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Pennant Group, Inc. - Quarter Report: 2023 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2023.
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
    For the transition period from                      to                     .
Commission file number: 001-38900
__________________________
THE PENNANT GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)
Delaware
83-3349931
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)
1675 East Riverside Drive, Suite 150, Eagle, ID 83616
(Address of Principal Executive Offices and Zip Code)
(208) 506-6100
(Registrant’s Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per sharePNTGNasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer☐Accelerated filer☒Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 7, 2023, 29,850,343 shares of the registrant’s common stock were outstanding.



Table of Contents
THE PENNANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023
TABLE OF CONTENTS



Table of Contents
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
THE PENNANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par value)

June 30, 2023December 31, 2022
Assets
Current assets:
Cash $2,838 $2,079 
Accounts receivable—less allowance for doubtful accounts of $957 and $592, respectively
57,252 53,420 
Prepaid expenses and other current assets11,549 18,323 
Total current assets71,639 73,822 
Property and equipment, net27,252 26,621 
Right-of-use assets260,730 260,868 
Deferred tax assets, net214 2,149 
Restricted and other assets10,940 10,545 
Goodwill83,614 79,497 
Other indefinite-lived intangibles61,025 58,617 
Total assets$515,414 $512,119 
Liabilities and equity
Current liabilities:
Accounts payable$12,037 $13,647 
Accrued wages and related liabilities22,848 23,283 
Operating lease liabilities—current17,412 16,633 
Other accrued liabilities16,180 16,684 
Total current liabilities68,477 70,247 
Long-term operating lease liabilities—less current portion246,307 247,042 
Other long-term liabilities7,779 6,281 
Long-term debt, net59,153 62,892 
Total liabilities381,716 386,462 
Commitments and contingencies
Equity:
Common stock, $0.001 par value; 100,000 shares authorized; 30,251 and 29,799 shares issued and outstanding, respectively, at June 30, 2023; and 30,149 and 29,692 shares issued and outstanding, respectively, at December 31, 2022
29 29 
Additional paid-in capital102,886 99,764 
Retained earnings25,931 21,284 
Treasury stock, at cost, 3 shares at June 30, 2023 and December 31, 2022
(65)(65)
Total Pennant Group, Inc. stockholders’ equity128,781 121,012 
Noncontrolling interest4,917 4,645 
Total equity133,698 125,657 
Total liabilities and equity$515,414 $512,119 
See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except for per-share amounts)

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Revenue$132,281 $116,316 $258,745 $230,226 
Expense
Cost of services106,176 92,716 208,778 182,978 
Rent—cost of services9,836 9,078 19,433 19,129 
General and administrative expense8,791 9,741 17,496 19,774 
Depreciation and amortization1,214 1,279 2,494 2,426 
Loss on asset dispositions and impairment, net
3 6,617 3 6,708 
Total expenses126,020 119,431 248,204 231,015 
Income (loss) from operations6,261 (3,115)10,541 (789)
Other income (expense):
Other income (expense)35 (35)65 (32)
Interest expense, net(1,453)(821)(2,859)(1,450)
Other (expense), net(1,418)(856)(2,794)(1,482)
Income (loss) before provision for income taxes4,843 (3,971)7,747 (2,271)
Provision (benefit) for income taxes1,921 (1,375)2,828 (833)
Net income (loss)2,922 (2,596)4,919 (1,438)
Less: net income attributable to noncontrolling interest125 80 272 224 
Net income (loss) and other comprehensive income attributable to The Pennant Group, Inc. $2,797 $(2,676)$4,647 $(1,662)
Earnings (loss) per share:
Basic$0.09 $(0.09)$0.16 $(0.06)
Diluted$0.09 $(0.09)$0.15 $(0.06)
Weighted average common shares outstanding:
Basic29,809 28,605 29,780 28,589 
Diluted30,193 28,605 30,171 28,589 

See accompanying notes to condensed consolidated financial statements.
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THE PENNANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands)
Common StockAdditional Paid-In CapitalRetained EarningsTreasury StockNon-controlling Interest
SharesAmountSharesAmountTotal
Balance at December 31, 202230,149 $29 $99,764 $21,284 3 $(65)$4,645 $125,657 
Net income attributable to The Pennant Group, Inc.— — — 1,850 — — — 1,850 
Net income attributable to noncontrolling interests— — — — — — 147 147 
Share-based compensation— — 1,367 — — — — 1,367 
Issuance of common stock from the exercise of stock options26 — 203 — — — — 203 
Net issuance of restricted stock28 — — — — — — — 
Balance at March 31, 202330,203 $29 $101,334 $23,134 3 $(65)$4,792 $129,224 
Net income attributable to The Pennant Group, Inc.— — — 2,797 — — — 2,797 
Net income attributable to Non-Controlling Interests— — — — — — 125 125 
Stock-based compensation— — 1,303 — — — — 1,303 
Issuance of common stock from the exercise of stock options38 — 249 — — — — 249 
Net issuance of restricted stock10 — — — — — — — 
Balance at June 30, 202330,251 $29 $102,886 $25,931 3 $(65)$4,917 $133,698 

Common StockAdditional Paid-In CapitalRetained EarningsTreasury StockNon-controlling Interest
SharesAmountSharesAmountTotal
Balance at December 31, 202128,826 $28 $95,595 $14,641 3 $(65)$4,045 $114,244 
Net income attributable to The Pennant Group, Inc.— — — 1,014 — — — 1,014 
Net income attributable to noncontrolling interests— — — — — — 144 144 
Share-based compensation— — 2,440 — — — — 2,440 
Issuance of common stock from the exercise of stock options21 1 89 — — — — 90 
Net issuance of restricted stock2 — — — — — — — 
Balance at March 31, 202228,849 $29 $98,124 $15,655 3 $(65)$4,189 $117,932 
Net loss attributable to The Pennant Group, Inc.— — — (2,676)— — — (2,676)
Net income attributable to Non-Controlling Interests— — — — — — 80 80 
Share-based compensation— — 2,380 — — — — 2,380 
Issuance of common stock from the exercise of stock options33 — 271 — — — — 271 
Net issuance of restricted stock4 — — — — — — — 
Balance at June 30, 202228,886 $29 $100,775 $12,979 3 $(65)$4,269 $117,987 

See accompanying notes to condensed consolidated financial statements.
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THE PENNANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended June 30,
20232022
Cash flows from operating activities:
Net income (loss)$4,919 $(1,438)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization2,494 2,426 
Amortization of deferred financing fees261 260 
Impairment of long-lived assets— 214 
Provision for doubtful accounts349 380 
Share-based compensation2,670 4,820 
Deferred income taxes2,365 1,017 
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable(2,631)406 
Prepaid expenses and other assets5,610 (7,049)
Operating lease obligations182 13 
Accounts payable(732)1,794 
Accrued wages and related liabilities(435)(34)
Other accrued liabilities(99)7,832 
Contract liabilities (CARES Act advance payments)— (6,211)
Other long-term liabilities580 469 
Net cash provided by operating activities15,533 4,899 
Cash flows from investing activities:
Purchase of property and equipment(3,973)(7,863)
Cash payments for business acquisitions(7,261)(775)
Other8 (112)
Net cash used in investing activities(11,226)(8,750)
Cash flows from financing activities:
Proceeds from Revolving Credit Facility94,000 41,000 
Payments on Revolving Credit Facility(98,000)(39,500)
Issuance of common stock upon the exercise of options452 361 
Net cash (used in) provided by financing activities(3,548)1,861 
Net increase (decrease) in cash 759 (1,990)
Cash beginning of period2,079 5,190 
Cash end of period$2,838 $3,200 

See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(unaudited, in thousands)
Six Months Ended June 30,
20232022
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest$2,857 $1,187 
Income taxes$160 $55 
Lease liabilities$17,898 $18,256 
Right-of-use assets obtained in exchange for new operating lease obligations$8,329 $1,385 
Non-cash adjustment to right-of-use assets and lease liabilities from lease modifications$— $6,522 
Non-cash adjustment to right-of-use assets and lease liabilities from lease terminations and assignments$— $(42,515)
Non-cash investing activity:
Capital expenditures in accounts payable$402 $1,100 

See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and operational senior living units)


1. DESCRIPTION OF BUSINESS
The Pennant Group, Inc. (herein referred to as “Pennant,” the “Company,” “it,” or “its”), is a holding company with no direct operating assets, employees or revenue. The Company, through its independent operating subsidiaries, provides healthcare services across the post-acute care continuum. As of June 30, 2023, the Company’s subsidiaries operated 101 home health, hospice and home care agencies and 51 senior living communities located in Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming.

Certain of the Company’s subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the operations through contractual relationships.

