cap amount for the 2024 fiscal year is $33,494.01, which is a 3.1%
increase over the fiscal year 2023 hospice cap.

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. Failure to report such data when required subjects a PAC to a 2% reduction in market basket prices then in effect.

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 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 2022 and 2023. This reduction penalty increases 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. In 2022 and 2023, HHS engaged in rulemaking under Section 1557 of the ACA that would expand the
influence and authority of existing civil rights laws, and prohibitions against discrimination on the bases of race, national origin, sex (or sex stereotype), gender
identity or expression, disability, or age, within the healthcare context. 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 Rights. On January 25, 2024, the HHS Office for Civil Rights (“OCR”) issued guidance to healthcare providers, services, and facilities emphasizing
the importance of non-discriminatory visitation policies consistent with CMS regulations and the U.S. National Strategy to Counter Antisemitism, highlighting the
prohibition of discrimination based on religion or other protected characteristics during public health emergencies. This guidance also addresses instances of non-
compliance, such as unequal treatment based on religious beliefs or dietary restrictions, and outlines the support OCR provides to ensure compliance, encouraging
affected individuals to file complaints for potential enforcement actions.

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.  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 FCA is a frequent
topic of analysis for the United States Supreme Court. As a result, interpretations of the FCA’s meaning periodically change, and the FCA has been, and may be in
the future, amended by Congress as a result of United States Supreme Court decisions. Civil monetary penalties (“CMPs”) under the FCA and other authorities,
including the Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a, are substantial and are adjusted annually for inflation. Under the qui tam

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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.

We may also face adverse consequences if we violate federal law 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,  treble  damages,  and  Medicare  exclusion  may  be  imposed  for
presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. 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.

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, government 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  government  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 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 sanctions and operating restrictions, up through and including the loss
of licensure and termination of, or exclusion from, important payor relationships. 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 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

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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 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 Health Insurance Portability and Accountability Act of 1996 (“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. Based on a
notice of proposed rulemaking HHS issued in January of 2021, which has yet been finalized, it is possible that HHS may issue new regulations regarding HIPAA
and its privacy requirements in 2024.

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 rate environment 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”),

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including reports on the following forms: 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. 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  48.4%  of  our  revenue  from  the  Medicare
program for the year ended December 31, 2023, 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, which is discussed in Item 1.,
Government Regulation. Budget pressures also frequently lead the federal government to reduce or limit reimbursement rates under Medicare, and to adjust when
or how those reductions or limitations are implemented. Additionally, Medicare payments can be delayed or denied (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, if we
do not realize an adequate percentage of billed Medicare charges, 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  or  payment  models  that  look  to  numerous  factors  in  order  to  issue  full  payment,  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.  Medicare  reimbursement  and  participation  may  also  be  tied  to  the
vaccination of employees against COVID-19 pursuant to a CMS rule which took effect in March 2022 and was in effect until August of 2023 when CMS withdrew
this requirement. When CMS’s COVID-19 vaccine mandate was in effect, it required employees of certain Medicare-participating facilities and services including
home health agencies and hospices to be vaccinated, which affected our businesses and employees during that time period.

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 14.2% of our revenue from Medicaid programs for the year ended December 31, 2023, which is typical.
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,  including  the  reduction  of  federal  funds  contributed  to  state  Medicaid  budgets
during  the  COVID-19  public  health  emergency.  Like  Medicare  payments,  Medicaid  payments  can  be  delayed  due  to  budgetary  constraints  of  the  state  or  state
agencies  responsible  for  making  such  payments,  and  Medicaid  payments  may  be  declined  (including  retroactively)  due  to  determinations  that  certain  costs,
services  or  providers  are  not  covered  by  the  state  Medicaid  agency  or  its  intermediary  organizations.  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. Health care reform is a key political
and legislative focal point. We cannot predict what effect 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. The consequences of elections are not yet fully known for this industry, and our industry may be affected by the Presidential primary campaigns
that began in 2023 and will continue this year, culminating with the presidential election in November of 2024. It is possible new laws may lower reimbursement
or increase the cost of doing business and adversely affect our business.

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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 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 with potential residents, referral sources, and others 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.  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 focuses 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
license(s), 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 and penalties, 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 termination of the operations’ payment relationships with
those programs, or imposition of other sanctions, including criminal penalties. Furthermore, in some states, citations issued against one operation can affect other
operations in the state, particularly where there is any element of common or affiliated ownership. 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
additional fines or penalties, result in increased scrutiny by state and

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federal survey agencies, and impact our expansion plans as well as our ongoing operations. 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 patients enrolled in managed care programs and the profitability of managed care companies, which could result in reduced revenue due to reduced
reimbursement for our services. There can be no assurance that third-party payors will make timely payments for our services, not seek recoupment of payments
on grounds that may or may not be valid, 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
financial condition, results of operations and cash flows. In addition, enrollment in Medicare Advantage programs continues to grow nationwide, and an increasing
proportion of Medicare and Medicaid funds are managed by companies that are also third-party payors who may seek to reduce reimbursement as described above.

Any economic downturn, deepening of an economic downturn, continued deficit spending by the Federal Government or state budget pressures may result in
a  reduction  in  payments  and  covered  services.  Adverse  economic  developments  in  the  United  States  could  lead  to  a  reduction  in  Federal  Government
expenditures, including government-funded programs in which we participate, such as Medicare and Medicaid. In addition, if at any time the Federal Government
is not able to meet its debt payments due to Congress failing to appropriate funds for the payment of these obligations, the Federal Government may stop or delay
making  payments  on  its  obligations,  including  funding  for  government  programs  in  which  we  participate,  such  as  Medicare  and  Medicaid.  Failure  of  the
government  to  make  payments  under  these  programs  could  have  a  material  adverse  effect  on  our  business  and  consolidated  financial  condition,  results  of
operations and cash flows. Further, any failure by the United States Congress to complete the federal budget process and fund government operations may result in
a Federal Government shutdown, potentially causing us to incur substantial costs without reimbursement under the Medicare program, which could have a material
adverse  effect  on  our  business  and  consolidated  financial  condition,  results  of  operations  and  cash  flows.  As  an  example,  the  failure  of  the  2011  Joint  Select
Committee to meet its Deficit Reduction goal resulted in an automatic reduction in Medicare home health and hospice payments of 2% beginning April 1, 2013
("sequestration" - suspended from May 1, 2020 through March 31, 2022; reinstated at 1% for the period April 1, 2022 through June 30, 2022 and at 2% thereafter).
In addition, the Federal Reserve has increased interest rates repeatedly and significantly in recent quarters and may further increase or decrease interest rates in
future quarters, impacting our cost of capital, our operating costs, and the economy as a whole.

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 to do so increase, our independent operating subsidiaries’ ability to conduct their business operations
effectively  could  be  harmed.  Staffing  challenges  increased  during  the  pandemic  and  have  persisted  due  to  health  care  worker  burnout,  COVID-19  exposures,
vaccine mandates, and wage inflation, increasing the competition for qualified staff and cost of retaining personnel, and continue to affect our operations. There
can be no assurance that we will be able to attract and retain key personnel going forward.

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. Additionally, the annual increase in Medicare
beneficiary caps may not keep pace with the rate of inflation or increased operating costs as it applies to the costs of caring for such patients, potentially resulting
in our hospice independent operating subsidiaries treating these patients at a loss.

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Security  breaches  and  other  cyber-security  incidents  could  subject  us  to  significant  liability.  Data  breaches  and  leaks,  which  represent  a  material  risk  to  our
business, are reported to have occurred with greater frequency in 2023 than in 2022 and 2021. Our business depends on the proper functioning and availability of
our computer systems and networks. Our 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  use  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 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,  such  as  a  ransomware  attack,  were  to  be  successful,  the  incident  could  result  in  the  theft,  destruction,  loss,  misappropriation  or  release  of
confidential  information  or  intellectual  property,  and  could  cause  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 and Nevada Privacy Law, 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,  new  laws  or  changes  in  applicable  laws
governing  CON  requirements  (or  increasing  the  circumstances  where  a  CON  is  needed),  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.

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 from independent accreditation authorities that may be required
by  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.  By  way  of  example,  in  2022  California  passed  Assembly  Bill  2673  which  prohibits  issuance  of  new
hospice licenses and limits transfer of existing licenses.

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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, 2023, 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. Additionally, California, through its passage of AB 35, has
increased the non-economic (i.e., pain and suffering) damages that may be recovered by attorneys on claims of professional negligence or malpractice in healthcare
cases  filed  in  California,  and  may  embolden  plaintiff’s  attorneys  to  be  more  aggressive  in  their  pursuit  of  facilities  operated  by  our  independent  operating
subsidiaries  and  the  services  provided  through  them.  Since  California’s  passage  of  AB  35,  Iowa  and  Nevada  have  enacted  similar  laws  that  increase  the  non-
economic damages that may serve as the basis for the recovery for attorney’s fees in those states, which may stimulate additional litigation in those states and
could  have  an  adverse  material  affect  on  our  financial  performance.  The  defense  of  lawsuits  may  result  in  significant  legal  costs,  regardless  of  the  outcome.
Further,  such  litigation  against  us  or  our  independent  operating  subsidiaries  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 and
other penalties, fines, or sanctions. 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,

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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 (including sanctions, fines, penalties, and other liabilities that state and
federal authorities may seek to impose upon us under various theories of successor liability despite our efforts to prevent such liabilities during our transactions),
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.

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
financial  condition,  results  of  operations  and  cash  flows.  In  addition,  our  home  health  payment  rates  could  be  reduced,  as  described  in  Item  1.,  Government
Regulation - Home Health Value Based Purchasing (HHVBP); further, our star ratings measured by CMS on a five-star basis may decrease, resulting in lower
estimation by potential residents and patients and reducing the likelihood of having those potential residents and patients use our services, as described in Item 1.,
Our Competitive Strengths - Superior Clinical Outcomes and Quality Care.

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. Recent legislation in Nevada that prohibits the reduction of available funds
based on the costs of defending claims or litigation may result in higher premiums for our operations within that state. Our insurance carriers may

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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.

Our self-insurance programs may expose us to significant and unexpected costs and losses. Our general liability and workers compensation insurance policies
include self-insured retentions under which we are responsible to pay for a portion of each claim. We establish insurance loss reserves based on an estimation
process that use information obtained from both company-specific and industry data. The estimation process requires us to continually monitor and evaluate the
life  cycle  of  claims.  Using  data  obtained  from  this  monitoring  and  our  assumptions  about  emerging  trends,  we,  along  with  an  independent  actuary,  develop
information about the size of ultimate claims based on historical experience and other available industry information. The most significant assumptions used in the
estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damages
with respect to unpaid claims. It is possible, however, that the actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large
number  of  successful  claims  or  claims  that  result  in  costs  or  liability  significantly  in  excess  of  our  projections.  For  these  and  other  reasons,  our  self-insurance
reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim is made against us and it
is not covered by our insurance or exceeds the insurance policy limits, our business may be negatively and materially impacted. Further, because our self-insured
retentions under our general and professional liability and workers’ compensation program apply on a per claim basis, there is no limit to the maximum number of
claims or the total amount for which we could be responsible in any policy period. We also self-insure our employee health benefits. With respect to our health
benefits  self-insurance,  our  reserves  and  premiums  are  computed  based  on  a  mix  of  company  specific  and  general  industry  data.  Even  with  a  combination  of
limited company-specific loss data and general industry data, our loss reserves are based on actuarial estimate that may not correlate to actual loss experience in
the future. Therefore, our reserves may prove to be insufficient and we may be exposed to significant and unexpected losses.

The unionization of our workers may adversely affect our revenue and profitability. To date, with the exception of one preexisting bargaining unit at an operation
acquired  as  part  of  a  joint  venture,  our  employees  have  chosen  not  to  unionize.  Throughout  2022  and  2023,  however,  there  has  been  a  nationwide  trend  of
increasing  union  activity,  including  strikes  in  the  health  care  industry  and  in  locations,  such  as  California,  in  which  we  operate.  Increasing  trends  of  service
workers successfully organizing to unionize their workplaces, may increase the likelihood of our employees seeking to unionize their activities at one or more
additional  locations  controlled  by  our  independent  operating  subsidiaries.  If  union  activity  among  our  employees  increases,  our  cost  of  doing  business  could
increase,  our  operations  could  experience  disruption,  and  affected  operations  may  no  longer  be  economical  to  continue  operating.  Further,  labor  disputes  and
unionization efforts, among our own employees or among the employees of our referral partners, payors, vendors, joint venture partners, acquisition targets, or
other parties, could lead to work stoppages, slowdown, strikes, lockouts, and increased costs, which could materially impact our operations.

Because we lease most 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,
2023, we leased all of our senior living communities, except for one. We also leased all of our 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),
the cost of which have increased since 2020 and may adversely affect us with future increases and operating expense reconciliations due for prior years. 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, such as the downturn that was ongoing in 2022 and 2023 as a result of higher than normal mortgage interest
rates, could adversely affect seniors’ ability to afford our

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resident fees and entrance fees. If national or local housing markets enter a persistent decline in prices or transaction activity, 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  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 in 2023 has impacted our operations, placing upward pricing pressure on all things from
wages  to  supplies  to  energy  costs. Inflation  is  expected  to  remain  relatively  consistent  in  2024,  but  may  continue  to  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 continued, 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  are  subject  to  increase  in  periods  of  rising  inflation  and  when  labor
shortages occur in the marketplace. Inflation has led, and may continue to lead, to increased interest rates, which have and could continue to increase our cost of
capital, impair consumers’ ability to purchase our services, or otherwise harm us financially.

Extreme weather, natural disasters, or other catastrophic events could adversely effect our results from operations. We operate and are subject to long term
leases in areas particularly susceptible to damage or losses caused by catastrophic or extreme weather and other natural events, including fires, snow, rain or ice
storms,  windstorms,  tornadoes,  hurricanes,  earthquakes,  flooding  and  other  severe  weather.  Many  of  our  services  require  our  employees  to  travel  to  patients’
homes by car. Adverse weather events could impair our ability to provide services and could cause substantial damages or losses to our communities or operations,
which may not be covered by insurance. These events may also indirectly effect our business by increasing the cost of (or making unavailable) insurance on terms
we find acceptable. Changes in regulations relating to climate change could require us to change the way we provide services and could result in increased costs
without a corresponding increase in revenue.

