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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020.

or

 

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: 001-33459

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

20-3934755

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

101 East State Street

Kennett Square, Pennsylvania

19348

(Address of principal executive offices)

(Zip Code)

(610444-6350

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.001 par value per share

GEN

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

Large accelerated filer

Accelerated Filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of Class A common stock, par value $0.001 per share, held by non-affiliates of the registrant, computed based on the closing sale price of $0.69 per share on June 30, 2020, as reported by The New York Stock Exchange, was approximately $66.7 million. The aggregate number of shares held by non-affiliates is calculated by excluding all shares held by executive officers, directors and holders known to hold 5% or more of the voting power of the registrant’s common stock. As of March 12, 2021, there were 111,728,783 shares of the registrant’s Class A common stock issued and outstanding, 744,396 shares of the registrant’s Class B common stock issued and outstanding, and 54,877,924 shares of the registrants Class C common stock, par value $0.001 per share, issued and outstanding.

Table of Contents

Genesis Healthcare, Inc.

Annual Report

Index

8

    

Page

Number

Forward-Looking Statements

1

PART I

Item 1.

Business

1

Item 1A.

Risk Factors

27

Item 1B.

Unresolved Staff Comments

52

Item 2.

Properties

53

Item 3.

Legal Proceedings

54

Item 4.

Mine Safety Disclosures

54

PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

54

Item 6.

Selected Financial Data

55

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

55

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

88

Item 8.

Financial Statements and Supplementary Data

88

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

88

Item 9A.

Controls and Procedures

88

Item 9B.

Other Information

91

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

91

Item 11.

Executive Compensation

95

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

99

Item 13.

Certain Relationships and Related Transactions, and Director Independence

101

Item 14.

Principal Accounting Fees and Services

105

PART IV

Item 15.

Exhibits, Financial Statement Schedules

106

111

Signatures

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Forward-Looking Statements

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans” or “prospect,” or the negative or other variations thereof or comparable terminology. These forward-looking statements are necessarily estimates and expectations reflecting the best judgment of our senior management based on our current estimates, expectations, forecasts and projections, and include comments that express our current opinions about trends and factors that may impact future operating results. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements, or industry results, to differ materially from any anticipated future results, performance or achievements, expressed or implied by such forward-looking statements. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our business and other matters. These risks and uncertainties include, but are not limited to, those described in Item 1A. “Risk Factors” and elsewhere in this report and those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (SEC).

Any forward-looking statements contained herein are made only as of the date of this report. We expressly disclaim any duty to update the forward-looking statements and other information contained in this report, except as required by law. Investors are cautioned not to place undue reliance on these forward-looking statements.

PART I

Item 1. Business

Company Overview

Genesis Healthcare, Inc. (Genesis) is a holding company with subsidiaries that, on a consolidated basis, comprise one of the nation’s largest post-acute care providers. As used in this report, the terms “we,” “us,” “our,” and the “Company,” and similar terms, refer collectively to Genesis and its consolidated subsidiaries, unless the context requires otherwise. We offer inpatient services, rehabilitation and respiratory therapy services and a full complement of administrative services to our affiliated operators through our administrative services subsidiaries and management services to third-party operators with whom we contract through our management services subsidiary. All of our healthcare operating subsidiaries focus on providing quality care to the people we serve, and our skilled nursing facility subsidiaries, which comprise the largest portion of our consolidated business, have a strong commitment to treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy, whom we refer to as high-acuity patients. For additional information regarding our financial condition, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Overview.”

Operations

Our services focus primarily on the medical and physical issues facing elderly patients and are provided by the employees of our skilled nursing facilities, assisted/senior living communities, integrated and third-party rehabilitation therapy business, and other ancillary services.

As of December 31, 2020, we had three reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted/senior living facilities and is the largest portion of our business; (2) rehabilitation therapy services, which includes our integrated and third-party rehabilitation and respiratory therapy services; and (3) all other services. For the year ended December 31, 2020, the inpatient services segment generated approximately 86% of our revenue, the rehabilitation therapy services segment generated approximately 10% of our revenue and all other services accounted for the remaining balance of our revenue. For additional information regarding the financial performance of our reportable operating segments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 – “Segment Information,” in the notes to our consolidated financial statements included elsewhere in this report.

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Inpatient Services Segment

Skilled Nursing Facilities

As of December 31, 2020, we offered inpatient services through our network of 341 skilled nursing and assisted/senior living facilities across 24 states, consisting of 319 skilled nursing facilities and 22 stand-alone assisted/senior living facilities. Of the 341 facilities, 246 are leased, 10 are owned, 12 are managed and 73 are joint ventures. Additionally, we have fixed-price options to purchase the real property of 15 of our leased facilities and 43 of our joint venture facilities. Collectively, our skilled nursing and assisted/senior living facilities have 40,193 licensed beds, approximately 74% of which are concentrated in the states of Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania, and West Virginia. See Item 2. “Properties” for the full count of facilities by state. Our skilled nursing and assisted/senior living facilities are generally clustered in large urban or suburban markets. For the year ended December 31, 2020, we generated approximately 83% of our revenue from our skilled nursing facilities, with the remainder primarily being generated from our assisted/senior living facilities, rehabilitation therapy services provided to third-party facilities, and other ancillary services.