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

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of the Company (the “Interim Financial Statements”) reflect the Company’s financial position, results of operations and cash flows of the business. The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the regulations of the Securities and Exchange Commission (“SEC”). Management believes that the Interim Financial Statements reflect, in all material respects, all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position, results of operations, and cash flows for the periods presented in conformity with GAAP. The results reported in these Interim Financial Statements are not necessarily indicative of results that may be expected for the entire year.

The Condensed Consolidated Balance Sheet as of December 31, 2022 is derived from the Company’s annual audited Consolidated Financial Statements for the fiscal year ended December 31, 2022, which should be read in conjunction with these Interim Financial Statements. Certain information in the accompanying footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with GAAP.

All significant intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its Condensed Consolidated Balance Sheets and the amount of consolidated net income that is attributable to the Company and the noncontrolling interest in its Condensed Consolidated Statements of Income.

The Company consists of various limited liability companies and corporations established to operate home health, hospice, home care, and senior living operations. The Interim Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

Estimates and Assumptions - The preparation of the Interim Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Interim Financial Statements relate to revenue, intangible assets and goodwill, right-of-use assets and lease liabilities for leases greater than 12 months, self-insurance reserves, and income taxes. Actual results could differ from those estimates.

CARES Act: The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act allowed for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. The Company deferred approximately $7,836 of the employer-paid portion of social security taxes, all of which was repaid by December 31, 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.
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THE PENNANT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 expenses when related expenses are incurred. As of June 30, 2023 and December 31, 2022, the Company had $1,469 and $1,479 in unapplied state relief funds, respectively. The unapplied state relief funds received are recorded in other accrued liabilities. The Company recognized state relief funding totaling $1,397 and $2,082 for the three and six months ended June 30, 2023, respectively, and $584 and $1,246 for the three and six months ended June 30, 2022, respectively, which the Company recognized as a reduction of cost of services expense.

3. TRANSACTIONS WITH ENSIGN
On October 1, 2019, The Ensign Group, Inc. (“Ensign”) completed the separation of Pennant (the “Spin-Off”). Pennant and Ensign continue to partner in the provision of services along the healthcare continuum.

The Company incurred costs of $192 and $465 for the three and six months ended June 30, 2023, and $458 and $1,101 for the three and six months ended June 30, 2022, 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 $1,014 and $1,954 for the three and six months ended June 30, 2023, respectively, and $648 and $1,223 for the three and six months ended June 30, 2022, respectively, and are included in cost of services.

The Company’s independent operating subsidiaries leased 29 communities from subsidiaries of Ensign under a master lease arrangement as of June 30, 2023 and June 30, 2022. See further discussion below at Note 8, Leases.

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

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

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


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

Three Months Ended June 30,Six Months Ended June 30,
 2023202220232022
Numerator: 
Net income (loss) attributable to The Pennant Group, Inc.$2,797 $(2,676)$4,647 $(1,662)
Denominator:
Weighted average shares outstanding for basic net income per share29,809 28,605 29,780 28,589 
Plus: assumed incremental shares from exercise of options and assumed conversion or vesting of restricted stock(a)
384 — 391 — 
Adjusted weighted average common shares outstanding for diluted income per share30,193 28,605 30,171 28,589 
Earnings Per Share:
Basic net income (loss) per common share$0.09 $(0.09)$0.16 $(0.06)
Diluted net income (loss) per common share$0.09 $(0.09)$0.15 $(0.06)
(a)
The diluted per share amounts do not reflect common equivalent shares outstanding of 2,312 and 2,158 for the three and six months ended June 30, 2023, respectively, and 3,832 and 3,806 for the three and six months ended June 30, 2022, respectively, because of their anti-dilutive effect.
5. REVENUE AND ACCOUNTS RECEIVABLE
Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicare, Medicaid, Commercial and managed care programs (Medicare Advantage and Managed Medicaid plans), in exchange for providing patient care. The healthcare services in home health and hospice patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct within the context of the contract. Additionally, there may be ancillary services which are not included in the rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rates, 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.

Combined revenue from the Medicare and Medicaid programs accounted for 62.8% and 62.4% of the Company’s revenue for the three and six months ended June 30, 2023, respectively, and 62.8% and 62.4% for the three and six months ended June 30, 2022, respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement.

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


Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company has determined that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

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

Home Health Revenue

Medicare Revenue

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

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

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

Non-Medicare Revenue

Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs. These rates can vary based upon the negotiated terms.

Non-episodic Based Revenue - Revenue is recognized on an accrual basis based upon the date of service at amounts equal to its established or estimated per visit rates, as applicable.

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


Hospice Revenue

Revenue is recognized on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are calculated as daily rates for each of the levels of care the Company delivers. Revenue is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap and an overall payment cap, the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has been exceeded. The Company regularly evaluates and records these adjustments as a reduction to revenue and an increase to other accrued liabilities.

Senior Living Revenue

The Company has elected the lessor practical expedient within ASC Topic 842, Leases and therefore recognizes, measures, presents, and discloses the revenue for services rendered under the Company’s senior living residency agreements based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the services included under the Company’s senior living residency agreements each have the same timing and pattern of transfer. The Company recognizes revenue under ASC Topic 606, Revenue from Contracts with Customers for its senior residency agreements, for which it has determined that the non-lease components of such residency agreements are the predominant component of each such contract.

The Company’s senior living revenue consists of fees for basic housing and assisted living care. Accordingly, the Company records revenue when services are rendered on the date services are provided at amounts billable to individual residents. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For residents under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rates on a per resident, daily basis or as services are rendered.

Revenue By Payor

Revenue by payor for the three months ended June 30, 2023 and 2022, is summarized in the following tables:

Three Months Ended June 30, 2023
Home Health and Hospice Services
Home Health ServicesHospice ServicesSenior Living ServicesTotal RevenueRevenue %
Medicare$23,920 $40,294 $— $64,214 48.5 %
Medicaid2,466 4,682 11,783 18,931 14.3 
Subtotal26,386 44,976 11,783 83,145 62.8 
Managed care15,837 1,417 — 17,254 13.1 
Private and other(a)
6,235 169 25,478 31,882 24.1 
Total revenue$48,458 $46,562 $37,261 $132,281 100.0 %
(a)Private and other payors in the Company’s home health and hospice services segment includes revenue from all payors generated in the Company’s home care operations.

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


Three Months Ended June 30, 2022
Home Health and Hospice Services
Home Health ServicesHospice ServicesSenior Living ServicesTotal RevenueRevenue %
Medicare$23,464 $34,234 $— $57,698 49.6 %
Medicaid2,732 3,859 8,752 15,343 13.2 
Subtotal26,196 38,093 8,752 73,041 62.8 
Managed care14,260 1,153 — 15,413 13.3 
Private and other(a)
5,529 113 22,220 27,862 23.9 
Total revenue$45,985 $39,359 $30,972 $116,316 100.0 %
(a)Private and other payors in the Company’s home health and hospice services segment includes revenue from all payors generated in the Company’s home care operations.

Revenue by payor for the six months ended June 30, 2023 and 2022, is summarized in the following tables:

Six Months Ended June 30, 2023
Home Health and Hospice Services
Home Health ServicesHospice ServicesSenior Living ServicesTotal RevenueRevenue %
Medicare$47,296 $77,674 $— $124,970 48.3 %
Medicaid4,657 9,280 22,625 36,562 14.1 
Subtotal51,953 86,954 22,625 161,532 62.4 
Managed care31,769 2,611 — 34,380 13.3 
Private and other(a)
12,526 286 50,021 62,833 24.3 
Total revenue$96,248 $89,851 $72,646 $258,745 100.0 %
(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.

Six Months Ended June 30, 2022
Home Health and Hospice Services
Home Health ServicesHospice ServicesSenior Living ServicesTotal RevenueRevenue %
Medicare$44,821 $67,955 $— $112,776 49.0 %
Medicaid5,238 7,124 18,375 30,737 13.4 
Subtotal50,059 75,079 18,375 143,513 62.4 
Managed care27,512 1,937 — 29,449 12.7 
Private and other(a)
11,066 166 46,032 57,264 24.9 
Total revenue$88,637 $77,182 $64,407 $230,226 100.0 %
(a)Private and other payors in the Company’s home health and hospice services segment includes revenue from all payors generated in the Company’s home care operations.