Delays in reimbursement may cause liquidity problems. If we experience problems with our billing information systems or if payment issues arise with Medicare,
Medicaid or other payors, we may encounter delays in our payment cycle or delays in submitting required cost reports. 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 experience or have experienced budget deficits or could have a budget deficit in the future, which may delay

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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 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. Failure to timely submit required cost reports may result in financial penalties.

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 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 continue 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 continue to serve
on the Ensign board of directors and a portion of our executive officers and 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 our existing long term leases, any commercial agreements entered into in the future between us and Ensign and the allocation of such directors’
time between us and Ensign.

A Medicare overpayment audit of one of our independent operating subsidiaries could result in a material loss. From June 2021 to May 2022, a united program
integrity  contractor  (“UPIC”)  for  the  Medicare  program  suspended  one  of  our  independent  operating  subsidiary’s  rights  to  submit  claims  to  and  obtain
reimbursement  from  Medicare  for  its  hospice  agency  services.  The  suspension  concluded  in  May  2022  and  Medicare  has  resumed  payment  on  new  claims
submitted  by  the  agency.  The  payments  suspended  as  of  June  30,  2022  totaled  $5.2  million  and  represented  all  Medicare  payments  due  to  that  independent
operating subsidiary’s provider number during the suspension. During the suspension, the UPIC reviewed 107 patient records from a 10-month period to determine
whether a Medicare overpayment was made to this independent operating subsidiary and whether repayment of any identified overpayment is due. Based on the
results  of  its  claim  review,  the  UPIC  alleged  actual  overpayments  of  $0.4  million  and  extrapolated  overpayments  of  $5.2  million  based  upon  its  sampled  and
extrapolated data. In September and October 2022, the Company submitted requests for redetermination of the alleged overpayments. The UPIC’s redetermination
decision was partially favorable, reducing the alleged overpayment from $5.2 million to $1.9 million. The Company plans to continue to contest the UPIC’s initial
overpayment determination for the claim samples redetermined adversely to the Company.

This suspension and overpayment allegation may increase the likelihood that this or other of our independent operating subsidiaries may be subjected to additional
scrutiny in the future. A Medicare contractor may review patient records from one or more of our other independent operating subsidiaries, which may lead to
those agencies having their Medicare payments

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suspended,  whether  temporarily  or  on  an  indefinite  or  permanent  basis,  potentially  leading  to  their  closure  and  resulting  adverse  impacts  on  our  revenues  and
profits.

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 generated dramatic and rapid changes in the laws affecting our operations,
and  the  unwinding  of  pandemic-related  activities  may  continue  to  affect  our  business  in  the  foreseeable  future.  U.S.  Federal,  state,  and  local  regulators
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  (“PHE”).  The  PHE  concluded  on  May  11,  2023,  which  required  us  to  navigate  the  termination  of  federal  and  state  waivers  and  flexibilities.  The
resumption of pre-COVID-19 regulatory requirements at the conclusion of the public health emergency may continue to 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 created significant volatility, uncertainty and economic disruption, and we continue to see the after-effects of
these changes today. Many of the direct and indirect consequences of COVID-19 on our business are now known; however, new developments in the wake of the
PHE’s termination, as well as legacy consequences from the COVID-19 pandemic including COVID-19 variants, second-order effects such as inflation, consumer
demand,  and  labor  supply  issues  are  ongoing.  Similarly,  not  all  the  risks  and  consequences  of  the  COVID-19  PHE’s  termination  and  conclusion  of  emergency
responses to COVID-19 in states and localities where we operate are not yet fully known, and may yet adversely affect our business in ways that are evolving or
may only be evident with the passage of time. Risks presented by the effects of COVID-19 include the following:

• 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 may lead to decreased revenue.

•

•

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, reduction of the qualified workforce due to
burnout and qualified personnel leaving the caregiving field, 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.

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•

Increased scrutiny by regulators of visitation requirements, 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, including both COVID-19 survey standards and the
resumption of pre-COVID-19 survey standards and practices.

Potential for continued inflation and price increases of certain goods or services resulting from changes in economic conditions and steps taken by the
federal government and the Federal Reserve, which could lead to higher inflation rates or longer-lasting inflation than anticipated, which could in turn
lead to an increase in expenses, including payroll, insurance, and 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.

Potential for future investigations, sanctions, fines, or other penalties arising from the conclusion of the COVID-19 PHE and the expiration of waivers and
flexibilities enacted at the federal and state levels as a result of the PHE, and the need to update and amend policies and procedures to timely acknowledge
the expiration of these waivers and flexibilities and meet new standards concerning visitation and infection control that arose from the COVID-19 PHE.

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 (including testing supplies) and
evolving  information.  Healthcare  companies,  including  those  in  the  post-acute  care  and  senior  living  industries  in  which  we  operate,  may  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
based on pandemic-era activity, such litigation may result in legal fees, damages, fines or settlements in amounts that could be material.

Although CMS and the states where we operate have rescinded, withdrawn, or discontinued their requirements for our employees to be vaccinated against COVID-
19, we may face risk for monitoring and ensuring compliance with these mandates while they were in effect during 2022 and the applicable portions of 2023.

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 these vaccination
requirements when they were in effect. These consequences may include fines, penalties, and other administrative sanctions. Current or prospective employees
may oppose vaccination, and the prior existence of these federal, state, and local vaccination mandates may make it more difficult to recruit or retain staff.

Item 1B. Unresolved Staff Comments

None.

Item 1C. Cybersecurity

As a health care provider, we regularly process and store patient and resident information. We are committed to the protection of the personal information of our
and our independent operating subsidiaries’ patients, residents, and employees. We have robust security tools, practices, and policies in place to help ensure the
confidentiality, integrity, and accessibility of the data with which we are entrusted.

Certain of the numerous tools and processes that we use to assess, identify and manage material risks include, without limitation:

• Automated third-party tools to screen and block malicious content

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• Dedicated IT security staff who review threats in real time and escalate issues as needed
•
• Ongoing security training for all employees

Regular security tests and audits performed by internal and external parties

Our Chief Information Officer (“CIO”), Bryant Saxon, oversees our cybersecurity program and dedicated security resources. Mr. Saxon has over 15 years of direct
cybersecurity  experience  in  Chief  Information  Officer  and  other  key  leadership  roles  in  the  healthcare  industry.  His  experience  includes  HIPAA  compliance,
systems design, security audits, and incident response.

Our Board of Directors is also committed to data security and is regularly updated by the CIO on cybersecurity and other relevant technology risks facing the
Company.  Each  quarter,  the  Audit  Committee  receives  an  IT  risk  update  from  the  CIO,  and  discusses  emerging  technology  and  cybersecurity  risks.  This  risk
update includes an overview and discussion of our cybersecurity and risk management programs. In addition, technology risk is a key component of our overall
enterprise risk assessment, which is conducted annually and presented to the Board of Directors. Through these processes, the Board of Directors is apprised of,
and  given  the  opportunity  to  discuss  at  length,  any  meaningful  cybersecurity  risks  we  face.  Directors  Scott  E.  Lamb,  Gregory  K.  Morris,  and  John  G.  Nackel,
Ph.D. provide key oversight on cybersecurity matters. Our executive team is also briefed on any significant security risks during monthly leadership meetings.

We emphasize that everyone has a role to play in data security. All employees are provided with data security and privacy training upon hire and as part of annual
refresher training. All employees are required to complete this training, and we also provide periodic updates and guidance related to cybersecurity. In addition, we
regularly conduct phishing simulations or other tests to identify cyber threats.

To address and mitigate cybersecurity risks from third-party systems, the Company implements a stringent process that includes SOC 1 and SOC 2 compliance.
These  standards  help  ensure  that  our  third-party  vendors  maintain  appropriate  security  controls  and  processes.  Additionally,  we  enter  into  Business  Associate
Agreements  (BAAs)  with  relevant  third-party  vendors.  These  agreements  are  critical  for  reinforcing  our  cybersecurity  framework,  as  they  require  vendors  to
maintain the confidentiality, integrity, and availability of protected health information according to our standards and federal regulations. Additionally, through
third-party  risk  assessments,  regular  audits,  and  the  enforcement  of  security  requirements,  we  seek  to  ensure  that  all  vendors  adhere  to  our  standards  of  data
security  and  privacy.  This  layered  security  approach,  incorporating  both  technical  compliance  and  legal  agreements,  helps  to  create  a  defense  against  external
cyber threats.

We did not experience any material cybersecurity incidents in 2023. Although we incur numerous costs in the ordinary course of business to address the risks and
implement the policies described above, risks from cybersecurity threats did not materially affect our strategy, results of operations, or financial condition in 2023.
Although we are deeply committed to cybersecurity, we cannot fully mitigate all technology risks. Cybersecurity threats, including data breaches, ransomware, and
similar threats, could materially impact our future results in the future. For further discussion of how any risks from cybersecurity threats may materially affect the
Company, including our business strategy, results of operations or financial condition, see Part 1, Item 1A. Risk Factors, which is incorporated by reference into
this Part 1, Item 1C. Cybersecurity..

Item 2. Properties

Service Center

We  lease  two  office  locations  to  accommodate  our  Service  Center.  We  lease  approximately  16,794  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 4,839
rentable square feet of office space located at 7440 South Creek Road, Suite 100, Sandy, Utah 84093, pursuant to a lease that expires January 31, 2026. 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, 2023, we operated 111 home health, hospice and home care agencies in Arizona, California, Colorado, Idaho, Montana, Nevada,

Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. Office space is leased within geographies served by our agencies.

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As of December 31, 2023, we operated 51 affiliated senior living communities in Arizona, California, Idaho, Nevada, Texas, and Wisconsin with 3,588

Senior Living units. We lease all of our communities, save one which we own, through long-term, triple-net lease arrangements.

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, 2023:

State
Arizona
California
Colorado
Idaho
Montana
Nevada
Oklahoma
Oregon
Texas
Utah
Washington
Wisconsin
Wyoming

Total

Home Health
Agencies

  Hospice Agencies

Senior Living
Communities

7 
8 
9 
5 
1 
1 
2 
2 
5 
7 
5 
2 
1 
55 

13 
12 
2 
4 
1 
2 
2 
1 
9 
4 
4 
1 
1 
56 

Senior Living Units
841 
629 
— 
175 
— 
385 
— 
— 
712 
— 
— 
846 
— 
3,588 

5 
7 
— 
2 
— 
4 
— 
— 
12 
— 
— 
21 
— 
51 

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 16, Commitments and Contingencies, to the Audited Consolidated 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  trades  under  the  symbol  “PNTG”  on  the  NASDAQ  Global  Select  Market.  As  of  February  28,  2024,  there  are  approximately  69

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.

Issuer Repurchases of Equity Securities

On December 12, 2022, the Board of the Directors of the Company approved a share repurchase program under which the Company could repurchase up

to $1.0 million of its common stock. Under the share repurchase program, the Company

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could repurchase shares from time to time through open market purchases, including through the use of trading plans intended to comply with Rule 10b5-1 under
the Securities Exchange Act of 1934. The timing and total amount of stock repurchases was dependent upon business, economic and market conditions, corporate
and  regulatory  requirements,  prevailing  stock  prices,  and  other  considerations.  The  authorization  expired  on  December  12,  2023.  No  shares  were  repurchased
during the year ended December 31, 2023 and 2022.

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, 2023, 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”), 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

12/2019

6/2020

12/2020

6/2021

12/2021

6/2022

12/2022

6/2023

12/2023

PNTG
NASDAQ
Peer Group

100 
100 
100 

219 
113 
110 

150 
127 
110 

385 
163 
140 

271 
183 
126 

152 
199 
119 

85 
139 
100 

73 
132 
105 

81 
174 
111 

92 
190 
117 

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 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,  Montana,  Nevada,  Oklahoma,  Oregon,  Texas,  Utah,
Washington, Wisconsin and Wyoming. As of December 31, 2023, our home health and hospice business provided home health, hospice and

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home care services from 111 agencies operating across 13 states, and our senior living business operated 51 senior living communities throughout six states.

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

Recent Activities

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

25 
15 
1,587 

32 
36 
3,184 

39 
36 
3,184 

46 
43 
3,434 

54 
50 
3,820 

63 
52 
3,963 

76 
54 
4,127 

88
54
4,127 

95 
49 
3,500 

111 
51 
3,588 

40 

68 

75 

89 

104 

115 

130 

142 

144 

162 

Acquisitions. During 2023, we expanded our operations with the addition of three home health agencies, eight hospice agencies, two home care agencies,
and two senior living communities. 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.

Trends

We have experienced modest senior living occupancy improvement through the year ended December 31, 2023, as a result of renewed consideration of
senior living communities as a home-based care setting as the negative impacts of the global pandemic have subsided. Though we have seen steady improvements
in occupancy throughout 2022 and 2023, the highly competitive environment for senior living residents and inflationary factors will continue to impact the rate at
which we return our occupancy levels in our senior living communities to pre-pandemic levels.

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

Segments

We  have  two  reportable  segments:  (1)  home  health  and  hospice  services,  which  includes  our  home  health,  home  care  and  hospice  businesses;  and  (2)
senior living services, which includes the operation of assisted living, independent living and memory care communities. Our Chief Executive Officer, who is our
Chief Operating Decision Maker (“CODM”), reviews financial information at the operating segment level 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.