We have developed programs for, and actively market our services to, high-acuity patients who are typically admitted to our facilities as they recover from strokes, other neurological conditions, cardiovascular and respiratory ailments, joint replacements and other muscular or skeletal disorders. We also provide 24-hour long-term care services for elderly residents and people with chronic conditions or prolonged illnesses. Our staff is devoted to providing a comforting environment and focused on helping each person achieve their highest level of independence and vitality.

We use interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care to our short-stay and long-stay patients. Many of our skilled nursing facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management. We also provide standard services to each of our skilled nursing patients, including room and board, special nutritional programs, social services, recreational activities and related healthcare and other services.

Our PowerBack Rehabilitation branded facilities are designed to provide short-stay skilled nursing facilities that deliver a comprehensive rehabilitation regimen in accommodations specifically designed to serve high-acuity patients. We believe that having PowerBack Rehabilitation facilities enables us to more effectively serve higher acuity patients and achieve a higher skilled mix than a traditional hybrid skilled nursing facility, which in turn results in higher reimbursement rates. Skilled mix is the average daily number of Medicare and insurance patients we serve at our skilled nursing facilities divided by the average daily number of total patients we serve at our skilled nursing facilities. Insurance as a payor source includes both traditional commercial insurance programs as well as managed care plans, including Medicare Advantage plans. As of December 31, 2020, we operated 10 stand-alone PowerBack Rehabilitation facilities with 1,121 beds.

As of December 31, 2020, we have administrative services agreements or management agreements with 85 unaffiliated or jointly owned skilled nursing or assisted living facility operators. The income associated with the management services provided to the third-party facility operator is included in inpatient services in our segment reporting as services are performed primarily by personnel supporting the inpatient services segment.

Our administrative service company provides a full complement of administrative and consultative services to our affiliated operators to allow them to better focus on the delivery of healthcare services.

Assisted/Senior Living Facilities

We complement our skilled nursing care business by providing assisted/senior living services at 22 stand-alone facilities with 1,704 beds and offer an additional 1,090 assisted/senior living beds within our skilled nursing facilities as of December 31, 2020. Our assisted/senior living facilities provide residential accommodations, activities, meals, security, housekeeping and assistance in the activities of daily living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing facility.

Rehabilitation Therapy Services

As of December 31, 2020, we provided rehabilitation therapy services, including speech-language pathology (SLP), physical therapy (PT), occupational therapy (OT) and respiratory therapy, to approximately 1,400 healthcare locations in 42 states, the District of Columbia and China, including 289 facilities operated by us. We provide rehabilitation therapy services at our skilled nursing facilities and assisted/senior living facilities as part of an integrated service offering in connection with our skilled nursing care. We believe that an integrated approach to treating high-acuity patients enhances our ability to achieve successful patient outcomes and enables us to

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identify and treat patients who can benefit from our rehabilitation therapy services. We believe hospitals and physician groups often refer high-acuity patients to our skilled nursing facilities because they recognize the value of an integrated approach to providing skilled nursing care and rehabilitation therapy services.

We believe that we have also established a strong reputation as a premium provider of rehabilitation therapy services to third-party skilled nursing operators in our local markets, with a recognized ability to provide these services to high-acuity patients. Our approach to providing rehabilitation therapy services for third-party operators emphasizes quality treatment and successful clinical outcomes.

In addition to our rehabilitation therapy services in the United States, we have a presence in China and Hong Kong with initiatives to develop a rehabilitation therapy care delivery model and other services. The activity related to this expansion did not have a material impact on our consolidated financial statements as of and for the years ended December 31, 2020 and 2019.

Other Services

As of December 31, 2020, we provided an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

COVID-19

Overview

On March 11, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions. Our primary focus as the effects of COVID-19 began to impact the United States was the health and safety of our patients, residents, employees and their respective families. We implemented various measures to provide the safest possible environment within our sites of service during this pandemic and will continue to do so.

The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the healthcare industry and our businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system across the United States. A significant number of our facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 is having and will likely continue to have a material and adverse effect on our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures.