Balance Sheet Impact

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

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Accounts receivable, net as of June 30, 2023 and December 31, 2022 is summarized in the following table:

June 30, 2023December 31, 2022
Medicare$32,516 $31,321 
Medicaid13,216 10,700 
Managed care9,705 9,370 
Private and other2,772 2,621 
Accounts receivable, gross58,209 54,012 
Less: allowance for doubtful accounts(957)(592)
Accounts receivable, net$57,252 $53,420 

Concentrations - Credit Risk

The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s gross receivables from the Medicare and Medicaid programs accounted for approximately 78.6% and 77.8% of its total gross accounts receivable as of June 30, 2023 and December 31, 2022, respectively. Combined revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.8% and 62.4% for the three and six months ended June 30, 2023, respectively, and 62.8% and 62.4% of the Company’s revenue for the three and six months ended June 30, 2022, respectively.

Practical Expedients and Exemptions

As the Company’s contracts have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

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

As of June 30, 2023, the Company provided services through 101 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 (loss) attributable to the Company's reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation, (3) acquisition related costs and credit allowances, (4) the costs associated with transitioning
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operations, (5) unusual, non-recurring or redundant charges, and (6) net income 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 tables present certain financial information regarding the Company’s reportable segments, general and administrative expenses are not allocated to the reportable segments and are included in “All Other” for the three and six months ended June 30, 2023 and 2022:

Home Health and Hospice ServicesSenior Living ServicesAll OtherTotal
Three Months Ended June 30, 2023
Revenue$95,020 $37,261 $— $132,281 
Segment Adjusted EBITDAR from Operations$15,681 $11,680 $(7,885)$19,476 
Three Months Ended June 30, 2022
Revenue$85,344 $30,972 $— $116,316 
Segment Adjusted EBITDAR from Operations$15,728 $8,771 $(7,870)$16,629 

Home Health and Hospice ServicesSenior Living ServicesAll OtherTotal
Six Months Ended June 30, 2023
Revenue$186,099 $72,646 $— $258,745 
Segment Adjusted EBITDAR from Operations$30,093 $21,921 $(15,399)$36,615 
Six Months Ended June 30, 2022
Revenue$165,819 $64,407 $— $230,226 
Segment Adjusted EBITDAR from Operations$29,676 $18,203 $(16,016)$31,863 

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

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Segment Adjusted EBITDAR from Operations$19,476 $16,629 $36,615 $31,863 
Less: Depreciation and amortization1,214 1,279 2,494 2,426 
Rent—cost of services9,836 9,078 19,433 19,129 
Other expense35 (35)65 (32)
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(a)
65 377 268 508 
Share-based compensation expense and related taxes(b)
1,354 2,380 2,773 4,820 
Acquisition related costs and credit allowances(c)
72 14 104 14 
Costs associated with transitioning operations(d)
538 6,691 585 5,934 
Unusual, non-recurring or redundant charges(e)
226 40 624 77 
Add: Net income attributable to noncontrolling interest125 80 272 224 
Condensed Consolidated Income (Loss) from Operations$6,261 $(3,115)$10,541 $(789)
(a)Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
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(b)
Share-based compensation expense and related payroll taxes incurred. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.
(c)
Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
(d)
During the six months ended June 30, 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.
(e)
Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative expenses.

Costs identified as redundant or non-recurring incurred by the Company for additional services provided by Ensign. All amounts are included in general and administrative expense. Fees incurred were $192 and $465 for the three and six months ended June 30, 2023, respectively, and $458 and $1,101 for the three and six months ended June 30, 2022, respectively.

7. ACQUISITIONS
The Company is focused on acquiring operations that are complementary to the Company’s current businesses, accretive to the Company’s business or otherwise advance the Company’s strategy. The results of all the Company’s independent operating subsidiaries are included in the Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting.

2023 Acquisitions

During the six months ended June 30, 2023, the Company expanded its operations with the addition of three home health agencies, one hospice agency, 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 , two home care agencies, and one hospice agency acquired were mostly concentrated in goodwill and 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 $7,261, which consisted of equipment and other assets of $1,027, goodwill of $4,117, and indefinite-lived intangible assets of $2,012 related to Medicare and Medicaid licenses, and other intangible assets of $186 less assumed liabilities of $81. The Company anticipates that the total goodwill recognized will be fully deductible for tax purposes.

One home health agency acquired was a Medicare license and is considered an asset acquisition. The fair value of the home health license acquired was $210 and was allocated to indefinite-lived intangible assets.

There were no material acquisition costs that were expensed related to the business combinations during the six months ended June 30, 2023.

2022 Acquisitions

During the six months ended June 30, 2022, the Company expanded its operations with the addition of one home health agency. The purchase price for this home health acquisition was $775.

The fair value of assets for home health acquisitions was mostly concentrated in goodwill and intangible assets and as such, these transactions were classified as business combinations in accordance with ASC Topic 805. The purchase price for the business combinations was $775, which consisted of equipment and other assets of $11, goodwill of $520, and indefinite-lived intangible assets of $244 related to Medicare and Medicaid licenses. The Company anticipates that the total goodwill recognized will be fully deductible for tax purposes. There were no material acquisition costs that were expensed related to the business combinations during the six months ended June 30, 2022.

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8. PROPERTY AND EQUIPMENT—NET
Property and equipment, net consist of the following:

June 30, 2023December 31, 2022
Land$96 $96 
Building1,890 1,890 
Leasehold improvements19,670 18,759 
Equipment27,559 25,532 
Furniture and fixtures1,217 1,151 
50,432 47,428 
Less: accumulated depreciation(23,180)(20,807)
Property and equipment, net$27,252 $26,621 

Depreciation expense was $1,211 and $2,486 for the three and six months ended June 30, 2023, respectively, and $1,264 and $2,396 for the three and six months ended June 30, 2022, respectively.

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 in the impairment analysis are considered Level 3 measurements due to their subjective nature. Management has evaluated its long-lived assets and determined there was no impairment recorded during the three and six months ended June 30, 2023 and 2022.

9. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
The following table represents activity in goodwill by segment for the six months ended June 30, 2023:

Home Health and Hospice ServicesSenior Living ServicesTotal
December 31, 2022$75,855 $3,642 $79,497 
Additions4,117 — 4,117 
June 30, 2023$79,972 $3,642 $83,614 

Other indefinite-lived intangible assets consist of the following:

June 30, 2023December 31, 2022
Trade name$1,571 $1,385 
Medicare and Medicaid licenses59,454 57,232 
Total$61,025 $58,617 

No goodwill or intangible asset impairments were recorded during the three and six months ended June 30, 2023 and 2022.

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10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:

June 30, 2023December 31, 2022
Refunds payable$2,122 $2,244 
Deferred revenue1,819 1,592 
Resident deposits3,040 4,315 
Property taxes975 1,027 
Deferred state relief funds1,469 1,479 
Accrued self-insurance liabilities4,231 3,546 
Other2,524 2,481 
Other accrued liabilities$16,180 $16,684 

Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Deferred revenue occurs when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to residents.

11. DEBT
Long-term debt, net consists of the following:
June 30, 2023December 31, 2022
Revolving Credit Facility$60,500 $64,500 
Less: unamortized debt issuance costs(a)
(1,347)(1,608)
Long-term debt, net$59,153 $62,892 
(a)
Amortization expense for debt issuance costs was $130 and $261 for the three and six months ended June 30, 2023, respectively, and $130 and $260 for the three and six months ended June 30, 2022, respectively, and is recorded in interest expense, net on the Condensed Consolidated Statements of Income.

On February 23, 2021, Pennant entered into an amendment to its existing credit agreement (as amended, the “Credit Agreement”), which provides for an increased revolving credit facility with a syndicate of banks with a borrowing capacity of $150,000 (the “Revolving Credit Facility”). On June 12, 2023, Pennant entered into a second amendment to the Credit Agreement that modified the reference rate from LIBOR to Standard Overnight Financing Rate (“SOFR”). 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 2.25% to 3.25% per annum or (ii) Base Rate plus a margin ranging from 1.25% to 2.25% 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 June 30, 2023, the Company’s weighted average interest rate on its outstanding debt was 7.97%. As of June 30, 2023, the Company had available borrowing on the Revolving Credit Facility of $85,314, which is net of outstanding letters of credit of $4,186.

The fair value of the Revolving Credit Facility approximates carrying value, due to the short-term nature and variable interest rates. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates.

The Credit Agreement is guaranteed, jointly and severally, by certain of the Company’s independent operating subsidiaries, and is secured by a pledge of stock of the Company's material independent operating subsidiaries as well as a first lien on substantially all of each material operating subsidiary's personal property. The Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its independent operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions,
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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 June 30, 2023, the Company was compliant with all such financial covenants.