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•

•

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 services statistics for the periods indicated:

Home health services:

Total home health admissions
Total Medicare home health admissions
Average Medicare revenue per completed 60-day home health episode

(a)

Hospice services:

Total hospice admissions
Average hospice daily census
Hospice Medicare revenue per day

(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

Year Ended December 31,
2022
2023

43,508 
19,389 

3,533  $

9,746 
2,607 

185  $

40,436 
18,641 
3,531 

9,166 
2,296 
178 

$

$

• 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:

Occupancy
Average monthly revenue per occupied unit

Revenue Sources

Home Health and Hospice Services

Year Ended December 31,

2023

2022

$

78.5 %
3,969 

$

75.7 %
3,516 

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.  Net  service  revenue  is  recognized  in  accordance  with  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 PDGM 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

32

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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.

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, share-based compensation, 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, which are included in cost of services and general and administrative expense.

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 initially recorded at their historical cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the depreciable assets (ranging from one to 40 years). Leasehold improvements are amortized on a straight-line basis
over the shorter of their estimated useful lives or the remaining lease term.

33

 
 
 
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Critical Accounting Policies and Estimates

Our  discussion  and  analysis  of  our  financial  condition  and  results  of  operations  are  based  on  our  consolidated  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  periods.  On  an  ongoing  basis  we  review  our
judgments and estimates, including but not limited to those related to self-insurance reserves, revenue, and intangible assets and goodwill. 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 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; and

Acquisition accounting and goodwill - The assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection
with our acquisitions, and the review of goodwill for impairment at the Company’s annual impairment test date or upon the occurrence of a triggering
event.

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 Financial Statements.

34

Table of Contents

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
Loss on asset dispositions and impairment, net

Total expenses

Income from operations
Other income (expense), net:

Other income
Interest expense, net
Other expense, net

Income before provision for income taxes
Provision for income taxes

Net income
Less: net income (loss) attributable to noncontrolling interest

Net income attributable to Pennant

Consolidated GAAP Financial Measures:
Total revenue
Total expenses
Income from operations

35

Year Ended December 31,
2022

2023

2021

100.0 %

100.0 %

100.0 %

80.4 
7.3 
6.7 
0.9 
— 
95.3 
4.7 

0.1 
(1.2)
(1.1)
3.6 
1.0 
2.6 
0.1 
2.5 %

79.6 
8.0 
7.2 
1.0 
1.5 
97.3 
2.7 

— 
(0.8)
(0.8)
1.9 
0.4 
1.5 
0.1 
1.4 %

79.7 
9.3 
8.2 
1.1 
0.6 
98.9 
1.1 

— 
(0.5)
(0.5)
0.6 
0.1 
0.5 
(0.1)
0.6 %

2023

Year Ended December 31,
2022
(In thousands)

2021

$

$

544,891  $
519,722 
25,169  $

473,241  $
460,502 
12,739  $

439,694 
434,999 
4,695 

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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, 2023
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2022
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2021
Revenue
Segment Adjusted EBITDAR from Operations

Home Health and
Hospice Services

Senior Living
Services

All Other

Total

(In thousands)

$
$

$
$

$
$

394,464  $
65,606  $

342,249  $
61,827  $

309,570  $
55,565  $

150,427  $
45,294  $

130,992  $
37,563  $

130,124  $
37,517  $

—  $
(31,704) $

—  $
(31,435) $

—  $
(26,208) $

544,891 
79,196 

473,241 
67,955 

439,694 
66,874 

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)

Share-based compensation expense
Acquisition related costs and credit allowances
Transition services costs
Costs associated with transitioning operations
Unusual or non-recurring charges

(g)

(e)

(f)

(d)

Add: Net income (loss) attributable to noncontrolling interest

Income from operations

36

2023

Year Ended December 31,
2022
(In thousands)

2021

$

$

79,196  $
5,130 
39,759 
339 

102 
5,565 
476 
— 
612 
2,575 
531 
25,169  $

67,955  $
4,900 
38,018 
(31)

1,435 
3,363 
731 
— 
6,103 
1,297 
600 
12,739  $

66,874 
4,784 
40,863 
(24)

1,045 
10,040 
80 
2,008 
2,835 
— 
(548)
4,695 

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(a)

(b)
(c)

(d)
(e)

(f)

(g)

Segment  Adjusted  EBITDAR  from  Operations  is  net  income  attributable  to  the  Company's  reportable  segments  excluding  interest  expense,  provision  for  income  taxes,  depreciation  and
amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2)
share-based  compensation  expense,  (3)  acquisition  related  costs  and  credit  allowances,  (4)  transition  services  costs,  (5)  costs  associated  with  transitioning  operations,  (6)  unusual,  non-
recurring or redundant charges, and (7) net income (loss) attributable to noncontrolling interest. General and administrative expenses are not allocated to the reportable segments, and are
included as “All Other”, accordingly the segment earnings measure reported is before allocation of corporate general and administrative expenses. The Company's segment measures may be
different from the calculation methods used by other companies and, therefore, comparability may be limited.
Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
Share-based  compensation  expense  and  related  payroll  taxes  incurred,  including  the  impact  of  the  modification  of  certain  restricted  stock  units  described  below  in  Note  12,  Options  and
Awards, to the Consolidated Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.
Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
Costs identified as redundant or non-recurring incurred by the Company as a result of the Spin-Off. The 2021 amounts represents part of the costs incurred under the Transition Services
Agreement.  All  amounts  are  included  in  general  and  administrative  expense.  Fees  incurred  under  the  Transition  Services  Agreement  were  $1,035,  $1,561,  and  $3,124  for  the  year  ended
December 31, 2023, 2022 and 2021, respectively.
During the year ended December 31, 2023, an affiliate of the Company placed its memory care units into transition and is actively seeking to sublease the units to an unrelated third party. The
amount  above  represents  the  net  operating  impact  attributable  to  the  units  in  transition.  The  amounts  reported  exclude  rent  and  depreciation  and  amortization  expense  related  to  such
operations and include legal settlement costs associated with one of the entities transitioned to Ensign. 

During January 2022, affiliates of the Company entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities
(the “Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022
and the remainder transferred on April 1, 2022. The amount above represents the net impact on revenue and cost of service attributable to all of the transferred entities. The amounts reported
exclude rent and depreciation and amortization expense related to such operations.
Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative and cost of services expenses. The
amounts reported for the year ended December 31, 2022 include certain costs identified as redundant or non-recurring incurred by the Company for services provided by Ensign under the
Transition Services Agreement, and were included in general and administrative expense.

Performance and Valuation Measures:

Consolidated Non-GAAP Financial Measures:
Performance Metrics

Consolidated EBITDA
Consolidated Adjusted EBITDA

Valuation Metric

Consolidated 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.

37

2023

Year Ended December 31,
2022
(In thousands)

2021

$
$

$

$
$

30,107  $
40,716  $

17,008  $
31,545  $

10,003 
26,407 

79,196 

2023

Year Ended December 31,
2022
(In thousands)

2021

60,128  $
12,293  $

56,977  $
6,003  $

51,045 
1,570 

 
 
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The table below reconciles Consolidated Net Income to Consolidated EBITDA, Consolidated Adjusted EBITDA and Consolidated Adjusted EBITDAR

for the periods presented:

Consolidated Net income
Less: Net income (loss) attributable to noncontrolling interest
Add: Provision for income taxes
Net interest expense
Depreciation and amortization

Consolidated EBITDA

Adjustments to Consolidated EBITDA
Add: Costs at start-up operations

(a)

(b)

Share-based compensation expense
Acquisition related costs and credit allowances
Transition services costs
Costs associated with transitioning operations
Unusual or non-recurring charges
Rent related to items (a) and (e) above

(d)

(f)

(e)

(c)

Consolidated Adjusted EBITDA

Rent—cost of services
Rent related to items (a) and (e) above

Adjusted rent—cost of services

Consolidated Adjusted EBITDAR

2023

Year Ended December 31,
2022
(In thousands)

2021

$

$

13,910  $
531 
5,674 
5,924 
5,130 
30,107 

7,243  $
600 
1,649 
3,816 
4,900 
17,008 

102 
5,565 
476 
— 
612 
2,575 
1,279 
40,716 
39,759 
(1,279)
38,480 
79,196 

1,435 
3,363 
731 
— 
6,103 
1,297 
1,608 
31,545 
38,018 
(1,608)
36,410 

2,148 
(548)
582 
1,941 
4,784 
10,003 

1,045 
10,040 
80 
2,008 
2,835 
— 
396 
26,407 
40,863 
(396)
40,467 

(a)
(b)

(c)
(d)

(e)

(f)

Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
Share-based compensation expense and related payroll taxes incurred, including the impact of the modification of certain restricted stock units described below in Note 12, Options and Awards, to
the Consolidated Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.
Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
Costs  identified  as  redundant  or  non-recurring  incurred  by  the  Company  as  a  result  of  the  Spin-Off.  The  2021  amounts  represents  part  of  the  costs  incurred  under  the  Transition  Services
Agreement. All amounts are included in general and administrative expense. Fees incurred under the Transition Services Agreement were $1,035, $1,561, and $3,124 for the year ended December
31, 2023, 2022 and 2021, respectively.
During the year ended December 31, 2023, an affiliate of the Company placed its memory care units into transition and is actively seeking to sublease the units to an unrelated third party. The
amount above represents the net operating impact attributable to the units in transition. The amounts reported exclude rent and depreciation and amortization expense related to such operations
and include legal settlement costs associated with one of the entities transitioned to Ensign. 

During January 2022, affiliates of the Company entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the
“Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and the
remainder transferred on April 1, 2022. The amount above represents the net impact on revenue and cost of service attributable to all of the transferred entities. The amounts reported exclude rent
and depreciation and amortization expense related to such operations.
Represents  unusual  or  non-recurring  charges  for  legal  services,  implementation  costs,  integration  costs,  and  consulting  fees  in  general  and  administrative  and  cost  of  services  expenses.  The
amounts  reported  for  the  year  ended  December  31,  2022  include  certain  costs  identified  as  redundant  or  non-recurring  incurred  by  the  Company  for  services  provided  by  Ensign  under  the
Transition Services Agreement, and were included in general and administrative expense.

38

 
 
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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
2022

2021

2023

Senior Living
2022

2023

2021

Segment Adjusted EBITDAR from Operations
Less: Rent—cost of services

Rent related to start-up and transitioning operations

Segment Adjusted EBITDA from Operations

$

$

65,606  $
5,791 
(313)
60,128  $

61,827  $
5,060 
(210)
56,977  $

(In thousands)
55,565  $
4,906 
(386)
51,045  $

45,294  $
33,967 
(966)
12,293  $

37,563  $
32,958 
(1,398)
6,003  $

37,517 
35,957 
(10)
1,570 

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

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

operations because:

•

•

•

•

•

•

•

•

•

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

39

Table of Contents

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

•

•

•

•

•

•

•

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

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

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

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

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

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and
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 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  Consolidated  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 EBITDA

We  believe  Consolidated  EBITDA  is  useful  to  investors  in  evaluating  our  operating  performance  because  it  helps  investors  evaluate  and  compare  the

results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.

We  calculate  Consolidated  EBITDA  as  net  income,  adjusted  for  net  income  (loss)  attributable  to  noncontrolling  interest,  before  (a)  interest  expense

(b) provision for income taxes and (c) depreciation and amortization.

Consolidated Adjusted EBITDA

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

We  calculate  Consolidated  Adjusted  EBITDA  by  adjusting  Consolidated  EBITDA  to  exclude  the  effects  of  non-core  business  items,  which  for  the

reported periods includes, to the extent applicable:

•

•

•

costs at start-up operations;

share-based compensation expense;

acquisition related costs and credit allowances;

40

Table of Contents

•

•

•

redundant or nonrecurring costs associated with the Transition Services Agreement (as defined in Note 3, Transactions with Ensign);

costs associated with transitioning operations; and

unusual or non-recurring charges.

Segment Adjusted EBITDA from Operations

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

Valuation Measure:

Consolidated Adjusted EBITDAR

We use Consolidated Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a measure commonly used by us,
research  analysts  and  investors  to  compare  the  enterprise  value  of  different  companies  in  the  healthcare  industry,  without  regard  to  differences  in  capital
structures. Additionally,  we  believe  the  use  of  Consolidated  Adjusted  EBITDAR  allows  us,  research  analysts  and  investors  to  compare  operational  results  of
companies 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  Adjusted  EBITDAR  should  not  be  construed  as  a  financial
performance measure.

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

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

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,

2023

2022

Revenue Dollars

Revenue Percentage

Revenue Dollars

Revenue Percentage

$

$

175,044 
194,627 
24,793 
394,464 
150,427 
544,891 

(In thousands)

32.1 % $
35.7 
4.6 
72.4 
27.6 
100.0 % $

159,858 
160,520 
21,871 
342,249 
130,992 
473,241 

33.8 %
33.9 
4.6 
72.3 
27.7 
100.0 %

(a)

Home care and other revenue is included with home health revenue in other disclosures in this report.

Our consolidated revenue increased $71.7 million, or 15.1%, driven by the net organic growth of existing operations across all segments of $58.4 million

or 12.3% as well as increased revenue from acquired operations of $13.3 million, or 2.8%, during the year ended December 31, 2023.

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Table of Contents

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,
2022
2023
(In thousands)

Change

% Change

175,044  $
194,627 
24,793 
394,464  $

159,858  $
160,520 
21,871 
342,249  $

15,186 
34,107 
2,922 
52,215 

9.5 %

21.2 
13.4 

15.3 %

Year Ended December 31,
2022
2023

Change

% Change

43,508 
19,389 

40,436 
18,641 

3,533  $

3,531  $

9,746 
2,607 

185  $
111 

9,166 
2,296 

178  $
95 

3,072 
748 
2 

580 
311 
7 
16 

7.6 %
4.0 
0.1 

6.3 
13.5 
3.9 
16.8 %

$

$

$

$

(a)

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

Home health and hospice revenue increased $52.2 million, or 15.3%. Revenue grew due to an increase in all key performance indicators including an
increase in total home health admissions of 7.6%, an increase in Medicare home health admissions of 4.0%, an increase in average Medicare revenue per 60-day
completed episode of 0.1%, an increase of 6.3% in total hospice admissions, an increase of 3.9% in hospice Medicare revenue per day, and an increase of 13.5% in
hospice average daily census. The improvement in these metrics resulted in net organic revenue growth of $40.8 million for the year ended December 31, 2023.
Growth was also driven by the acquisition of 11 home health, home care, and hospice operations, between December 31, 2022 and December 31, 2023, resulting in
an increase in revenue of $11.4 million, or 3.3% overall.