The Centers for Disease Control and Prevention (CDC) has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19. In addition, our employees are at risk of contracting or spreading the disease due to the nature of the work environment when caring for patients. In an effort to prevent the introduction of COVID-19 into our facilities, and to help control further exposure to infections within communities, we have implemented policies restricting visitors at all of our facilities except for essential healthcare personnel and for families and friends, under certain compassionate care circumstances, such as, but not exclusively, end-of-life situations. We also implemented policies for screening employees and anyone permitted to enter the building, implemented in-room only dining, activities programming and therapy. Our policy is to follow government guidance to minimize further exposure, including personal protection protocols, restricting new admissions, and isolating patients. Due to the vulnerable nature of our patients, we expect many of these restrictions will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed. Notwithstanding these restrictions and our other response efforts, the virus has had, and likely will continue to have, introduction to, and transmission within, certain facilities due to the easily transmissible nature of COVID-19.

Our operations and supply chains have been materially and adversely affected by the COVID-19 pandemic, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures serve to outline the estimated impact of COVID-19 on our business through December 31, 2020, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19.

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Operations

Our first report of a positive case of COVID-19 in one of our facilities occurred on March 16, 2020. Since that time, 292 of our 341 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 71% of the patient and resident positive COVID-19 cases in our facilities have occurred in the states of Connecticut, Maryland, Massachusetts, New Jersey, New Mexico, Pennsylvania, and West Virginia, which correspond to many of the largest community outbreak areas across the country. Our facilities in these seven states represent approximately 60% of our total operating beds.

Our occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.

Net Revenues

Our net revenues for the year ended December 31, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. Our skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 76.6% for the three months ended December 31, 2020. The revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as discussed below. See Regulatory and Reimbursement Relief. After considering a commensurate reduction in related and direct operating expenses, we estimate lost revenue caused by COVID-19 reduced earnings by approximately $185.9 million for the year ended December 31, 2020.

Operating Expenses

Our operating expenses for the year ended December 31, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the year ended December 31, 2020, we estimate to have incurred approximately $257.9 million of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs and the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate.

We are not reasonably able to predict the total amount of costs we will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.

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Liquidity

We have taken, and will continue to take, actions to enhance and to preserve our liquidity in response to the pandemic. During the year ended December 31, 2020, our usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, in the second quarter of 2020, we applied for and received $156.8 million of advanced Medicare payments and from April through December 2020, received approximately $275.4 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, we have elected to implement the CARES Act payroll tax deferral program, which preserved, on an interest free basis, $92.2 million of cash, representing the employer portion of payroll taxes incurred between March 27, 2020 and December 31, 2020. The advance Medicare payments of $156.8 million, which are also interest free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding has been committed by a number of states in which we operate, currently estimated at $124.7 million.

We continue to seek opportunities to enhance and to preserve our liquidity, including through reducing expenses, continuing to evaluate our capital structure and seeking further government-sponsored financial relief related to the pandemic. We cannot provide assurance that such efforts will be successful, timely or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic. See Note 1 – “General Information – Going Concern Considerations” and Note 23 – “Subsequent Events – Restructuring Transactions.”

Regulatory and Reimbursement Relief

On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provided a temporary 6.2% increase to each qualifying state’s Medicaid Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (HHS), including any extensions or termination, which currently expires on April 20, 2021. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporarily increased FMAP is claimed. Further, a number of additional states in which we operate have implemented incremental FMAP related reimbursement provisions and other forms of support to assist providers. For the year ended December 31, 2020, we recognized FMAP reimbursement relief of $82.3 million as net revenues and other forms of state support grants of $39.1 million as Federal and state stimulus – COVID-19 other income in the consolidated statements of operations. As of December 31, 2020, we deferred recognition of $3.3 million of other forms of state support grants, which are presented within accrued expenses in the consolidated balance sheet. We cannot predict the extent to which further FMAP funding programs will be implemented in the states in which we operate.

In further response to the pandemic, on March 27, 2020, the former U.S. Presidential administration signed into law the bipartisan CARES Act, which authorized the cash distribution of relief funds to reimburse healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus. Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. The secretary of HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.

We were impacted by certain provisions of the CARES Act, as summarized below.

Temporary suspension of certain patient coverage criteria and documentation and care requirements. The CARES Act and a series of temporary waivers and guidance issued by the Centers for Medicare and Medicaid Services (CMS) suspend various Medicare patient coverage criteria as well as certain documentation and care requirements. These accommodations are intended to ensure patients have access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

Relief Funds. The CARES Act authorized HHS to distribute relief fund grants to healthcare providers to support healthcare-related expenses or lost revenue attributable to COVID-19. HHS has made several rounds of distributions to providers based

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upon a variety of factors and providers have been able to apply for additional funding. To retain the funds, providers must submit an attestation accepting certain terms and conditions. During April 2020, we first began receiving relief grants from CARES Act funds administered by HHS. Through December 31, 2020, we have received $198.7 million in these initial relief grants, the majority of which are related to skilled nursing care provided through our Inpatient Services segment.