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

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

Total share-based compensation expense for all Plans for the three and six months ended June 30, 2023 and 2022 was:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Share-based compensation expense related to stock options$984 779 $1,834 $1,621 
Share-based compensation expense related to Restricted Stock180 1,502 357 3,021 
Share-based compensation expense related to Restricted Stock to non-employee directors139 99 479 178 
Total share-based compensation$1,303 $2,380 $2,670 $4,820 

In future periods, the Company estimates it will recognize the following share-based compensation expense for unvested stock options and unvested Restricted Stock as of June 30, 2023:

Unrecognized Compensation ExpenseWeighted Average Recognition Period
(in years)
Unvested Stock Options$12,296 3.5
Unvested Restricted Stock2,751 4.0
Total unrecognized share-based compensation expense$15,047 

On July 25, 2022 the Company modified certain outstanding RSUs granted to the former chief executive officer of the Company in connection with the Spin-off. All the RSUs had an original vesting date of October 1, 2022. The modification resulted in the forfeiture of 250 outstanding RSUs and accelerated the vesting on the remaining 943 RSUs from October 1, 2022 to July 31, 2022. The modification of the award resulted in a net reduction of share-based compensation expense related to the awards of $3,812 recorded in general and administrative expense in the third quarter of 2022.

Stock Options

Under the Pennant Plans, options granted to employees of the subsidiaries of Pennant generally vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years after the date of grant.

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for share-based payment awards under the Plans. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility and expected option life. The Company develops estimates based on historical data and market information, which can change significantly over time.

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The fair value of each option is estimated on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for stock options granted as of June 30:

Grant YearOptions GrantedRisk-Free Interest Rate
Expected Life(a)
Expected Volatility(b)
Dividend YieldWeighted Average Fair Value of Options
2023656 4.0 %6.541.6 %— %$6.78 
2022298 2.2 %6.539.9 %— %$6.60 
(a)
Under the midpoint method, the expected option life is the midpoint between the contractual option life and the average vesting period for the options being granted. This resulted in an expected option life of 6.5 years for the options granted.
(b)Because the Company’s equity shares have been traded for a relatively short period of time, expected volatility assumption was based on the volatility of related industry stocks.

The following table represents the employee stock option activity during the six months ended June 30, 2023:

Number of
Options
Outstanding
Weighted
Average
Exercise Price
Number of
Options Vested
Weighted
Average
Exercise Price
of Options
Vested
December 31, 20222,219 20.76 973 $16.90 
Granted656 14.03 
Exercised(63)7.18 
Forfeited(37)22.22 
Expired(34)20.13 
June 30, 20232,741 $19.29 1,054 $18.17 

Restricted Stock

A summary of the status of Pennant’s non-vested Restricted Stock, and changes during the six months ended June 30, 2023, is presented below:

Non-Vested Restricted StockWeighted Average Grant Date Fair Value
December 31, 2022418 $14.26 
Granted42 11.42 
Vested(78)12.53 
Forfeited(3)15.30 
June 30, 2023379 $14.29 

13. LEASES
The Company’s independent operating subsidiaries lease 51 senior living communities and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from 15 to 25 years. Most of these leases contain renewal options, most involve rent increases and none contain purchase options. The lease term excludes lease renewals because the renewal rents are not at a bargain, there are no economic penalties for the Company to renew the lease, and it is not reasonably certain that the Company will exercise the extension options. The Company’s independent operating subsidiaries leased 29 communities from subsidiaries of Ensign (the “Ensign Leases”) under a master lease arrangement as of June 30, 2023 and June 30, 2022. Each of the leases have an initial term of between 14 and 20 years from the lease commencement date. The total amount of rent expense included in rent - cost of services paid to subsidiaries of Ensign was $3,333 and $6,749 for the three and six months ended June 30, 2023, respectively, and $3,006 and $6,490 for the three and six months ended June 30, 2022, respectively. In addition to rent, each of the operating companies are required to pay the following: (1) all
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impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all community maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

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

As further described in Note 3, on January 27, 2022, affiliates of the Company entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of five senior living communities. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and the remainder transferred on April 1, 2022. As a result of the lease terminations, the Company reduced both the right of use assets and the lease liabilities by $42,515. 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 $6,522 for the six months ended June 30, 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.

The components of operating lease cost, are as follows:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Operating Lease Costs:
Community Rent—cost of services$8,462 $7,837 $16,736 $16,626 
Office Rent—cost of services1,374 1,241 2,697 2,503 
Rent—cost of services$9,836 $9,078 $19,433 $19,129 
General and administrative expense$104 $74 $197 $155 
Variable lease cost (a)
$1,761 $1,298 $3,491 $2,873 
(a)
Represents variable lease cost for operating leases, which costs include property taxes and insurance, common area maintenance, and consumer price index increases, incurred as part of the Company’s triple net lease, and which is included in cost of services for the three and six months ended June 30, 2023 and 2022.
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The following table shows the lease maturity analysis for all leases as of June 30, 2023, for the years ended December 31:

YearAmount
2023 (Remainder)$18,300 
202435,913 
202534,543 
202633,441 
202732,778 
Thereafter253,655 
Total lease payments408,630 
Less: present value adjustments(144,911)
Present value of total lease liabilities263,719 
Less: current lease liabilities(17,412)
Long-term operating lease liabilities$246,307 

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at each lease’s commencement date to determine each lease's operating lease liability. As of June 30, 2023, the weighted average remaining lease term is 12.3 years and the weighted average discount rate is 7.6%.

14. INCOME TAXES
The Company recorded income tax expense (benefit) of $1,921 and $(1,375) or 39.7% and 34.6% of earnings before income taxes for the three months ended June 30, 2023 and 2022, respectively. The increase in effective tax is primarily due to a change in the deductibility of equity compensation of certain executives.

The Company recorded income tax expense (benefit) of $2,828 and $(833), or 36.5% and 36.7% of earnings before income taxes for the six months ended June 30, 2023 and 2022, respectively. The decrease in effective tax is primarily due to a changes in the deductibility of equity compensation of certain executives.

15. COMMITMENTS AND CONTINGENCIES
Regulatory Matters - The Company provides services in complex and highly regulated industries. The Company’s compliance with applicable U.S. federal, state and local laws and regulations governing these industries may be subject to governmental review and adverse findings may result in significant regulatory action, which could include sanctions, damages, fines, penalties (many of which may not be covered by insurance), and even exclusion from government programs. The Company is a party to various regulatory and other governmental audits and investigations in the ordinary course of business and cannot predict the ultimate outcome of any federal or state regulatory survey, audit or investigation. While governmental audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve and penalties subject to appeal may remain in place during such appeals, which may include suspension, termination, or revocation of participation in governmental programs for the payment of the services the Company provides. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses. The Company believes it is presently in compliance in all material respects with all applicable laws and regulations.

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


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 Condensed 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, as well as employment-related claims. If there were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results of operations and cash flows. In addition, the defense of these lawsuits may result in significant legal costs, regardless of the outcome, and may result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company also is subject to potential lawsuits under the False Claims Act (the “FCA”) and comparable state laws alleging submission of fraudulent claims for services to any governmental healthcare program (such as Medicare) or commercial 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 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.

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.

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 June 30, 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 previously paid claims. The Company has appealed substantially all denials arising from these Reviews using the
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THE PENNANT GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


applicable appeals process. As of June 30, 2023, and through the filing of this Quarterly Report on Form 10-Q, 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. As of June 30, 2023, the total amount due from the government payor impacted by the suspension was $5,105 and was recorded in long-term other assets. The amounts suspended represent all Medicare payments due to the provider number during the suspension.

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 has alleged sampled and extrapolated overpayments of $5,105, and has 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 and expects to receive refunds related to the successful appeals. The Company continues to work through the appeals process for the remaining denied claims. 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 June 30, 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 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.

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 $350 for each covered person for fiscal year 2023 and fiscal year 2022.

16. COMMON STOCK REPURCHASE PROGRAM
On December 12, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company may repurchase up to $1,000 of its common stock. Under the share repurchase program, the Company may 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 will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The authorization expires on December 12, 2023, and may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of common stock. No shares were repurchased during the three and six months ended June 30, 2023.
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with the Interim Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-K, Form 10-Q and Form 8-K, for additional information. The section entitled “Risk Factors” filed within our 2022 Annual Report describes some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Quarterly Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

Special Note About Forward-Looking Statements
        
    This Quarterly Report contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “might,” “will,” “should,” “could,” “seeks,” “approximately,” “goals,” “future,” “projects,” “predicts,” “guidance,” “target,” “intends,” “plans,” “estimates,” “anticipates”, the negative version of these words or other comparable words. Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the effects of competition and the effects of future legislation or regulations and other non-historical statements.