Senior Living Services

Revenue (in thousands)
Number of communities at period end
Occupancy
Average monthly revenue per occupied unit

Year Ended December 31,
2022
2023

Change

% Change

$

$

150,427 
51 
78.5 %
3,969 

$

$

130,992 
49 
75.7 %
3,516 

$

$

19,435 
2 
2.8 %
453 

14.8 %
4.1 

12.9 %

Senior  living  revenue  increased  $19.4  million,  or  14.8%,  for  the  year  ended  December  31,  2023  when  compared  to  the  same  period  in  the  prior  year
primarily due to a 12.9% increase in average monthly revenue per occupied unit and a 2.8% increase in occupancy rate between December 31, 2022 and December
31, 2023. Growth in revenue was also driven by the acquisition of two senior living communities, between December 31, 2022 and December 31, 2023, resulting
in an increase of $1.9 million, or 1.4% overall.

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Table of Contents

Cost of Services

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

Home Health and Hospice
Senior Living

Total cost of services

Year Ended December 31,
2022
2023
(In thousands)

Change

% Change

$

$

331,844  $
106,252 
438,096  $

282,988  $
93,650 
376,638  $

48,856 
12,602 
61,458 

17.3 %
13.5 

16.3 %

Consolidated cost of services increased $61.5 million, or 16.3%, for the year ended December 31, 2023 when compared to the year ended December 31,
2022. The increase in the amount of cost of services was driven primarily by volume of services provided. Cost of services as a percentage of revenue increased by
80 basis points from 79.6% to 80.4% over the same time period. The increase was driven primarily by increased wages and benefits.

Home Health and Hospice Services

Year Ended December 31,
2022
2023

(In thousands)

Change

% Change

Cost of service
Cost of services as a percentage of revenue

$

331,844 

$

282,988 

$

84.1 %

82.7 %

48,856 

1.4 %

17.3 %

Cost  of  services  related  to  our  Home  Health  and  Hospice  services  segment  increased  $48.9  million,  or  17.3%,  primarily  due  to  increased  volume  of
services from the growth in admissions and average daily census. Cost of services as a percentage of revenue for the year ended December 31, 2023 increased by
140 basis points compared to the year ended December 31, 2022 primarily due to increased wages and benefits.

Senior Living Services

Year Ended December 31,
2022
2023

(In thousands)

Change

% Change

Cost of service
Cost of services as a percentage of revenue

$

106,252 

$

70.6 %

93,650 

$

71.5 %

12,602 

(0.9)%

13.5 %

Cost of services related to our Senior Living services segment increased $12.6 million, or 13.5%, during the year ended December 31, 2023 in response to
higher occupancy and wage rate increases. As a percentage of revenue, costs of service decreased by 90 basis points during the year ended December 31, 2023
when compared to the year ended December 31, 2022 due to cost optimization, as occupancy increases toward approximately 80.0%.

Rent—Cost of Services.  Rent  increased  4.6%  from  $38.0  million  to  $39.8  million  for  the  year  ended  December  31,  2023  compared  to  the  year  ended
December 31, 2022, primarily as a result of the newly acquired senior living communities. As a percentage of revenue, rent—cost of services decreased 70 basis
points when compared to the year ended December 31, 2022 due to improved senior living performance.

General and Administrative Expense. General and administrative expense increased $2.7 million, or 7.9%, from $34.0 million to $36.7 million for the
year ended December 31, 2023 when compared to the year ended December 31, 2022. The increase in general and administrative expense was due to an increase
of $1.5 million in share-based compensation for the year ended December 31, 2023 when compared to the year ended December 31, 2022.

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

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Table of Contents

Loss on Asset Dispositions and Impairment, Net. Loss on asset dispositions and impairment, net decreased $6.9 million for the year ended December 31,

2023 when compared to the year ended December 31, 2022 due to the transfer of senior living communities to Ensign in 2022.

Provision for Income Taxes. Our effective tax rate for the year ended December 31, 2023 was 29.0% of earnings before income taxes compared with an
effective  tax  rate  of  18.5%  for  the  year  ended  December  31,  2022.  The  increase  in  the  effective  tax  rate  is  primarily  due  to  a  change  in  nondeductible  equity
compensation expenses. See Note 14, Income Taxes, to the Consolidated 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, 2022 as compared to the year ended December 31, 2021 refer to Item

7. Management's Discussion and Analysis of Financial Condition and Results of Operations on Form 10-K filed with the SEC on February 23, 2023.

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 June 12, 2023, Pennant entered into the Second Amendment to its existing credit agreement (as amended, the “Credit Agreement”), to replace the
LIBOR-based rates in the Credit Agreement with Standard Overnight Financing Rate (“SOFR”) based rates, due to the phase-out of LIBOR as a preferred global
reference  rate.  The  Credit  Agreement  provides  for  a  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, except that the loans may become due immediately if the Company triggers an event of default under the
terms of the Credit Agreement. 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, 2023, we were in compliance with all covenants.

As of December 31, 2023 we had $6.1 million of cash and $80.8 million of available borrowing capacity on our Revolving Credit Facility.

We believe that our existing cash, cash generated through operations, and access to available borrowing capacity under our Credit Agreement, will be

sufficient to provide adequate liquidity for the next twelve months for both our operating activities and opportunities for acquisition growth.

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Table of Contents

The following table presents selected data from our statement of cash flows for the periods presented:

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities

Net change in cash
Cash at beginning of year

Cash at end of year

Year Ended December 31,

2023

2022

(In thousands)
33,090  $
(30,222)
1,112 
3,980 
2,079 
6,059  $

9,044 
(24,239)
12,084 
(3,111)
5,190 
2,079 

$

$

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Our net cash flow from operating activities for the year ended December 31, 2023 increased by $24.0 million when compared to the year ended December
31, 2022. The primary drivers of this difference was a $6.7 million increase in net income, a $12.9 million net increase in cash flows from the change in operating
assets and liabilities, and an increase of $4.4 million in non-cash expenses.

Our net cash used in investing activities for the year ended December 31, 2023 increased by $6.0 million compared to the year ended December 31, 2022,
primarily driven by a $11.9 million increase in business acquisitions and other assets, offset by a $6.1 million decrease in purchases of property and equipment
during the year ended December 31, 2023 compared to the year ended December 31, 2022.

    Our net cash provided by financing activities decreased by $11.0 million for the year ended December 31, 2023 when compared to the year ended December 31,
2022 primarily due to a decrease in our net borrowings.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest  Rate  Risk.  We  are  exposed  to  risks  associated  with  market  changes  in  interest  rates.  On  June  12,  2023,  Pennant  entered  into  the  Second
Amendment to the Credit Agreement, which replaced the reference rate under the Credit Agreement from LIBOR-based rate to SOFR-based rate. A 1.0% interest
rate change would cause interest expense to change by approximately $0.7 million annually based upon our outstanding long-term debt as of December 31, 2023.
We manage our exposure to this market risk by monitoring available financing alternatives.

Item 8.    Financial Statements and Supplementary Data

The consolidated 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

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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

Our  management  is  responsible  for  establishing  and  maintaining  adequate  internal  control  over  financial  reporting,  as  defined  in  Rule  13a-15(f)
promulgated under the Exchange Act. 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. 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.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework  (2013).  As  a  result  of  this  assessment,  management  concluded  that,  as  of  December  31,  2023,  our  internal  control  over  financial  reporting  was
effective  in  providing  reasonable  assurance  regarding  the  reliability  of  financial  reporting  and  the  preparation  of  financial  statements  for  external  purposes  in
accordance with generally accepted accounting principles.

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, 2023, 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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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders 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, 2023, 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, 2023, 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, 2023, of the Company and our report dated February 28, 2024, 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 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, ID
February 28, 2024

Item 9B. Other Information

Rule 10b5-1 Plan Election

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Table of Contents

Brent J. Guerisoli, Chief Executive Officer, entered into a Rule 10b5-1 trading arrangement on May 5, 2023 (the "Rule 10b5-1 Plan"). Mr. Guerisoli’s 10b5-1 Plan
provides for the potential sale of up to 2,514 shares of the Company's common stock between August 7, 2023 and May 7, 2024.

John J. Gochnour, President and Chief Operating Officer, entered into a Rule 10b5-1 trading arrangement on December 14, 2023 (the "Rule 10b5-1 Plan"). Mr.
Gochnour's 10b5-1 Plan provides for the potential sale of up to 15,715 shares of the Company's common stock between March 15, 2024 and July 30, 2024, and
6,286 shares of the Company’s common stock between March 15, 2024 and May 21, 2025.

This Rule 10b5-1 trading arrangement was entered into during open trading windows and is intended to satisfy the affirmative defense conditions of Rule 10b5-1
(c) under the Securities Exchange Act of 1934, as amended, and the Company's policies regarding transactions in Company securities.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

Part III.

Item 10.     Directors, Executive Officers and Corporate Governance

The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2024 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 2024 Annual Meeting of

Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is hereby incorporated by reference to our definitive proxy statement on Form 14A for the 2024 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 2024 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 2024 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 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, 2023 and 2022

Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021

• Notes to the Consolidated 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#

2.2#

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).
Form of Operations Transfer Agreement, dated as of January 27, 2022, entered into by affiliates of the Company and affiliates of Ensign
(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
January 27, 2022).
Amended and Restated Certificate of Incorporation of The Pennant Group, Inc., effective as of September 27, 2019 (incorporated by reference to
Exhibit 3.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3, 2019).

Second Amended and Restated Bylaws 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).

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).

49

 
 
Table of Contents

10.5+

10.6+

10.7+

10.8+

10.9+

10.10+

10.11

10.12

10.13+

10.14+

10.15+

10.16+

10.17

21.1*
23.1*
31.1*
31.2*
32.1**

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).

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

Amendment to Restricted Stock Unit Agreement, dated July 25, 2022, by and between The Pennant Group, Inc. and Daniel H. Walker
(incorporated by reference to Exhibit 10.2 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on
July 29, 2022).
Credit Agreement, dated June 12, 2023, 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 June 12, 2023).
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.

32.2**
97.1*
101.INS*

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.
Clawback Policy of The Pennant Group, Inc.
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

50

Table of Contents

101.CAL*
101.DEF*
101.LAB*
101.PRE*
104*

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.
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.

51

 
 
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, 2024

The Pennant Group, Inc.

BY: 

/s/ LYNETTE B. WALBOM
Lynette B. Walbom
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/ BRENT J. GUERISOLI
Brent J. Guerisoli

/s/ LYNETTE B. WALBOM
Lynette B. Walbom

/s/ BARRY M. SMITH
Barry M. Smith

/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

Chief Executive Officer (Principal Executive
Officer)

February 28, 2024

Chief Financial Officer (Principal Financial Officer,
Principal Accounting Officer and Duly Authorized
Officer)

Chairman

Director

Director

Director

Director

Director

Director

52

February 28, 2024

February 28, 2024

February 28, 2024

February 28, 2024

February 28, 2024

February 28, 2024

February 28, 2024

February 28, 2024

 
 
 
 
 
Table of Contents

THE PENNANT GROUP, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to the Consolidated Financial Statements

54

56
57
58
59
61

53

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders 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, 2023 and 2022,
the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2023, 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
control  over  financial  reporting  as  of  December  31,  2023,  based  on  criteria  established  in  Internal  Control  —  Integrated  Framework  (2013)  issued  by  the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, 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 our 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 Reserve — Refer to Note 2 and Note 16 to the financial statements

Critical Audit Matter Description

The Company is self-insured for general and professional liability, workers’ compensation, automobile, and its employee health plans while maintaining stop-loss
coverage with third-party insurers to limit its total liability exposure. The self-insurance reserves are undiscounted. Self-insurance reserves consist of the projected
settlement  value  of  reported  and  unreported  claims.  The  projected  settlement  values  are  estimated  based  on  the  Company’s  historical  claim  experience,
supplemented with industry experience, as necessary and are established using actuarial methods followed in the insurance industry.

We identified the evaluation of the Company’s self-insurance reserves for general and professional liability and workers’ compensation as a critical audit matter
because estimating 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
self-insurance reserves were appropriately recorded as of December 31, 2023.

54

Table of Contents

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the self-insurance reserves for general and professional liability and workers’ compensation included the following among others:

•

•

•

We  tested  the  effectiveness  of  controls  related  to  self-insurance  reserves  for  general  and  professional  liability  and  workers’  compensation,  including
management’s controls over the review of the historical claim data and the projection of the settlement value of the reported and unreported claims.

We  evaluated  the  methods  and  assumptions  used  by  management  to  estimate  the  self-insurance  reserves  for  general  and  professional  liability  and
workers’ compensation by:

◦

◦

◦

Reading the Company’s insurance policies and compared the coverage and terms to the assumptions used by management.

Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial
estimate were accurate and complete.

Comparing management's change in ultimate loss to the differential between expected development and actuals incurred during the current year
to identify potential bias in the determination of the insurance reserves.

With the assistance of our actuarial specialists, we developed independent estimates of self-insurance reserves for general and professional liability and
workers’ compensation and compared our estimates to management’s estimates.

/s/ DELOITTE & TOUCHE LLP

Boise, ID
February 28, 2024

We have served as the Company's auditor since 2019.