    The risk factors discussed in this Quarterly Report and the 2022 Annual Report under the heading “Risk Factors,” could cause our results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:

•federal and state changes to, or delays receiving, reimbursement and other aspects of Medicaid and Medicare;
•changes in, and compliance with, the laws and regulations affecting the U.S. healthcare industry;
•proposed changes to payment models and reimbursement amounts within the Medicare and Medicaid fee schedules for future calendar years;
•future cost containment measures undertaken by payors;
•government reviews, audits and investigations of our business;
•potential additional regulation affecting the transparency, ownership, operating standards, and staffing of businesses in our industry;
•increased competition and increased cost of acquisition or retention for, or a shortage of, skilled personnel;
•achievement and maintenance of competitive quality of care ratings and referrals from referral sources;
•changes in, and compliance with, state and federal employment, fair housing, safety, licensing and other laws;
•competition from other healthcare providers, 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;
•actions of labor unions;
•costs associated with litigation or any future litigation settlements;
•the leases of our affiliated senior living communities;
•inability to complete future acquisitions at attractive prices or at all, and failure to successfully or efficiently new acquisitions into our existing operations and operating subsidiaries;
•general economic conditions, including a housing downturn, which could affect seniors’ ability to afford resident fees, or inflation and increasing interest rates, which raise the costs of goods and borrowing capital, which may affect the delivery and affordability of our services;
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•security breaches and other cyber security incidents;
•the performance of the financial and credit markets and uncertainties related to our ability to obtain financing or the terms of such financing; and
•uncertainties related to the lingering effect of the COVID-19 pandemic, including new regulatory risks impacting our operations, potential litigation, and vaccination mandates

    Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any forward-looking statements in this Quarterly Report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.

Overview

We are a leading provider of high-quality healthcare services to patients of all ages, including the growing senior population, in the United States. We strive to be the provider of choice in the communities we serve through our innovative operating model. We operate in multiple lines of businesses including home health, hospice and senior living services across Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. As of June 30, 2023, our home health and hospice business provided home health, hospice and home care services from 101 agencies operating across these 14 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:

December 31,June 30,
201520162017201820192020202120222023
Home health and hospice agencies32 39 46 54 63 76 88 95 101 
Senior living communities36 36 43 50 52 54 54 49 51 
Senior living units3,184 3,184 3,434 3,820 3,963 4,127 4,127 3,500 3,588 
Total number of home health, hospice, and senior living operations68 75 89 104 115 130 142 144 152 

Recent Activities

Acquisitions. During the six months ended June 30, 2023, we expanded our operations with the addition of three home health agencies, one hospice agency, two home care agencies, as well as 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 first half of 2023, partly as a result of improving COVID-19 case trends and renewed consideration of senior living communities as a home-based care setting. Though we have seen steady improvements in occupancy throughout 2022 and the first half of 2023, we cannot be sure when the occupancy levels in our senior living communities will return 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.

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Government Regulation

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 2024 Hospice Payment Rate Update final rule (the “Hospice Payment Final Rule”). 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 June 30, 2023, CMS proposed rules regarding the administration of a Hospice Special Focus Program (“HSFP”) beginning in 2024. Under this proposed rule, CMS proposes the data sources that will be used in identifying hospices for inclusion in the HSFP, how those hospices will be scored, and the criteria for selecting hospices to be included within the HSFP. This proposed rule also proposes the survey frequency for hospices within the HSFP and potential criteria for hospices to successfully complete and exit the HSFP or face termination from the Medicare program. The proposed rule also sets forth a mechanism for the informal resolution of disputes between CMS and hospice providers, including disputes arising from hospice providers’ condition-level deficiencies, and would resemble the existing informal dispute resolution mechanism for Medicare-participating home health agencies, These provisions are part of a proposed rule that is still open for public comment through August 29, 2023. A final rule is expected prior to January 1, 2024, so that the HSFP may begin in 2024.

On June 30, 2023, CMS issued the calendar year (“CY”) 2024 Home Health Prospective Payment System Proposed Rule (“Home Health Payment Proposed Rule”). The Home Health Payment Proposed Rule proposes a 5.653% decrease to the home health 30-day period standard payment rate in CY 2024, which includes the remaining half (3.925%) of the 7.9% permanent decrease that CMS proposed to fully implement by 2024, and an additional decrease based on assumed behavior changes resulting from implementation of the Patient Driven Grouping Model (“PDGM”). Aside from these adjustments, CMS finalized a proposed 3.0% basket increase for the home health payment update in CY 2024, less a productivity adjustment of 0.3%, resulting in a net 2.7% cost inflation update. CMS also proposed recalibrated PDGM case-mix weights and low utilization payment adjustment thresholds using 2022 data. Overall, the Home Health Payment Proposed Rule estimates that Medicare payments to all home health agencies will decrease in the aggregate by 2.2%, or $375.0 million, based on its contents. The comment period for this proposed rule ends on August 29, 2023. The final rule setting the 2024 Home Health Prospective Payment System schedule is expected later in 2023; this final rule may contain significant changes, or even remove, the provisions contained within the Home Health Payment Proposed Rule. The Home Health Prospective Payment System Proposed Rule is the subject of legal action by home healthcare industry groups challenging its contents and methodology, seeking to withhold applying the 2024 Proposed Rule and the reimbursement rate cuts it will require if made final. Among the arguments raised by plaintiffs suing to vacate the Home Health Payment Proposed Rule, they have argued that this proposed rule violates Congress’ instruction for the reimbursement adjustments to be “budget-neutral,” which requires the new payment rules to neither increase or decrease, on net, total Medicare payments. The plaintiffs suing CMS also contend that the proposed rule, if finalized, would penalize home health agencies for following Congress’s directives and reduce the scope of services available to beneficiaries.

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. We also report an “all other” category that includes general and administrative expense from our Service Center.

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Common Stock Repurchase Program

On December 12, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company may repurchase up to $1.0 million of its common stock. Under the share repurchase program, the Company may 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, as amended. The timing and total amount of stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The authorization expires on December 12, 2023, and may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of common stock. No shares were repurchased during the three and six months ended June 30, 2023.

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. Total admissions of home health patients, including new acquisitions, new admissions and readmissions.
•Total Medicare home health admissions. Total admissions of home health patients, who are receiving care under Medicare reimbursement programs, including new acquisitions, new admissions and readmissions.
•Average Medicare revenue per completed 60-day home health episode. The average amount of revenue for each completed 60-day home health episode generated from patients who are receiving care under Medicare reimbursement programs.
•Total hospice admissions. Total admissions of hospice patients, including new acquisitions, new admissions and recertifications.
•Average hospice daily census. The average number of patients who are receiving hospice care during any measurement period divided by the number of days during such measurement period.
•Hospice Medicare revenue per day. The average daily Medicare revenue recorded during any measurement period for services provided to hospice patients.
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The following table summarizes our overall home health and hospice statistics for the periods indicated:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Home health services:
Total home health admissions10,441 10,055 21,351 20,237 
Total Medicare home health admissions4,849 4,682 9,797 9,315 
Average Medicare revenue per 60-day completed episode(a)
$3,595 $3,580 $3,531 $3,539 
Hospice services:
Total hospice admissions2,322 2,119 4,773 4,528 
Average hospice daily census2,494 2,285 2,467 2,259 
Hospice Medicare revenue per day$189 $176 $186 $177 
(a)The year-to-date average Medicare revenue per 60-day completed episode includes post period claim adjustments for prior quarters.

Senior Living Services

•Occupancy. The ratio of actual number of days our units are occupied during any measurement period to the number of days units are available for occupancy during such measurement period.
•Average monthly revenue per occupied unit. The room and board 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:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Occupancy78.0 %76.5 %78.1 %74.4 %
Average monthly revenue per occupied unit$3,939 $3,470 $3,893 $3,418 

Revenue Sources

Home Health and Hospice Services

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 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;
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(g) adjustments to the base payments for case mix and geographic wages; and (h) recoveries of overpayments. For further detail regarding PDGM see the Government Regulation section of our 2022 Annual Report.

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 one through 60 and a lower rate for all subsequent days of service. CMS also provides 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 estimate amounts due back to Medicare to the extent that the cap has been exceeded.

Senior Living Services. As of June 30, 2023, we provided assisted living, independent living and memory care services in 51 communities. 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 payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients. Cost of services also includes the cost of general and professional liability insurance and other general cost of services specifically attributable to our operations.
 
Rent—Cost of Services. Rent—cost of services consists solely of base minimum rent amounts payable under lease agreements to our landlords. Our subsidiaries lease and operate but do not own the underlying real estate at our operations, and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

General and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to information systems, stock-based compensation and rent for our Service Center offices.
 
Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from 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.
 
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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on Interim Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the Interim Financial Statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our judgments and estimates, including but not limited to those related to self-insurance reserves, revenue, leases, intangible assets, goodwill, and income taxes. We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. Refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies, within the 2022 Annual Report 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 estimate of variable considerations to arrive at the transaction price, including methods and assumptions used to determine settlements with Medicare and Medicaid payors or retroactive adjustments due to audits and reviews;
•Leases - We use our estimated incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments;
•Acquisition accounting - The assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions; and
•Income taxes - The estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.

Recent Accounting Pronouncements
    
Information concerning recently issued accounting pronouncements, if applicable, are included in Note 2, Basis of Presentation and Summary of Significant Accounting Policies in the Interim Financial Statements. We determined that there were no applicable recently issued accounting pronouncements for the current reporting period.

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Results of Operations

The following table sets forth details of our revenue, expenses and earnings as a percentage of total revenue for the periods indicated:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Total revenue100.0 %100.0 %100.0 %100.0 %
Expense:
Cost of services80.4 79.7 80.7 79.5 
Rent—cost of services7.4 7.8 7.5 8.3 
General and administrative expense6.6 8.4 6.8 8.6 
Depreciation and amortization0.9 1.1 1.0 1.1 
Loss on asset dispositions and impairment, net
— 5.7 — 2.9 
Total expenses95.3 102.7 96.0 100.4 
Income (loss) from operations4.7 (2.7)4.0 (0.4)
Other (expense):
Interest expense, net(1.1)(0.7)(1.1)(0.6)
Other expense, net(1.1)(0.7)(1.1)(0.6)
Income (loss) before provision for income taxes3.7 (3.4)2.9 (1.0)
Provision (benefit) for income taxes1.5 (1.2)1.0 (0.4)
Net income (loss)2.2 (2.2)1.9 (0.6)
Less: net income attributable to noncontrolling interest0.1 0.1 0.1 0.1 
Net income (loss) attributable to Pennant2.1 %(2.3)%1.8 %(0.7)%


The following table presents our consolidated GAAP Financial measures for the three and six months ended June 30, 2023 and 2022:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Consolidated GAAP Financial Measures:
Total revenue$132,281 $116,316 $258,745 $230,226 
Total expenses$126,020 $119,431 $248,204 $231,015 
Income (loss) from operations$6,261 $(3,115)$10,541 $(789)

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The following tables present certain financial information regarding our reportable segments. General and administrative expenses are not allocated to the reportable segments and are included in “All Other”:

Home Health and Hospice ServicesSenior Living ServicesAll OtherTotal
(In thousands)
Segment GAAP Financial Measures:
Three Months Ended June 30, 2023
Revenue$95,020 $37,261 $— $132,281 
Segment Adjusted EBITDAR from Operations$15,681 $11,680 $(7,885)$19,476 
Three Months Ended June 30, 2022
Revenue$85,344 $30,972 $— $116,316 
Segment Adjusted EBITDAR from Operations$15,728 $8,771 $(7,870)$16,629 

Home Health and Hospice ServicesSenior Living ServicesAll OtherTotal
(In thousands)
Segment GAAP Financial Measures:
Six Months Ended June 30, 2023
Revenue$186,099 $72,646 $— $258,745 
Segment Adjusted EBITDAR from Operations$30,093 $21,921 $(15,399)$36,615 
Six Months Ended June 30, 2022
Revenue$165,819 $64,407 $— $230,226 
Segment Adjusted EBITDAR from Operations$29,676 $18,203 $(16,016)$31,863 

The table below provides a reconciliation of Segment Adjusted EBITDAR from Operations to Condensed Consolidated Income from operations:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Segment Adjusted EBITDAR from Operations(a)
$19,476 $16,629 $36,615 $31,863 
Less: Depreciation and amortization1,214 1,279 2,494 2,426 
Rent—cost of services9,836 9,078 19,433 19,129 
Other expense (income)35 (35)65 (32)
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(b)
65 377 268 508 
Share-based compensation expense(c)
1,354 2,380 2,773 4,820 
Acquisition related costs and credit allowances(d)
72 14 104 14 
Costs associated with transitioning operations(e)
538 6,691 585 5,934 
Unusual, non-recurring or redundant charges(f)
226 40 624 77 
Add: Net income attributable to noncontrolling interest125 80 272 224 
Condensed Consolidated Income (Loss) from Operations$6,261 $(3,115)$10,541 $(789)
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(a)Segment Adjusted EBITDAR from Operations is net income (loss) attributable to the Company's reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation, (3) acquisition related costs and credit allowances, (4) the costs associated with transitioning operations, (5) unusual, non-recurring or redundant charges, and (6) net income attributable to noncontrolling interest. General 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.
(b)Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
(c)Share-based compensation expense and related payroll taxes incurred. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.
(d)Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
(e)During the six months ended June 30, 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.
(f)Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative expenses.

Costs identified as redundant or non-recurring incurred by the Company for additional services provided by Ensign. All amounts are included in general and administrative expense. Fees incurred were $192 and $465 for the three and six months ended June 30, 2023, respectively, and $458 and $1,101 for the three and six months ended June 30, 2022, respectively.
Performance and Valuation Measures:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Consolidated Non-GAAP Financial Measures:
Performance Metrics
Consolidated EBITDA$7,385 $(1,951)$12,828 $1,381 
Consolidated Adjusted EBITDA$10,068 $7,608 $17,984 $13,753 
Valuation Metric
Consolidated Adjusted EBITDAR$19,476 $36,615 

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Segment Non-GAAP Measures:(a)
Segment Adjusted EBITDA from Operations
Home health and hospice services$14,390 $14,534 $27,572 $27,244 
Senior living services$3,563 $944 $5,811 $2,525 
(a)General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss.

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The tables below reconcile Consolidated Net Income (loss) to the consolidated Non-GAAP financial measures, Consolidated EBITDA and Consolidated Adjusted EBITDA, and to the Non-GAAP valuation measure, Consolidated Adjusted EBITDAR, for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Consolidated Net income (loss)$2,922 $(2,596)$4,919 $(1,438)
Less: Net income attributable to noncontrolling interest125 80 272 224 
Add: Provision for income taxes1,921 (1,375)2,828 (833)
Interest expense, net1,453 821 2,859 1,450 
Depreciation and amortization1,214 1,279 2,494 2,426 
Consolidated EBITDA7,385 (1,951)12,828 1,381 
Adjustments to Consolidated EBITDA
Add: Costs at start-up operations(a)
65 377 268 508 
Share-based compensation expense(b)
1,354 2,380 2,773 4,820 
Acquisition related costs and credit allowances(c)
72 14 104 14 
Costs associated with transitioning operations(d)
538 6,691 585 5,934 
Unusual, non-recurring or redundant charges(e)
226 40 624 77 
Rent related to items (a) and (d) above428 57 802 1,019 
Consolidated Adjusted EBITDA10,068 7,608 17,984 13,753 
Rent—cost of services9,836 9,078 19,433 19,129 
Rent related to items (a) and (d) above(428)(57)(802)(1,019)
Adjusted rent—cost of services9,408 9,021 18,631 18,110 
Consolidated Adjusted EBITDAR$19,476 $36,615 
(a)Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
(b)Share-based compensation expense and related payroll taxes incurred. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense.
(c)Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
(d)During the six months ended June 30, 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.
(e)
Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative expenses.

Costs identified as redundant or non-recurring incurred by the Company for additional services provided by Ensign. All amounts are included in general and administrative expense. Fees incurred were $192 and $465 for the three and six months ended June 30, 2023, respectively, and $458 and $1,101 for the three and six months ended June 30, 2022, respectively.


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The tables below reconciles Segment Adjusted EBITDAR from Operations to Segment Adjusted EBITDA from Operations for the periods presented:
Three Months Ended June 30,
Home Health and HospiceSenior Living
2023202220232022
(In thousands)
Segment Adjusted EBITDAR from Operations$15,681 $15,728 $11,680 $8,771 
Less: Rent—cost of services1,374 1,241 8,462 7,837 
Rent related to start-up and transitioning operations(83)(47)(345)(10)
Segment Adjusted EBITDA from Operations$14,390 $14,534 $3,563 $944 

Six Months Ended June 30,
Home Health and HospiceSenior Living
2023202220232022
(In thousands)
Segment Adjusted EBITDAR from Operations$30,093 $29,676 $21,921 $18,203 
Less: Rent—cost of services2,697 2,503 16,736 16,626 
Rent related to start-up and transitioning operations(176)(71)(626)(948)
Segment Adjusted EBITDA from Operations$27,572 $27,244 $5,811 $2,525 

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 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
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•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.

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Consolidated Adjusted EBITDAR targets.

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 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. Our use of Non-GAAP Financial Measures should not be construed as an inference that our future results will be unaffected by unusual or unexpected items.