55

Table of Contents

Assets
Current assets:

THE PENNANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

December 31, 2023

December 31, 2022

Cash
Accounts receivable—less allowance for doubtful accounts of $259 and $592 at December 31, 2023
and 2022, respectively
Prepaid expenses and other current assets

$

Total current assets

Property and equipment, net
Right-of-use assets
Deferred tax assets, net
Restricted and other assets
Goodwill
Other indefinite-lived intangibles

Total assets

Liabilities and equity
Current liabilities:

Accounts payable
Accrued wages and related liabilities
Lease liabilities—current
Other accrued liabilities

Total current liabilities

Long-term lease liabilities—less current portion
Deferred tax liabilities, net
Other long-term liabilities
Long-term debt, net
Total liabilities

Commitments and contingencies (Note 16)
Equity:

Common stock, $0.001 par value; 100,000 shares authorized; 30,297 and 29,948 shares issued and
outstanding at December 31, 2023, respectively, and 30,149 and 29,692 shares issued and outstanding
at December 31, 2022, respectively
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 3 shares at December 31, 2023 and 2022

Total The Pennant Group, Inc. stockholders' equity

Noncontrolling interest
Total equity

Total liabilities and equity

$

$

$

See accompanying notes to the consolidated financial statements.

56

6,059  $

61,116 
12,902 
80,077 
28,598 
262,923 
— 
9,337 
91,014 
67,742 
539,691  $

10,841  $
28,256 
17,122 
15,330 
71,549 
248,596 
1,855 
8,262 
63,914 
394,176 

29 
105,712 
34,663 
(65)
140,339 
5,176 
145,515 
539,691  $

2,079 

53,420 
18,323 
73,822 
26,621 
260,868 
2,149 
10,545 
79,497 
58,617 
512,119 

13,647 
23,283 
16,633 
16,684 
70,247 
247,042 
— 
6,281 
62,892 
386,462 

29 
99,764 
21,284 
(65)
121,012 
4,645 
125,657 
512,119 

Table of Contents

THE PENNANT GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per-share amounts)

Revenue

Expense:

Cost of services
Rent—cost of services
General and administrative expense
Depreciation and amortization
Loss on asset dispositions and impairment, net
Total expenses

Income from operations
Other income (expense), net:
Other income (expense)
Interest expense, net
Other expense, net

Income before provision for income taxes
Provision for income taxes

Net income
Less: net income (loss) attributable to noncontrolling interest

Net income and other comprehensive income attributable to The Pennant Group, Inc.
Earnings per share:
Basic
Diluted

Weighted average common shares outstanding:

Basic
Diluted

Year Ended December 31,
2022

2021

2023

$

544,891  $

473,241  $

439,694 

438,096 
39,759 
36,667 
5,130 
70 
519,722 
25,169 

339 
(5,924)
(5,585)
19,584 
5,674 
13,910 
531 
13,379  $

376,638 
38,018 
33,981 
4,900 
6,965 
460,502 
12,739 

(31)
(3,816)
(3,847)
8,892 
1,649 
7,243 
600 
6,643  $

0.45  $
0.44  $

0.23  $
0.22  $

29,863 
30,193 

29,064 
30,159 

350,236 
40,863 
36,259 
4,784 
2,857 
434,999 
4,695 

(24)
(1,941)
(1,965)
2,730 
582 
2,148 
(548)
2,696 

0.09 
0.09 

28,406 
30,642 

$

$
$

See accompanying notes to the consolidated financial statements.

57

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THE PENNANT GROUP, INC.

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Retained
Earnings

Treasury Stock

Shares

Amount

Non-
controlling
Interest

Total
Equity

Balance at December 31, 2020
Net income 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
Net income attributable to The Pennant
Group, Inc.
Net income 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, 2022
Net income attributable to The Pennant
Group, Inc.
Net income 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, 2023

28,696  $

28  $

84,671  $

11,945 

3  $

(65) $

4,593  $ 101,172 

— 

— 
— 

115 
15 
28,826 

— 

— 
— 

125 
1,198 
30,149 

— 

— 
— 

— 

— 
— 

— 
— 
28 

— 

— 
— 

1 
— 
29 

— 

— 
— 

— 

— 
10,040 

884 
— 
95,595 

— 

— 
3,086 

1,083 
— 
99,764 

— 

— 
5,369 

89 
59 
30,297  $

— 
— 
29  $

579 
— 
105,712  $

2,696 

— 
— 

— 
— 
14,641 

6,643 

— 
— 

— 
— 
21,284 

13,379 

— 
— 

— 
— 
34,663 

— 

— 
— 

— 
— 
3 

— 

— 
— 

— 
— 
3 

— 

— 
— 

— 

— 
— 

— 
— 
(65)

— 

— 
— 

— 
— 
(65)

— 

— 
— 

— 

2,696 

(548)
— 

— 
— 
4,045 

— 

600 
— 

— 
— 
4,645 

— 

531 
— 

(548)
10,040 

884 
— 
114,244 

6,643 

600 
3,086 

1,084 
— 
125,657 

13,379 

531 
5,369 

— 
— 
3  $

— 
— 
(65) $

— 
— 

579 
— 
5,176  $ 145,515 

See accompanying notes to the consolidated financial statements.

58

(In thousands)

Table of Contents

THE PENNANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

2023

Year Ended December 31,
2022

2021

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization
Amortization of deferred financing fees
Provision for doubtful accounts
Share-based compensation
Deferred income taxes
Loss on asset dispositions and impairment
Change in operating assets and liabilities, net of effects of business acquisitions:

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 provided by (used in) 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 revolver agreement
Payments on revolver agreement
Finance lease obligations
Payments for deferred financing costs
Issuance of common stock upon the exercise of options
Net cash provided by financing activities

Net increase (decrease) in cash
Cash beginning of period

Cash end of period

$

13,910  $

7,243  $

5,130 
521 
646 
5,369 
4,004 
70 

(7,350)
7,770 
(12)
(1,845)
4,972 
(814)
— 
719 
33,090 

(8,105)
(21,376)
(201)
(540)
(30,222)

4,900 
520 
881 
3,086 
1,700 
218 

(361)
(7,426)
(67)
2,368 
(197)
1,856 
(6,211)
534 
9,044 

(14,170)
(10,130)
(49)
110 
(24,239)

182,000 
(181,500)
33 
— 
579 
1,112 
3,980 
2,079 
6,059  $

129,500 
(118,500)
— 
— 
1,084 
12,084 
(3,111)
5,190 
2,079  $

$

2,148 

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 

See accompanying notes to the consolidated financial statements.

59

Table of Contents

THE PENNANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In Thousands)

2023

Year Ended December 31,
2022

2021

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
$
Finance lease assets obtained in exchange for new finance lease obligations
$
Non-cash adjustment to right-of-use assets and lease liabilities from lease modifications
Non-cash adjustment to right-of-use assets and lease liabilities from lease terminations and assignments $
Non-cash investing activity:

5,012  $
841  $
36,653  $
12,826  $
633  $
5,195  $
—  $

3,027  $
99  $
35,994  $
12,645  $
—  $
6,270  $
(43,136) $

Capital expenditures in accounts payable

$

319  $

1,280  $

1,448 
2,616 
39,151 
3,230 
— 
4,674 
— 

730 

See accompanying notes to the consolidated financial statements.

60

Table of Contents

THE PENNANT GROUP INC.
NOTES TO THE CONSOLIDATED 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,
2023, the Company’s subsidiaries operated 111 home health, hospice and home care agencies and 51 senior living communities located in Arizona, California,
Colorado, Idaho, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming.

Certain  of  the  Company’s  subsidiaries,  collectively  referred  to  as  the  Service  Center,  provide  accounting,  payroll,  human  resources,  information

technology, legal, risk management, and other services to the operations through contractual relationships.

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

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying consolidated financial statements of the Company (the “Financial Statements”) reflect the Company’s financial
position for the years ended December 31, 2023 and 2022, and the Company’s results of operations and cash flows for the years ended December 31, 2023, 2022
and 2021 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”). The Company presents noncontrolling interests within the equity section of its consolidated balance sheets and
the  amount  of  consolidated  net  income  (loss)  that  is  attributable  to  The  Pennant  Group,  Inc.  and  the  noncontrolling  interest  in  its  consolidated  statements  of
income.

All  intercompany  transactions  and  balances  between  the  various  legal  entities  comprising  the  Company  have  been  eliminated  in  consolidation.  The

consolidated 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.

Reclassifications - Certain amounts in the prior financial statements have been reclassified to conform to the presentation of the current period financial

statements.

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 recognition, and intangible assets and goodwill. Actual results could differ from those estimates.

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

61

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 Accounting Standard Codification (“ASC”) Topic 340, Other Assets and Deferred Costs, 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. The
CARES Act allowed for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and
the remainder due on December 31, 2022. The Company deferred approximately $7,836 of employer-paid portion of social security tax, all of which was repaid as
of December 31, 2022. The CARES Act also expanded the Centers for Medicare & Medicaid Services’ (“CMS”) ability to provide accelerated/advance payments
intended to increase the cash flow of healthcare providers and suppliers impacted by COVID-19. During 2020, the Company applied for and received $27,997 in
funds under the Accelerated and Advance Payment (“AAP”) Program, all of which was recouped as of June 23, 2022.

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. Depreciation is computed using the straight-line method
over the estimated useful lives of the depreciable assets (ranging from one to 40 years). Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the remaining lease term. Repairs and maintenance are expensed as incurred.

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. There were no long-lived asset impairments during the year
ended December 31, 2023. Management evaluated its long-lived assets and the Company identified $218 and $2,835 in long-lived asset impairments related to six
senior living communities for the years ended December 31, 2022 and 2021, respectively. 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.

Goodwill  represents  the  excess  of  the  purchase  price  over  the  fair  value  of  identifiable  net  assets  acquired  in  business  combinations.  The  Company
reviews  goodwill  for  impairment  annually  on  the  first  day  of  the  fourth  quarter  and  also  if  events  or  changes  in  circumstances  indicate  the  occurrence  of  a
triggering event. 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

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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, 2023, we evaluated potential triggering events that might be indicators that our goodwill and indefinite-lived intangible assets were
impaired. As a result of our evaluation, no goodwill or indefinite-lived intangible asset impairments were recorded during the years ended December 31, 2023,
2022 and 2021. See further discussion at Note 9, Goodwill and Intangible Assets.

Self-Insurance  Reserve  -  The  Company  retains  risk  for  a  substantial  portion  of  potential  claims  for  general  and  professional  liability  and  workers’
compensation.  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, 2023, 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, Washington, and Wyoming 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.

The following table presents details of the Company's insurance program, including general and professional liability and workers’ compensation, and
amounts accrued for the periods indicated in other accrued liabilities and other long-term liabilities in our accompanying consolidated 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 $2,045 and $1,561 included in restricted and other assets
for  the  years  ended  December  31,  2023  and  2022,  respectively,  and  $237  and  $188  included  in  prepaid  expenses  and  other  current  assets  for  the  years  ended
December 31, 2023 and 2022, respectively.

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

As of December 31,

2023

2022

$

$

4,078  $
4,892 
8,970 
(6,509)
2,461  $

3,690 
3,810 
7,500 
(5,748)
1,752 

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  self-funds  medical,  including  prescription  drugs,  dental  healthcare,  and  vision  benefits  for  its
employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss exposure associated with this policy,
the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $325 for each covered person for fiscal years 2023
and  2022.  As  of  December  31,  2023  and  2022  our  medical  benefits  liability  was  $1,931  and  $1,794,  respectively,  recorded  as  a  component  of  other  accrued
liabilities.

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  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.

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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
and other comprehensive income attributable to The Pennant Group, Inc. in its consolidated statements of income. Net income per share is calculated based on net
income 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.  The  total  amount  of  share-based  compensation  was  $5,369,  $3,086,  and  $10,040  for  the  years  ended
December 31, 2023, 2022 and 2021, respectively, of which $2,250, $647 and $7,964, 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.

State Relief Funding - The  Company  receives  state  relief  funding  through  programs  from  various  states,  including  healthcare  relief  funding  under  the
American Rescue Plan Act (“ARPA”), and other state specific relief programs. The funding generally incorporates specific use requirements primarily for direct
patient care including labor-related expenses that are attributable to the COVID-19 pandemic or are associated with providing patient care.

These funds are recognized as a reduction of cost of services when related expenses are incurred. As of December 31, 2023 and 2022, the Company had
$780 and $1,479 in unapplied state relief funds, respectively. The unapplied state relief funds received are recorded in other accrued liabilities on the consolidated
balance sheets. The Company recognized state relief funding totaling $4,654 for the year ended December 31, 2023, and $3,941 for the year ended December 31,
2022, which the Company recognized as a reduction of cost of services.

Recent Accounting Pronouncements - Except  for  rules  and  interpretive  releases  of  the  Securities  and  Exchange  Commission  (SEC)  under  authority  of
federal  securities  laws  and  a  limited  number  of  grandfathered  standards,  the  FASB  ASC  is  the  sole  source  of  authoritative  GAAP  literature  recognized  by  the
FASB and applicable to the Company. For any new pronouncements announced, 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.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which requires
the Company to expand the breadth and frequency of segment disclosures to include additional information about significant segment expenses, the chief operating
decision maker and other items, and also require the annual disclosures on an interim basis. This guidance is effective for annual periods beginning after December
15,  2023,  which  will  be  the  Company's  fiscal  year  2024,  with  early  adoption  permitted.  The  Company  is  currently  evaluating  the  impact  of  the  ASU  on  its
Quarterly and Annual Reports.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires the Company
to disclose disaggregated jurisdictional and categorical information for the tax rate reconciliation, income taxes paid and other income tax related amounts. This
guidance is effective for annual periods beginning after December 15, 2024, which will be the Company's fiscal year 2025, with early adoption permitted. The
Company doesn’t expect it to have any material impacts.

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3. TRANSACTIONS WITH ENSIGN

On October 1, 2019, The Ensign Group, Inc. (“Ensign”) completed the separation of Pennant (the “Spin-Off”). Pennant and Ensign continue to partner in

the provision of services along the healthcare continuum.

The Company has incurred $1,035, $1,561, and $3,124 in costs related to the Transitions Services Agreement for the years ended December 31, 2023,

2022 and 2021, respectively, that related primarily to shared services at proximate operations.

Expenses related to room and board charges at Ensign skilled nursing facilities for hospice patients were $4,583, $3,211, and $3,084 for the years ended

December 31, 2023, 2022 and 2021, respectively.