We strongly encourage investors to review the Interim Financial Statements, included in this Quarterly 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 Consolidated Net Income to the Non-GAAP Financial Measures in the table presented above, along with the Interim Financial Statements and related notes included elsewhere in this Quarterly 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, before (a) interest expense (b) provision for income taxes and (c) depreciation and amortization.

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Consolidated Adjusted EBITDA

We adjust Consolidated EBITDA when evaluating our performance because we believe that the exclusion of the 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 Consolidated 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;
•costs associated with transitioning operations; and
•unusual, non-recurring, or redundant 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 with operating and finance leases. A significant portion of finance 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.

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Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Revenue
Three Months Ended June 30,
20232022
Revenue DollarsRevenue PercentageRevenue DollarsRevenue Percentage
(In thousands)
Home health and hospice services
Home health$42,411 32.1 %$40,669 35.0 %
Hospice46,562 35.2 39,359 33.8 
Home care and other(a)
6,047 4.6 5,316 4.6 
Total home health and hospice services95,020 71.9 85,344 73.4 
Senior living services37,261 28.1 30,972 26.6 
Total revenue$132,281 100.0 %$116,316 100.0 %
(a)Home care and other revenue is included with home health revenue in other disclosures in this Quarterly Report.

Our total revenue increased $16.0 million, or 13.7% during the three months ended June 30, 2023. We experienced growth of $9.7 million from increased operational performance in our Home Health and Hospice segment from increased admissions and rates in both lines of business when compared to the three months ended June 30, 2022. The growth in our Senior Living segment resulted in an increase in revenue of $6.3 million driven primarily by the combination of increased occupancy of 150 basis points and improved average rate per occupied room of $469.
Home Health and Hospice Services
Three Months Ended June 30,
20232022Change% Change
(In thousands)
Home health and hospice revenue
Home health services$42,411 $40,669 $1,742 4.3 %
Hospice services46,562 39,359 7,203 18.3 
Home care and other6,047 5,316 731 13.8 
Total home health and hospice revenue$95,020 $85,344 $9,676 11.3 %
Three Months Ended June 30,
20232022Change% Change
Home health services:
Total home health admissions10,441 10,055 386 3.8 %
Total Medicare home health admissions4,849 4,682 167 3.6 
Average Medicare revenue per 60-day completed episode$3,595 $3,580 $15 0.4 
Hospice services:
Total hospice admissions2,322 2,119 203 9.6 
Average daily hospice census2,494 2,285 209 9.1 
Hospice Medicare revenue per day$189 $176 $13 7.4 
Number of home health and hospice agencies at period end101 89 12 13.5 

Home health and hospice revenue increased $9.7 million, or 11.3%. Revenue grew due to an increase in certain key performance indicators including, an increase of 3.8% in total home health admissions, an increase in total hospice admissions of 9.6%, an increase in average daily hospice census of 9.1%, and an increase of 7.4% in hospice Medicare revenue per day,
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during the three months ended June 30, 2023 compared to the prior year quarter. Growth was also driven by the addition of twelve home health and hospice operations between June 30, 2022 and June 30, 2023, resulting in an increase of $2.9 million or 3.4%.

Senior Living Services
Three Months Ended June 30,
20232022Change% Change
Revenue (in thousands)$37,261 $30,972 $6,289 20.3 %
Number of communities at period end51 48 3 6.3 
Occupancy78.0 %76.5 %1.5 %
Average monthly revenue per occupied unit$3,939 $3,470 $469 13.5 

Senior living revenue increased $6.3 million, or 20.3%, for the three months ended June 30, 2023 compared to the prior year quarter. Revenue grew primarily due to a 13.5% increase in average monthly revenue per occupied unit and an increase of 150 basis points in occupancy between June 30, 2022 and June 30, 2023. Growth was also driven by the addition of three senior living communities between June 30, 2022 and June 30, 2023, resulting in an increase of $1.3 million or 4.2% overall.

Cost of Services

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

Three Months Ended June 30,
20232022Change% Change
(In thousands)
Home Health and Hospice$80,076 $70,301 $9,775 13.9 %
Senior Living26,100 22,415 3,685 16.4 
Total cost of services$106,176 $92,716 $13,460 14.5 %

Total consolidated cost of services increased $13.5 million, or 14.5%, for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022. Cost of services as a percentage of revenue increased by 70 basis points from 79.7% to 80.4% for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022.

Home Health and Hospice Services

Three Months Ended June 30,
20232022Change% Change
(In thousands)
Cost of service $80,076 $70,301 $9,775 13.9 %
Cost of services as a percentage of revenue84.3 %82.4 %1.9 %

Cost of services related to our Home Health and Hospice Services segment increased $9.8 million, or 13.9%, primarily due to increased volume of services provided. Cost of services as a percentage of revenue for the three months ended June 30, 2023 increased 190 basis points from 82.4% to 84.3% for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022, primarily due to increased wages and benefits offset by a reduced insurance costs.

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Senior Living Services

Three Months Ended June 30,
20232022Change% Change
(In thousands)
Cost of service $26,100 $22,415 $3,685 16.4 %
Cost of services as a percentage of revenue70.0 %72.4 %(2.4)%

Cost of services related to our Senior Living Services segment increased $3.7 million, or 16.4%. As a percentage of revenue, costs of service decreased by 240 basis points from 72.4% to 70.0% for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022, due to primarily to reduced insurance costs and increased state relief funds received.

Rent—Cost of Services. Rent expense increased 8.3% from $9.1 million to $9.8 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily as a result of the newly acquired senior living communities. Rent as a percentage of total revenue decreased 40 basis points from 7.8% to 7.4% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

General and Administrative Expense. Our general and administrative expense decreased $0.9 million or 9.7% from $9.7 million to $8.8 million for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022. General and administrative expense as a percentage of revenue decreased 180 basis points from 8.4% to 6.6%. The primary driver of the decrease in general and administrative expense was the decrease in share-based compensation of $1.3 million due primarily to the vesting of certain outstanding RSUs granted in connection with the Spin-Off as described above in Note 12, Options and Awards to the Interim Financial Statements included elsewhere in this Quarterly Report, during the three months ended June 30, 2023 when compared to the three months ended June 30, 2022. Increases in wages and information systems costs offset the decrease from share-based compensation.

Depreciation and Amortization. Depreciation and amortization expense was essentially flat as a percentage of total revenue. The impact of increased capital expenditures on depreciation was offset by the prior year impairment of assets that were transferred to Ensign during the current year.

Provision for Income Taxes. We recorded income tax expense (benefit) of $1.9 million and $(1.4) million or 39.7% and 34.6% of earnings before income taxes for the three months ended June 30, 2023 and 2022, respectively. The increase in the effective tax rate is primarily due to change in the deductibility of equity compensation for certain executives.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Revenue

Six Months Ended June 30,
20232022
Revenue DollarsRevenue PercentageRevenue DollarsRevenue Percentage
(In thousands)
Home health and hospice services
Home health$84,191 32.5 %$78,089 33.9 %
Hospice89,851 34.7 77,182 33.5 
Home care and other(a)
12,057 4.7 10,548 4.6 
Total home health and hospice services186,099 71.9 165,819 72.0 
Senior living services72,646 28.1 64,407 28.0 
Total revenue$258,745 100.0 %$230,226 100.0 %
(a)Home care and other revenue is included with home health revenue in other disclosures in this Quarterly Report.

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Our total revenue increased $28.5 million, or 12.4%, during the six months ended June 30, 2023. The increase in revenue was driven by increases in key metrics for home health and hospice and senior living, including hospice admissions, hospice revenue per day, hospice average daily census, senior living occupancy, and senior living revenue per occupied room.

Home Health and Hospice Services

Six Months Ended June 30,
20232022Change% Change
(In thousands)
Home health and hospice revenue
Home health services$84,191 $78,089 $6,102 7.8 %
Hospice services89,851 77,182 12,669 16.4 
Home care and other12,057 10,548 1,509 14.3 
Total home health and hospice revenue$186,099 $165,819 $20,280 12.2 %
Six Months Ended June 30,
20232022Change% Change
Home health services:
Total home health admissions21,351 20,237 1,114 5.5 %
Total Medicare home health admissions9,797 9,315 482 5.2 
Average Medicare revenue per 60-day completed episode(a)
$3,531 $3,539 $(8)(0.2)
Hospice services:
Total hospice admissions4,773 4,528 245 5.4 
Average daily census2,467 2,259 208 9.2 
Hospice Medicare revenue per day$186 $177 $9 5.1 
Number of home health and hospice agencies at period end1018912 13.5 
(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 $20.3 million, or 12.2% during the six months ended June 30, 2023. Segment revenue grew primarily due an increase in hospice average daily census of 9.2%, an increase of 5.5% in home health admissions, inclusive of an increase in total Medicare home health admissions of 5.2%, and an increase of 5.4% in hospice admissions. The addition of twelve home health and hospice operations between June 30, 2022 and June 30, 2023, added revenue of $4.6 million or 2.8%.

Senior Living Services

Six Months Ended June 30,
20232022Change% Change
Revenue (in thousands)$72,646 $64,407 $8,239 12.8 %
Number of communities at period end51 48 3 6.3 
Occupancy78.1 %74.4 %3.7 %
Average monthly revenue per occupied unit$3,893 $3,418 $475 13.9 

Senior living revenue increased $8.2 million, or 12.8%, for the six months ended June 30, 2023 compared to the same period in the prior year primarily due to an increase of 13.9% in average monthly revenue per occupied unit and an increase of 370 basis points in the occupancy rate between June 30, 2022 and June 30, 2023. The acquisition of three senior living communities between June 30, 2022 and June 30, 2023, added $2.1 million or 3.2% in revenue.
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Cost of Services
Six Months Ended June 30,
20232022Change% Change
(In thousands)
Home Health and Hospice$157,484 $137,232 $20,252 14.8 %
Senior Living51,294 45,746 5,548 12.1 
Total cost of services$208,778 $182,978 $25,800 14.1 %

Consolidated cost of services increased $25.8 million, or 14.1%, during the six months ended June 30, 2023. Cost of services as a percentage of revenue for the six months ended June 30, 2023 increased by 120 basis points to 80.7% from 79.5% compared to the six months ended June 30, 2022.

Home Health and Hospice Services
Six Months Ended June 30,
20232022Change% Change
Cost of service (in thousands)$157,484 $137,232 $20,252 14.8 %
Cost of services as a percentage of revenue84.6 %82.8 %1.8 %

Cost of services related to our Home Health and Hospice services segment increased $20.3 million, or 14.8%, primarily due to the increased volume of services from growth in admissions and census. Cost of services as a percentage of revenue for the six months ended June 30, 2023 increased by 180 basis points compared to the six months ended June 30, 2022 primarily due to increased wages and benefits.

Senior Living Services

Six Months Ended June 30,
20232022Change% Change
Cost of service (in thousands)$51,294 $45,746 $5,548 12.1 %
Cost of services as a percentage of revenue70.6 %71.0 %(0.4)%

Cost of services related to our Senior Living services segment increased $5.5 million, or 12.1%, during the six months ended June 30, 2023 in response to higher occupancy and wage rate increases. As a percentage of revenue, costs of service decreased by 40 basis points from 71.0% to 70.6% during the six months ended June 30, 2023 when compared to the six months ended June 30, 2022, due primarily to reduction in contract labor, decline in property taxes and receipt of state relief funds.

Rent—Cost of Services. Rent increased 1.6% from $19.1 million to $19.4 million during the six months ended June 30, 2023 compared to the same period in the prior year, primarily as a result of the newly acquired senior living communities. As a percentage of revenue, rent—cost of services decreased 80 basis points when compared to the six months ended June 30, 2022.

General and Administrative Expense. Our general and administrative expense decreased $2.3 million, or 11.5%, from $19.8 million to $17.5 million for the six months ended June 30, 2023 when compared to the six months ended June 30, 2022. The decrease in general and administrative expense was due to a decrease of $2.4 million in share-based compensation, for the six months ended June 30, 2023 when compared to the six months ended June 30, 2022.

Depreciation and Amortization. Depreciation and amortization expense was essentially flat as a percentage of total revenue.

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Loss on asset dispositions and impairment, net. Loss on asset dispositions and impairment, net decreased $6.7 million for the six months ended June 30, 2023 when compared to the six months ended June 30, 2022 due to senior living communities transferred to Ensign in 2022.

Provision for Income Taxes. We recorded income tax expense (benefit) of $2.8 million and $(0.8) million, or 36.5% and 36.7% of earnings (loss) before income taxes, for the six months ended June 30, 2023 and 2022, respectively. The decrease in the effective tax rate is primarily due to changes in the deductibility of equity compensation for certain executives.

Liquidity and Capital Resources

Our primary sources of liquidity are net cash provided by operating activities and borrowings under our revolving credit facility.

Revolving Credit Facility    

On February 23, 2021, Pennant entered into an amendment to its existing credit agreement (as amended, the “Credit Agreement”), which provides for an increased revolving credit facility with a syndicate of banks with a borrowing capacity of $150.0 million (the “Revolving Credit Facility”). The Revolving Credit Facility is not subject to interim amortization and the Company will not be required to repay any loans under the Revolving Credit Facility prior to maturity in 2026. On June 12, 2023, Pennant entered into a second amendment to the Credit Agreement that modified the reference rate from LIBOR to Standard Overnight Financing Rate (“SOFR”). 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 SOFR 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 June 30, 2023, the Company was compliant with all such financial covenants.

As of June 30, 2023, we had $2.8 million of cash and $85.3 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 existing Credit Agreement, will be sufficient to provide adequate liquidity for the next twelve months for our operating activities and for opportunities of acquisition growth.

The following table presents selected data from our Condensed Consolidated Statement of Cash Flows for the periods presented:
Six Months Ended June 30,
20232022
(In thousands)
Net cash provided by operating activities$15,533 $4,899 
Net cash used in investing activities(11,226)(8,750)
Net cash (used in) provided by financing activities(3,548)1,861 
Net increase (decrease) in cash 759 (1,990)
Cash at beginning of period2,079 5,190 
Cash at end of period$2,838 $3,200 

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Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
    
Our net cash flow from operating activities for the six months ended June 30, 2023 increased by $10.6 million when compared to the six months ended June 30, 2022. The primary driver of this difference was a $6.3 million increase in Net income, and a $5.3 million net increase in cash flows from the change in operating assets and liabilities, partially offset by a decrease of $1.0 million in non-cash expenses, net of the impact of acquisitions.
    
Our net cash used in investing activities for the six months ended June 30, 2023 increased by $2.5 million compared to the six months ended June 30, 2022, primarily driven by a $6.5 million increase in business acquisitions offset by a $3.9 million decrease in purchases of property and equipment during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Our net cash used in financing activities increased by approximately $5.4 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was primarily due to a net reduction in the balance on our line of credit during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Contractual Obligations, Commitments and Contingencies

We continue to make draws and payments on our Revolving Credit Facility, as described in Note 11, Debt, to the Interim Financial Statements in Part I of this Quarterly Report. Additionally, we have right-of-use assets obtained in exchange for new operating lease obligations, as described in the supplemental disclosures of cash flow information in the Condensed Consolidated Statement of Cash Flows and in Note 13, Leases, to the Interim Financial Statements in Part I of this Quarterly Report.

Besides those transactions there have been no other material changes to our total obligations during the period covered by this Quarterly Report outside of the normal course of our business.

Item 3. 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 a second amendment to the Credit Agreement that modified the reference rate from LIBOR to SOFR. A 1.0% interest rate change would cause interest expense to change by approximately $0.6 million annually based upon our outstanding long-term debt as of June 30, 2023. We manage our exposure to this market risk by monitoring available financing alternatives.

Item 4. 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 Quarterly Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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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PART II. OTHER INFORMATION
Item 1. Legal Proceedings

We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our results of operations or financial condition. However, the results of such matters cannot be predicted with certainty and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows. See Note 15, Commitments and Contingencies, to the Interim Financial Statements for a description of claims and legal actions arising in the ordinary course of our business.

Item 1A. Risk Factors

We have disclosed under the heading “Risk Factors” in the 2022 Annual Report risk factors that materially affect our business, financial condition or results of operations. You should carefully consider the risk factors set forth in the 2022 Annual Report and the other information set forth elsewhere in this Quarterly Report. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Since the filing of our 2022 Annual Report on February 23, 2023, the following additions have been made to the risk factors previously disclosed.

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 developments in the United States could lead to a reduction in Federal Government expenditures, including governmentally 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 unless the federal debt ceiling is raised, and legislation increasing the debt ceiling is not enacted, 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).
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Item 6. Exhibits

EXHIBIT INDEX
ExhibitDescription
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).
Credit Agreement, dated June 12, 2023, by and among The Pennant Group, Inc. and certain of its subsidiaries, the lenders named therein, and Truist Bank (successor by merger to SunTrust Bank), as administrative agent for the lenders.
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 Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL 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.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES
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 undersigned thereunto duly authorized.
 The Pennant Group, Inc.
Dated: August 8, 2023
BY: /s/ LYNETTE B. WALBOM  
  Lynette B. Walbom
  Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)





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