The  Company’s  independent  operating  subsidiaries  leased  29  of  its  senior  living  communities  from  subsidiaries  of  Ensign  under  a  master  lease

arrangement as of December 31, 2023. See further discussion below at Note 13, Leases.

On  January  27,  2022,  affiliates  of  the  Company  entered  into  certain  operations  transfer  agreements  (collectively,  the  “Transfer  Agreements”)  with
affiliates of Ensign, providing for the transfer of the operations of five senior living communities (the “Transaction”). The Transfer Agreements required one of the
transferors  to  place  $6,500  in  escrow  to  cover  post-closing  capital  expenditures  and  operating  losses  related  to  one  of  the  communities,  and  such  escrow  was
funded  by  an  initial  payment  by  the  transferor  at  closing  followed  by  eight  equal  monthly  installments.  The  Company  recorded  the  amount  in  loss  on  asset
dispositions and impairment, net during 2022. The Transaction closed in April 2022.

4. COMPUTATION OF NET INCOME PER COMMON SHARE

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

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

Numerator:
Net income
Less: net income (loss) attributable to noncontrolling interest

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

Year Ended December 31,
2022

2021

2023

13,910  $
531 
13,379  $

7,243  $
600 
6,643  $

2,148 
(548)
2,696 

29,863 
330 
30,193 

29,064 
1,095 
30,159 

28,406 
2,236 
30,642 

0.45  $
0.44  $

0.23  $
0.22  $

0.09 
0.09 

$

$

$
$

(a)

The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the
period) because their inclusion would have been antidilutive. Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were
2,363, 1,860, and 478 for the years ended December 31, 2023, 2022 and 2021, respectively.

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

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programs (Commercial, Medicare Advantage and Managed Medicaid plans). 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.

The Company records revenue from Medicare, Medicaid and managed care programs as services are performed at their expected net realizable amounts
under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and
third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the
change or adjustment becomes known based on final settlement.

Disaggregation of Revenue

The  Company  disaggregates  revenue  from  contracts  with  its  patients  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
below.

The Company’s service specific revenue recognition policies are as follows:

Home Health Revenue

Medicare Revenue

Net service revenue is recognized in accordance with the Patient Driven Groupings Model (“PDGM”). Under PDGM, Medicare provides agencies with
payments for each 30-day payment period provided to beneficiaries. If a beneficiary is still eligible for care after the end of the first 30-day payment period, a
second 30-day payment period can begin. There are no limits to the number of periods of care a beneficiary who remains eligible for the home health benefit can
receive. While payment for each 30-day payment period is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to
ensure appropriate payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted for certain
variables including, but not limited to: (a) a low utilization payment adjustment if the number of visits is below an established threshold that varies based on the
diagnosis  of  a  beneficiary;  (b)  a  partial  payment  if  the  patient  transferred  to  another  provider  or  the  Company  received  a  patient  from  another  provider  before
completing the period of care; (c) adjustment to the admission source of claim if it is determined that the patient had a qualifying stay in a post-acute care setting
within 14 days prior to the start of a 30-day payment period; (d) the timing of the 30-day payment period provided to a patient in relation to the admission date,
regardless of whether the same home health provider provided care for the entire series of episodes; (e) changes to the acuity of the patient during the previous 30-
day payment period; (f) changes in the base payments established by the Medicare program; (g) adjustments to the base payments for case mix and geographic
wages; and (h) recoveries of overpayments.

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

In addition to revenue recognized on completed episodes and periods, the Company also recognizes a portion of

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

Non-Medicare Revenue

Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paid

by other insurance carriers, including Medicare Advantage programs; 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, 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.

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Revenue by payor for the years ended December 31, 2023, 2022 and 2021, is summarized in the following tables:

Home Health and Hospice Services

Year Ended December 31, 2023

Medicare
Medicaid

Subtotal
Managed care
Private and other

(a)

Total revenue

Medicare
Medicaid

Subtotal
Managed care
Private and other

(a)

Total revenue

Medicare
Medicaid

Subtotal
Managed care
Private and other

(a)

Total revenue

Home Health Services
$

96,035  $
9,625 
105,660 
68,260 
25,917 
199,837  $

Hospice Services

Senior Living Services

Total Revenue

Revenue %

167,775  $
20,738 
188,513 
5,488 
626 
194,627  $

—  $

46,974 
46,974 
— 
103,453 
150,427  $

263,810 
77,337 
341,147 
73,748 
129,996 
544,891 

48.4 %
14.2 
62.6 
13.5 
23.9 
100.0 %

$

$

$

(a)

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

Home Health and Hospice Services

Year Ended December 31, 2022

Home Health Services
$

91,415  $
9,749 
101,164 
57,824 
22,741 
181,729  $

Hospice Services

Senior Living Services

Total Revenue

Revenue %

140,338  $
15,568 
155,906 
4,277 
337 
160,520  $

—  $

37,617 
37,617 
— 
93,375 
130,992  $

231,753 
62,934 
294,687 
62,101 
116,453 
473,241 

49.0 %
13.3 
62.3 
13.1 
24.6 
100.0 %

(a)

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

Home Health and Hospice Services

Year Ended December 31, 2021

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 %

(a)

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

Balance Sheet Impact

Included in the Company’s consolidated balance sheets are contract assets, comprised of billed accounts receivable and unbilled receivables, which are
the  result  of  the  timing  of  revenue  recognition,  billings  and  cash  collections,  as  well  as,  contract  liabilities,  which  primarily  represent  payments  the  Company
receives in advance of services provided.

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Accounts receivable as of December 31, 2023 and December 31, 2022 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, 2023

December 31, 2022

$

$

35,665  $
11,578 
11,752 
2,380 
61,375 
(259)
61,116  $

31,321 
10,700 
9,370 
2,621 
54,012 
(592)
53,420 

The following table summarizes the activity for our allowance for doubtful accounts for the years ended December 31, 2023, 2022 and 2021:

Balance at beginning of period
Additions to bad debt expense
Write-offs of uncollectible accounts

Balance at end of period

Concentrations- Credit Risk

Year Ended December 31,
2022

2023

2021

$

$

592  $
646 
(979)
259  $

902  $
881 
(1,191)

592  $

643 
616 
(357)
902 

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 77.0% and 77.8% of its total gross accounts receivable as of December
31, 2023 and December 31, 2022, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.6%, 62.3%, and 62.6%
of the Company's revenue for the years ended December 31, 2023, 2022 and 2021, respectively.

6. BUSINESS SEGMENTS

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

As of December 31, 2023, the Company provided services through 111 affiliated home health, hospice and home care agencies, and 51 affiliated senior
living operations. The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize
the  quality  of  care  provided  and  profitability.  The  Company’s  Service  Center  provides  various  services  to  all  lines  of  business.  The  Company  does  not  review
assets by segment and therefore assets by segment are not disclosed below.

The CODM uses Segment Adjusted EBITDAR from Operations as the primary measure of profit and loss for the Company's reportable segments and to
compare the performance of its operations with those of its competitors. Segment Adjusted EBITDAR from Operations is net income attributable to the Company's
reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the operations

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation expense,
(3) acquisition related costs and credit allowances, (4) transition services costs, (5) costs associated with transitioning operations, (6) unusual, non-recurring or
redundant  charges,  and  (7)  net  income  (loss)  attributable  to  noncontrolling  interest.  General  and  administrative  expenses  are  not  allocated  to  the  reportable
segments,  and  are  included  as  “All  Other”,  accordingly  the  segment  earnings  measure  reported  is  before  allocation  of  corporate  general  and  administrative
expenses. The Company's segment measures may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

The  following  table  presents  certain  financial  information  regarding  the  Company’s  reportable  segments,  general  and  administrative  expenses  are  not

allocated to the reportable segments and are included in “All Other”.

Year Ended December 31, 2023
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2022
Revenue
Segment Adjusted EBITDAR from Operations
Year Ended December 31, 2021
Revenue
Segment Adjusted EBITDAR from Operations

Home Health and
Hospice Services

Senior Living
Services

All Other

Total

$
$

$
$

$
$

394,464  $
65,606  $

342,249  $
61,827  $

309,570  $
55,565  $

150,427  $
45,294  $

130,992  $
37,563  $

130,124  $
37,517  $

—  $
(31,704) $

—  $
(31,435) $

—  $
(26,208) $

544,891 
79,196 

473,241 
67,955 

439,694 
66,874 

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 (expense)

Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations

(a)

(b)

Share-based compensation expense
Acquisition related costs and credit allowances
Transition services costs
Costs associated with transitioning operations
Unusual, non-recurring or redundant charges 

(d)

(f)

(e)

(c)

Add: Net income (loss) attributable to noncontrolling interest

Consolidated Income from operations

Year Ended December 31,
2022

2023

2021

$

$

79,196  $
5,130 
39,759 
339 

102 
5,565 
476 
— 
612 
2,575 
531 
25,169  $

67,955  $
4,900 
38,018 
(31)

1,435 
3,363 
731 
— 
6,103 
1,297 
600 
12,739  $

66,874 
4,784 
40,863 
(24)

1,045 
10,040 
80 
2,008 
2,835 
— 
(548)
4,695 

(a)
(b)

(c)

(d)

Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.

Share-based compensation expense and related payroll taxes incurred, including the impact of the modification of certain restricted stock units described below in Note 12, Options and
Awards, to the Consolidated Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.

Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.

Costs identified as redundant or non-recurring incurred by the Company as a result of the Spin-Off. The 2021 amounts represents part of the costs incurred under the Transition Services
Agreement. All amounts are included in general and administrative expense. Fees incurred under the Transition Services Agreement were $1,035, $1,561, and $3,124 for the year ended
December 31, 2023, 2022 and 2021, respectively.

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(e)

(f)

During the year ended December 31, 2023, an affiliate of the Company placed its memory care units into transition and is actively seeking to sublease the units to an unrelated third party.
The amount above represents the net operating impact attributable to the units in transition. The amounts reported exclude rent and depreciation and amortization expense related to such
operations and include legal settlement costs associated with one of the entities transitioned to Ensign.

During January 2022, affiliates of the Company entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities
(the “Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022
and the remainder transferred on April 1, 2022. The amount above represents the net impact on revenue and cost of service attributable to all of the transferred entities. The amounts reported
exclude rent and depreciation and amortization expense related to such operations.

Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative and cost of services expenses. The
amounts reported for the year ended December 31, 2022 include certain costs identified as redundant or non-recurring incurred by the Company for services provided by Ensign under the
Transition Services Agreement, and were included in general and administrative expense.

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.

2023 Acquisitions

During the year ended December 31, 2023, the Company expanded its operations with the addition of three home health agencies, eight hospice agencies,
two home care agencies, and two senior living communities. In connection with the addition of the two senior living communities, the Company entered into a
new  long-term  “triple-net”  lease.  A  subsidiary  of  the  Company  entered  into  a  separate  operations  transfer  agreement  with  the  prior  operator  of  each  acquired
operation as part of each transaction.

The fair value of assets for two home health agencies, eight hospice agencies, and two home care agencies acquired were mostly concentrated in goodwill
and  indefinite-lived  intangible  assets  and  as  such,  these  transactions  were  classified  as  business  combinations  in  accordance  with  ASC  Topic  805,  Business
Combinations (“ASC 805”). The purchase price for the business combinations was $21,376, which primarily consisted of goodwill of $11,517, indefinite-lived
intangible assets of $8,914 related to Medicare and Medicaid licenses, and equipment, other assets and accounts receivable of $1,026, less assumed liabilities of
$81. The acquisitions contributed $10,549 in revenue and operating income of $280 during the year ended December 31, 2023. The Company anticipates that the
total goodwill recognized will be fully deductible for tax purposes.

One home health agency acquired a Medicare license and was considered an asset acquisition. The fair value of the home health license acquired was

$211 and was recorded in other indefinite-lived intangibles.

There were no material acquisition costs that were expensed related to the business combinations during the year ended December 31, 2023.

2022 Acquisitions

During the year ended December 31, 2022, the Company expanded its operations with the addition of three home health agencies, four hospice agencies,
and one senior living community. In connection with the addition of the senior living community, the Company entered into a new long-term “triple-net” lease. A
subsidiary of the Company entered into a separate operations transfer agreement with the prior operator of each acquired operation as part of each transaction.

The  aggregate  purchase  price  for  the  home  health  and  hospice  acquisitions  was  $10,130.  The  goodwill  was  primarily  attributable  to  indefinite-lived
intangible assets that do not qualify for separate recognition, and to synergies the Company expects to achieve related to the acquisition, which was allocated to the
Company's operating segments which are its reporting units. Total goodwill recognized was fully deductible for tax purposes. There were no material acquisition
costs that were expensed related to the business combination during the year ended December 31, 2022.

2021 Acquisitions

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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. Total goodwill recognized was 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 were considered asset acquisitions. The fair value of assets for the hospice licenses

acquired totaled $585 and was allocated to indefinite-lived intangible assets.

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 805. The table below presents the allocation of the purchase price for the operations acquired in acquisitions during
the years ended December 31, 2023, 2022 and 2021 as noted above:

Equipment, furniture, and fixtures
Goodwill
Other indefinite-lived intangible assets
Intangible assets
Other assets
Liabilities assumed
    Total acquisitions
Less: cash paid in prior year (held in escrow)

(a)

Total cash paid for acquisitions

2023

December 31,
2022

2021

$

$

$

34  $

11,517 
8,914 
— 
992 
(81)
21,376  $
— 
21,376  $

188  $

5,232 
4,887 
10 
— 
(187)
10,130  $
— 
10,130  $

62 
7,821 
6,242 
— 
10 
— 
14,135 
(585)
13,550 

(a)

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.

Subsequent Events

On January 1, 2024, the Company announced it closed on a home health joint venture with John Muir Health (“Muir”), a leading nonprofit integrated
health system serving communities throughout the east bay region of San Francisco, California. The transaction, which combines certain assets and the operations
of  Muir’s  home  health  business  and  the  assets  and  operations  of  a  local  Pennant-affiliated  home  health  agency,  will  be  majority-owned  and  managed  by  an
independent operating subsidiary of the Company and provide home health services to patients throughout the San Francisco east bay region. Along with the assets
contributed by a local Pennant-affiliated home health agency, the Company paid Muir $11,780 for a majority interest in the joint venture.

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following:

Land
Building
Leasehold improvements
Equipment
Furniture and fixtures
Total property and equipment
Less: accumulated depreciation

Property and equipment, net

December 31,

2023

2022

$

$

96  $

1,890 
21,204 
29,247 
1,238 
53,675 
(25,077)
28,598  $

96 
1,890 
18,759 
25,532 
1,151 
47,428 
(20,807)
26,621 

Depreciation expense was $5,120, $4,856 and $4,751 for the years ended December 31, 2023, 2022 and 2021, respectively.

The Company acquired one building and related assets during the year ended December 31, 2022 associated with an existing senior living community

operation. The total acquisition price of the land, building and related equipment was $2,007.

Asset Impairment

The Company measures certain assets at fair value on a non-recurring basis, including long-lived assets, which are evaluated for impairment. Long-lived
assets include assets such as property and equipment, operating lease assets and certain intangible assets. The inputs used to determine the fair value of long-lived
assets and a reporting unit are considered Level 3 measurements due to their subjective nature. Management has evaluated its long-lived assets and determined
there  were  no  losses  due  to  impairment  for  the  year  ended  December  31,  2023,  and  $218  and  $2,835  for  the  years  ended  December  31,  2022  and  2021,
respectively. Losses resulting from impairment are included in loss on asset dispositions and impairment, net on the consolidated statements of income.

9. GOODWILL AND INTANGIBLE ASSETS

The Company tests goodwill annually 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.

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 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 a 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. 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 charges during the years ended December 31, 2023, 2022 and 2021.

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table represents activity in goodwill by segment:

December 31, 2021
Additions
December 31, 2022
Additions

December 31, 2023

Other indefinite-lived intangible assets consist of the following:

Home Health and
Hospice Services

Senior Living Services

Total

$

$

70,623  $
5,232 
75,855 
11,517 
87,372  $

3,642  $
— 
3,642 
— 
3,642  $

74,265 
5,232 
79,497 
11,517 
91,014 

1,385 
57,232 
58,617 

December 31,

2023

2022

1,385  $

66,357 
67,742  $

December 31, 2023

December 31, 2022

1,566  $
1,658 
2,367 
1,255 
780 
4,392 
3,312 
15,330  $

2,244 
1,592 
4,315 
1,027 
1,479 
3,546 
2,481 
16,684 

Trade names
Medicare and Medicaid licenses

Total other indefinite-lived intangibles

10. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

Refunds payable
Deferred revenue
Resident deposits
Property taxes
Deferred state relief funds
Accrued self-insurance liabilities
Other

Other accrued liabilities

$

$

$

$

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. Deferred state relief funds are relief funds the Company has received from various states
that will offset against future related expenses.

11. DEBT

Long-term debt, net consists of the following:

Revolving credit facility
Less: unamortized debt issuance costs

(a)

Long-term debt, net

December 31,

2023

2022

$

$

65,000  $
(1,086)
63,914  $

64,500 
(1,608)
62,892 

(a)

Amortization  expense  for  debt  issuance  costs  was  $521,  $520,  and  $488  for  the  years  ended  December  31,  2023,  2022  and  2021,  respectively,  and  is  recorded  in  interest  expense,  n
consolidated statements of income.

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On June 12, 2023, Pennant entered into the Second Amendment to the Credit Agreement that replaced the reference rate in the Credit Agreement from
LIBOR-based rates to SOFR-based rates. The Credit Agreement provides for a 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 Term SOFR (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,  2023,  the  Company’s  weighted  average  interest  rate  on  its  outstanding  debt  was  7.9%.  As  of  December  31,  2023,  the
Company had available borrowing on the Revolving Credit Facility of $80,814, 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, 2023 and 2022, the Company was compliant with all such financial covenants.

12. OPTIONS AND AWARDS

Outstanding options and restricted stock awards of the Company were granted under the 2019 Omnibus Incentive Plan and Long-Term Incentive Plan (the

“LTIP”), (together referred to as the “Pennant Plans”).

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

Share-Based Compensation

The following disclosures represent share-based compensation expense relating to the Pennant Plans, including awards to employees of the Company’s

subsidiaries.

Total share-based compensation expense for all of the Pennant Plans for the years ended December 31, 2023, 2022 and 2021 were as follows:

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

2023

Year Ended December 31,
2022

2021

$

$

3,945  $
712 
712 
5,369  $

3,266  $
(467)
287 
3,086  $

3,093 
6,141 
806 
10,040 

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In  future  periods,  the  Company  estimates  it  will  recognize  the  following  share-based  compensation  expense  for  unvested  stock  options  and  unvested

Restricted Stock. Total unrecognized share-based compensation as of December 31, 2023 was as follows:

Unvested stock options
Unvested Restricted Stock

Total unrecognized share-based compensation expense

Unrecognized Share-Based
Compensation Expense

$

$

11,529 
2,389 
13,918 

Weighted Average
Recognition Period (in years)
3.3
3.5

On July 25, 2022 the Company modified certain outstanding RSUs granted to the former chief executive officer of the Company in connection with the
Spin-Off. All the RSUs had an original vesting date of October 1, 2022. The modification resulted in the forfeiture of 250 outstanding RSUs and accelerated the
vesting on the remaining 943 RSUs from October 1, 2022 to July 31, 2022. The modification of the award resulted in a net reduction of share-based compensation
expense related to the awards of $3,812 recorded in general and administrative expense during 2022. There were no modification of awards during 2023.

Stock Options

Under the Pennant Plans, options granted to employees of the subsidiaries of Pennant generally vest over five years at 20% per year on the anniversary of

the grant date. Options expire ten years after the date of grant.

The Company uses the Black-Scholes option-pricing model to determine the grant date fair value which is used to recognize the value of share-based
compensation expense for share-based payment awards under the Pennant 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 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:

Grant Year
2023
2022
2021

Options
Granted

Risk-Free Interest
Rate

Expected Life

(a)

Expected
(b)
Volatility

Dividend Yield

924 
448 
454 

4.2 %
2.7 %
1.1 %

6.5
6.5
6.5

41.8 %
39.8 %
38.4 %

Weighted
Average Fair
Value of Options
6.59 
6.35 
13.84 

— % $
— % $
— % $

(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.

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table represents the employee stock option activity during the year ended December 31, 2023:

December 31, 2022
Granted
Exercised
Forfeited
Expired

December 31, 2023

Number of
Options
Outstanding

Weighted
Average
Exercise Price

Number of
Options Vested

Weighted
Average
Exercise Price
of Options
Vested

2,219  $
924  $
(89) $
(72) $
(58) $
2,924  $

20.76 
13.55 
6.57 
21.51 
19.14 

18.79 

973  $

16.90 

1,190  $

19.14 

The aggregate intrinsic value of options outstanding, vested, unvested and exercised as of and for the year ended December 31, 2023 is as follows:

Options
Outstanding
Vested
Unvested
Exercised

$

December 31, 2023

3,776 
2,699 
1,077 
577 

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 1,734 unvested and outstanding options at December 31, 2023. The weighted average contractual life for options outstanding, vested and expected to vest at
December 31, 2023 was 7.16 years.

Restricted Stock

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 year ended December 31,
2023, is presented below:

December 31, 2022
Granted
Vested
Forfeited

December 31, 2023

13. LEASES

Non-Vested Restricted
Awards

Weighted Average
Grant Date Fair Value
14.26 
11.31 
13.36 
15.70 

14.27 

418  $
63 
(213)
(3)
265  $

The Company’s independent operating subsidiaries lease senior living communities and its administrative offices under non-cancelable operating leases,
most of which have initial lease terms ranging from 15 to 25 years. The Company’s independent operating subsidiaries also lease the administrative offices of
home health and hospice agencies which generally range from one to 11 years. Most of these leases contain renewal options, most involve rent increases and none
contain purchase options. The lease term excludes lease renewals because the renewal rents are not at a bargain, there are no economic penalties for the Company
to renew the lease, and it is not reasonably certain that the Company will exercise the extension options. The Company elected the accounting policy practical
expedients in ASC 842 to: (i) combine associated lease and non-lease components into a single lease component; and (ii) exclude recording short-term leases as
right-of-use  assets  and  liabilities  on  the  consolidated  balance  sheets.  Non-lease  components,  which  are  not  significant  overall,  are  combined  with  lease
components.

77

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of December 31, 2023, the Company’s independent operating subsidiaries leased 29 senior living 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. The total amount of rent
expense included in rent - cost of services paid to subsidiaries of Ensign was $13,567, $13,595, and $12,773, for the years ended December 31, 2023, 2022 and
2021, respectively. In addition to rent, each of the operating companies are required to pay the following: (1) all impositions and taxes levied on or with respect to
the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the
business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties;
(4) all community maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties
and the business conducted on the leased properties.

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

As further described in Note 3, Transactions with Ensign, on January 27, 2022, affiliates of the Company entered into Transfer Agreements with affiliates
of Ensign, providing for the transfer of the operations of five senior living communities. The closing of the Transaction was completed in two phases with the
transfer of two operations on March 1, 2022 and the remainder transferred on April 1, 2022. As a result of the lease terminations, the Company reduced both the
right of use assets and the lease liabilities by $42,506. Four of the terminated leases were part of a master lease agreement. As a result of the transferred leases
being  removed  from  the  master  lease  arrangement,  the  remaining  lease  components  under  the  master  lease  arrangement  were  modified  which  resulted  in  a  net
increase to the lease liability and ROU asset balance of $6,161 for the year ended December 31, 2022.

On July 7, 2023 the Company modified one of its master leases, which included nine locations, with an unrelated party to extend the term of the master
lease from September 30, 2035 to March 31, 2038. As a result of the modification, the lease components under the master lease arrangement were modified which
resulted in a net increase to the lease liability and ROU asset balance of $5,195.

The components of operating lease cost, are as follows:

Operating lease costs:
Facility rent—cost of services
Office rent—cost of services

Rent—cost of services

General and administrative expense
Variable lease cost

(a)

2023

Year Ended December 31,
2022

2021

$

$

$
$

33,992  $
5,767 
39,759  $

385  $
7,369  $

32,958  $
5,060 
38,018  $

370  $
6,281  $

35,958 
4,905 
40,863 

276 
6,248 

(a)

Represents  variable  lease  cost  for  operating  leases,  which  costs  include  property  taxes  and  insurance,  common  area  maintenance,  and  consumer  price  index  increases,  incurred  as  part  of  the
Company’s triple net lease, and which is included in cost of services for the years ended December 31, 2023, 2022 and 2021.

78

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

Year
2024
2025
2026
2027
2028
Thereafter
Total lease payments

Less: present value adjustments
Present value of total lease liabilities

Less: current lease liabilities

Long-term operating lease liabilities

Operating Leases

$

$

37,625 
36,393 
34,900 
33,941 
33,187 
249,070 
425,116 
(159,398)
265,718 
(17,122)
248,596 

At lease commencement, 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 liability. As of December 31, 2023, the weighted average remaining lease term and the weighted average discount rate was 12.5 years and
8.1% for operating leases, respectively.

14. INCOME TAXES

The provision for income tax expense for the years ended December 31, 2023, 2022 and 2021 is summarized as follows:

Current:

Federal
State

Total current

Deferred:
Federal
State

Total deferred

Total provision for income taxes

2023

Year Ended December 31,
2022

2021

$

$

1,178  $
492 
1,670 

3,217 
787 
4,004 
5,674  $

(193) $
146 
(47)

1,334 
362 
1,696 
1,649  $

1,768 
566 
2,334 

(1,360)
(392)
(1,752)
582 

79

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A reconciliation of the federal statutory tax rate to the effective tax rate for income from continuing operations for the years ended December 31, 2023,

2022 and 2021, respectively, is comprised as follows:

(a)

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
Tax credits
Deductible equity compensation
Noncontrolling interest
Other adjustments

(b)

Total income tax expense at effective rate

2023

Year Ended December 31,
2022

2021

21.0 %
5.3 
0.8 
2.0 
1.0 
— 
0.2 
(0.2)
— 
(0.7)
(0.4)
29.0 %

21.0 %
4.7 
0.6 
(6.1)
0.6 
— 
0.2 
— 
(0.8)
(1.7)
— 
18.5 %

21.0 %
3.9 
1.8 
19.4 
2.1 
2.7 
0.7 
— 
(34.1)
5.0 
(1.2)
21.3 %

(a)
(b)

During the year ended December 31, 2023, approximately $2,078 of the share-based compensation expense related to restricted stock that originally resulted in a deferred tax asset was written off.
During the year ended December 31, 2023, employees exercised stock options representing approximately 89 shares. The Company had decreased exercises and increased expirations of stock
options in the year ended December 31, 2023 coupled with an increase in book income has caused the effect of this on the effective tax rate to be minimal. During the year ended December 31,
2022, employees exercised stock options representing approximately 125 shares. During the year ended December 31, 2021, employees exercised stock options representing approximately 115
shares. These exercises and vestings resulted in tax benefits that reduced the Company's effective tax rate significantly in the year ended December 31, 2021.

The Company’s deferred tax assets and liabilities for the years ended December 31, 2023 and 2022 are summarized below.

Deferred tax assets (liabilities):
Accrued compensation
Allowance for doubtful accounts
State taxes
Net operating losses
Lease liabilities
Insurance
Other
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
Depreciation and amortization
Prepaid expenses
Right-of-use assets
State taxes

Total deferred tax liabilities

Net deferred tax assets (liabilities)

Year Ended December 31,
2022
2023

$

$

8,472  $
960 
64 
— 
69,029 
1,061 
1,164 
80,750 
— 
80,750 
(13,714)
(786)
(68,105)
— 
(82,605)
(1,855) $

7,681 
1,088 
— 
2,537 
68,676 
961 
1,564 
82,507 
(29)
82,478 
(11,618)
(781)
(67,765)
(165)
(80,329)
2,149 

During the year ended December 31, 2023, the Company fully utilized all of its federal and state net operating loss carryforwards from the year ended

December 31, 2022.

80

 
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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

2023

Year Ended December 31,
2022

2021

$

$

—  $
— 
— 
—  $

65  $
— 
(65)
—  $

— 
188 
(123)
65 

None of the unrecognized tax benefits net of their state benefits would affect the Company’s effective tax rate for the years ended December 31, 2023,
2022 and 2021. 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.

As of December 31, 2023, the Company is no longer subject to federal tax examinations for the fiscal years prior to 2020, and in most states, is no longer
subject to state income tax examinations for fiscal years before 2019. The lapsing of the statutes of limitation for the years ended December 31, 2023 and 2022 had
no impact on the Company’s unrecognized tax benefits.

15. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) defined contribution plan (the “401(k) Plan”), whereby eligible employees may contribute up to 90% of their annual basic
earnings, subject to applicable annual Internal Revenue Code limits. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in
the 401(k) Plan) by the Company. The Company expensed matching contributions to the 401(k) Plan of $866, $627, and $412 during the years ended December
31, 2023, 2022 and 2021, respectively.

During fiscal year 2021, the Company implemented a non-qualified deferred compensation plan (the “DCP”) for executives, other highly compensated
employees,  independent  contractors  and  non-employee  directors  which  went  into  effect  on  June  1,  2021,  effective  for  compensation  to  be  paid  in  2022  and
thereafter.  The  independent  contractors  and  non-employee  directors  are  otherwise  ineligible  for  participation  in  the  Company's  401(k)  plan.  The  DCP  allows
participants to defer the receipt of a portion of their base compensation, and further allows certain participants to defer up to 80% of their base salary and bonus
compensation  or  director  fees.  At  the  participant’s  election,  payments  can  be  deferred  until  a  specific  date  at  least  one  year  after  the  year  of  deferral  or  until
termination of engagement with the Company and can be paid in a lump sum or in up to ten annual installments. Separate deferral elections can be made for each
year, and in limited circumstances, existing payment elections may be changed. The amounts deferred are credited with earnings and losses based upon the actual
performance of the deemed investments selected by the participant. The rate of return for each participant varies depending on the specific investment elections
made by the participant. Additionally, the plan deposits the employee deferrals into a rabbi trust and the funds are generally invested in individual variable life
insurance  contracts  owned  by  the  Company  that  are  specifically  designed  to  informally  fund  savings  plans  of  this  nature.  The  Company  paid  for  related
administrative costs, which were immaterial during the fiscal years presented.

As of December 31, 2023 and 2022, the Company’s deferred compensation liabilities were $1,108 and $389, respectively, in other long-term liabilities on
the  consolidated  balance  sheets.  The  cash  surrender  value  of  the  individual  variable  life  insurance  contracts  is  based  on  investment  funds  that  shadow  the
investment allocations specified by participants in the DCP. As of December 31, 2023 and 2022, the cash surrender value of the company owned life insurance
(“COLI”) policies were $1,123 and $386, respectively, and were included as a component of restricted and other assets on the consolidated balance sheets. There
are no outstanding loan amounts offset against the cash surrender value of the COLI policies. The losses recorded for the change in cash surrender value were
immaterial for each period presented.

16. COMMITMENTS AND CONTINGENCIES

Regulatory  Matters  -  The  Company  provides  services  in  complex  and  highly  regulated  industries.  The  Company’s  compliance  with  applicable  U.S.
federal,  state  and  local  laws  and  regulations  governing  these  industries  may  be  subject  to  governmental  review  and  adverse  findings  may  result  in  significant
regulatory  action,  which  could  include  sanctions,  damages,  fines,  penalties  (many  of  which  may  not  be  covered  by  insurance),  and  even  exclusion  from
government programs. The

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Company  is  a  party  to  various  regulatory  and  other  governmental  audits  and  investigations  in  the  ordinary  course  of  business  and  cannot  predict  the  ultimate
outcome of any federal or state regulatory survey, audit or investigation. While governmental audits and investigations are the subject of administrative appeals,
the appeals process, even if successful, may take several years to resolve and penalties subject to appeal may remain in place during such appeals. The Department
of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses. The
Company believes that it is presently in compliance in all material respects with all applicable laws and regulations.

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

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

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

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

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

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

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, 2023, ten of the Company’s independent operating subsidiaries had Reviews scheduled, on appeal or in dispute resolution process,
both pre- and post-payment. If an operation fails an initial or subsequent Review, the operation could then be subject to extended Review, suspension of payment,
or extrapolation of the identified error rate to all billing in the same time period. The Company, from time to time, receives record requests in Reviews which have
resulted in claim denials on paid claims. The Company has appealed substantially all denials arising from these Reviews using the applicable appeals process. As
of  December  31,  2023,  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. The Company cannot predict the ultimate outcome of any regulatory and other
governmental Reviews. While such reviews are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve.
The  costs  to  respond  to  and  defend  such  Reviews  may  be  significant  and  an  adverse  determination  in  such  reviews  may  subject  the  Company  to  sanctions,
damages, extrapolation of damage findings, additional recoupments, fines, other penalties (some of which may not be covered by insurance), and termination from
Medicare programs which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.

From  June  2021  to  May  2022,  one  hospice  provider  number  was  subject  to  a  Medicare  payment  suspension  imposed  by  a  UPIC.  The  total  amounts
suspended was $5,105, which represents all Medicare payments due to the provider number during the suspension. As of December 31, 2023, the total amount due
from the government payor impacted by the suspension was $1,888 and was recorded in long-term other assets.

In  May  2022,  the  Company  received  communication  that  the  Medicare  payment  suspension,  for  the  above-referenced  hospice  provider  number,  was
terminated and the UPIC’s review was complete. The UPIC reviewed 107 patient records covering a 10-month period to determine whether, in its view, a Medicare
overpayment was made. Based on the results of the review, the UPIC initially alleged sampled and extrapolated overpayments of $5,105, and withheld that amount
through continued recoupment of Medicare payments. The Company is pursuing its appeal rights through the administrative appeals process, including contesting
the  methodology  used  by  the  UPIC  to  perform  statistical  extrapolation.  To  date  the  Company  has  been  successful  in  appealing  some  of  the  previously  denied
claims. The  Company  received  the  refund  of  previously  withheld  amounts  totaling  $3,249  for  the  year  ended  December  31,  2023,  respectively.  The  Company
continues to work through the appeals process for the remaining denied claims of $1,888 and expects to be successful in those appeals. Based on the information
currently  available  to  the  Company,  the  Company  cannot  predict  the  timing  or  the  ultimate  outcome  of  this  review  including  refunds  to  be  received.  As  of
December 31, 2023, the Company has an accrued liability that is immaterial for this review which was recorded as an offset to revenue.

Insurance  -  The  Company  retains  risk  for  a  substantial  portion  of  potential  claims  for  general  and  professional  liability,  workers’  compensation  and
automobile liability. The Company recognizes obligations associated with these costs, up to specified deductible limits in the period in which a claim is incurred,
including with respect to both reported claims and claims incurred but not reported. The general and professional liability insurance has a retention limit of $150
per claim with a $500 corridor as an additional out-of-pocket retention the Company 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,  Washington  and  Wyoming  which  are
subject to state insurance and possess their own limits.

83

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THE PENNANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Effective  January  1,  2022,  the  Company  is  self-insured  for  claims  related  to  employee  health,  dental  and  vision  care.  To  protect  itself  against  loss
exposure, the Company has purchased individual stop-loss insurance coverage that insures individual health claims that exceed $325 for each covered person for
fiscal years 2023 and 2022, respectively.

84

The following is a list of subsidiaries of The Pennant Group, Inc. as of December 31, 2023:

List of Subsidiaries of The Pennant Group, Inc.

Exhibit 21.1

Subsidiary
2410 Stillhouse Senior Living, Inc.
Alpowa Healthcare, Inc.
Apricus Home Health LLC
Arches Home Care, Inc.
Audition LLC
Autumn Ridge Senior Living, Inc.
Bear River Healthcare LLC
Black Mountain Healthcare LLC
Bluebird Home Care, LLC
Bluebird Home Health Holdings, LLC
Bluebird Home Health, LLC
Bluebird Hospice, LLC
Brenwood Park Senior Living, Inc.
Brio Arizona Home Health, LLC
Brookfield Senior Living LLC
Brookhollow Senior Living LLC
Brown Road Senior Housing LLC
Bruce Neenah Senior Living, Inc.
Buffalo Springs Healthcare LLC
Cactus Heights Healthcare LLC
Canyon Healthcare, Inc.
Capitol Healthcare, Inc.
Care Continuum Solutions LLC
CCS Holding LLC
Cedar Senior Living, Inc.
City Creek Holding LLC
City Creek Senior Living LLC
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.

Jurisdiction
Nevada
Nevada
Arizona
Nevada
Nevada
Nevada
Nevada
Delaware
Delaware
Delaware
Delaware
Delaware
Nevada
Arizona
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada

  
Eagle Healthcare LLC
Eden Landing Healthcare LLC
Elevate HC Partners, LLC
Elkhorn Healthcare LLC
Emblem Healthcare, Inc.
Emerald Healthcare, Inc.
Eureka Healthcare, Inc.
Exemplar Healthcare, Inc.
Finding Home Healthcare, Inc.
Finding Home Physician Services LLC
Glacier Peak Healthcare, Inc.
Go Assisted, Inc.
Granite Healthcare, Inc.
Granite Hills Senior Living, Inc.
Great Lakes Healthcare, Inc.
Great Plains Healthcare, Inc.
Green Bay Senior Living, Inc.
Green Meadows Senior Living LLC
Heartland Healthcare, Inc.
Huachuca Healthcare LLC
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.
Juniper Point Healthcare LLC
Kenosha Senior Living, Inc.
Keystone Hospice Care, Inc.
Lake Pointe Senior Living, Inc.
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.
Monitive Group, LLC
Monument Healthcare, Inc.
Moorland Senior Living LLC
Moss Bay Senior Living, Inc.

Nevada
Nevada
Delaware
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada
Texas
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
Utah
Nevada
Nevada
Nevada

Mountain Peak Home Care, Inc.
Mountain Vista Senior Living, Inc.
Oceano Senior Living, 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.
Pine Valley Holding LLC
Pine Valley Senior Living LLC
Pinnacle Senior Living LLC
Pinnacle Service Center LLC
Pleasant Run Senior Living, Inc.
Ponderosa Healthcare LLC
PPM California LLC
PPM Nevada LLC
PPM Oregon LLC
PPM Texas LLC
PPM Washington LLC
PPM Wisconsin LLC
PPM Wyoming LLC
Prairie View Healthcare, Inc.
Primrose Senior Living, Inc.
Prospect Senior Living, Inc.
Racine Senior Living, Inc.
Rancho Bernardo Healthcare LLC
Red Rock Healthcare, Inc.
Rio Verde Healthcare LLC
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.

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
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada

Sandstone Senior Living, Inc.
Sawtooth Senior Living LLC
Sentinel Healthcare LLC
Sheboygan Senior Living, Inc.
Shoshone Holdings LLC
Silver Lake Healthcare, Inc.
Somers Kenosha Senior Living, Inc.
Somersett Healthcare LLC
South Bay Healthcare, Inc.
South Plains Healthcare, Inc.
Southern Pines Healthcare LLC
Southport Healthcare LLC
Spanish Meadows Healthcare LLC
Spokane Healthcare, Inc.
Spring Valley Assisted Living, Inc.
Star Valley Healthcare, Inc.
Stevens Point Senior Living, Inc.
Stone Creek Healthcare LLC
Stoughton Senior Living, Inc.
Summerlin Healthcare, Inc.
Sun Peak Healthcare LLC
Sun Spruce Healthcare LLC
Sunset Mesa Healthcare LLC
Sycamore Grove Healthcare LLC
Sycamore Senior Living, Inc.
Symbol Healthcare, Inc.
Table Rock Senior Living LLC
Tamarack Healthcare LLC
Terrace Court Senior Living, Inc.
Teton Healthcare, Inc.
The Pennant Group, Inc.
Thomas Road Senior Housing, Inc.
Thousand Peaks Healthcare, Inc.
Total Healthcare Services LLC
Triumph Healthcare LLC
Tuolumne Holding LLC
Twin Falls Senior Living LLC
Two Rivers Senior Living, Inc.
Vesper Healthcare, Inc.
Victoria Ventura Assisted Living Community, Inc.
Virgin River Healthcare, Inc.
Whitetank Mountain Healthcare LLC
Whitewater Healthcare LLC

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
Nevada
Nevada
Nevada
Nevada
Nevada
Nevada

Willow Creek Senior Living, Inc.
Wisconsin Rapids Senior Living, Inc.
Woodlake Healthcare LLC

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, 2024, 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, 2023.

EXHIBIT 23.1

/s/ DELOITTE & TOUCHE LLP

Boise, ID
February 28, 2024

I, Brent J. Guerisoli, 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, 2024

/s/ BRENT J. GUERISOLI

Name:  Brent J. Guerisoli

Title:  

Chief Executive Officer (Principal Executive
Officer)

 
 
   
 
 
 
 
 
 
 
I, Lynette B. Walbom, 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, 2024

/s/ LYNETTE B. WALBOM
Name: 

Title:  

Lynette B. Walbom
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,  2023,  as  filed  with  the
Securities and Exchange Commission on the date hereof (the Report), I, Brent J. Guerisoli, 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:

EXHIBIT 32.1

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/ BRENT J. GUERISOLI

Name: Brent J. Guerisoli

Title:

Chief Executive Officer (Principal Executive
Officer)

February 28, 2024

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.

 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
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,  2023,  as  filed  with  the
Securities  and  Exchange  Commission  on  the  date  hereof  (the  Report),  I,  Lynette  B.  Walbom,  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/ LYNETTE B. WALBOM
Name: 

Title:  

Lynette B. Walbom
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, 2024