On July 22, 2020, the former U.S. presidential administration announced an additional $5 billion relief fund to be used to protect residents of long term care facilities and nursing homes from the impact of COVID-19. Through December 31, 2020, we received $68.3 million of relief grants under the program. The $5 billion relief fund included:

oApproximately $2.5 billion in payments to be used primarily to support increased testing and meet staffing and personal protective equipment needs.
oSubsequent distributions as part of the Quality Incentive Payments Program (QIP). In order to qualify for payments under QIP, a facility must have an active state certification as a nursing home or skilled nursing facility and receive reimbursement from CMS. HHS will administer quality checks on nursing home certification status to identify and remove facilities that have a terminated, expired, or revoked certification or enrollment. Facilities must also report to at least one of three data sources that will be used to establish eligibility and collect necessary provider data to inform payment.

The QIP Program has been divided into four performance periods (September, October, November and December 2020). All nursing homes or skilled nursing facilities meeting the previously noted qualifications were eligible for each of the performance periods.  

o$250 million for distribution to “COVID only” facilities.
o$250 million for providers that participate in approved training programs to better enable nursing home employees to administer COVID-19-related safety practices.

We recognize relief funds as income once there is reasonable assurance that the applicable terms and conditions required to retain the funds have been met. During the year ended December 31, 2020, we recognized $306.1 million of aggregate relief funds within the “Federal and state stimulus – COVID-19 other income” caption in the consolidated statement of operations.

On June 9, 2020 as part of its ongoing efforts to provide financial relief to healthcare providers impacted by COVID-19, HHS announced the Phase 2 general distribution to Medicaid, Medicaid managed care, Children's Health Insurance Program (CHIP) and dental providers. HHS anticipates distributing approximately $15 billion to eligible providers that participate in state Medicaid and CHIP programs that did not receive a payment from the Provider Relief Fund General Allocation (Phase 1). Eligible applicants will receive 2% of Gross Revenues from Patient Care for calendar years 2017, 2018 or 2019 as selected by applicant. The Company has submitted applications for its assisted living facilities that meet the eligibility criteria.

Medicare Accelerated and Advanced Payment Program. During the second quarter of 2020, we applied for and received $156.8 million of interest free advanced Medicare payments. These payments will be subsequently recouped over time as revenue is recognized for claims submitted for services provided to Medicare patients. In October 2020, CMS extended the recoupment period to begin one year from the date the advanced payments were issued. Our recoupment period for the advanced payments is expected to be from April 2021 to February 2022. We have reported advanced payments of $118.8 million and $36.7 million within accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet as of December 31, 2020.

Payroll Tax Deferral. Under the CARES Act, we have elected to defer payment, on an interest free basis, of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. One-half of the deferral amount is due on each of December 31, 2021 and December 31, 2022. We have presented $46.1 million of the deferred payroll tax balance within accrued expenses and $46.1 million within other long-term liabilities in the consolidated balance sheet as of December 31, 2020.

Temporary Suspension of Medicare Sequestration. The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee for service claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to remain in place through at least 2023, unless Congress takes further

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action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020; this period was subsequently extended through March 31, 2021. During the year ended December 31, 2020, the suspension of sequestration resulted in net revenues of $8.4 million.

Employee Retention Tax Credit. The employer payroll tax credit provisions of the CARES Act grant eligible companies a credit against applicable payroll taxes for each calendar quarter in an amount equal to 50% of qualified wages with a maximum credit of $5,000 per employee. The refundable tax credit is available to employers that fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. Qualified employees are those who are not providing services as a result of such orders of a government authority. The impact of the employee retention tax credit program was not material for the year ended December 31, 2020.

Testing Requirements

Beginning in April 2020, authorities in several states in which we operate began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities. This came after the CDC stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes. On July 22, 2020, CMS announced that nursing homes in states with a 5% or greater positivity rate for COVID-19 will be required to test all nursing home staff each week. On August 26, 2020, CMS issued new parameters for testing, requiring routine monthly testing of all facility staff if the facility’s county positivity rate is less than 5%; weekly testing if the county positivity rate is between 5-10%; and twice weekly testing if the county positivity rate exceeds 10%. These testing requirements are in addition to obligations to screen staff each shift, residents daily, and all persons entering the facility for signs and symptoms of COVID-19. Facilities must test any staff or resident who has signs or symptoms of COVID-19. In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period. In addition to CMS's testing mandates, some states have imposed their own testing requirements for residents and staff. Non-compliance with state or federal mandates may result in imposition of fines or other administrative action, including license revocation.

Reporting Requirements

On April 19, 2020, CMS announced new regulatory requirements that will require skilled nursing homes to report cases of COVID-19 directly to the CDC. This information must be reported in accordance with existing privacy regulations and statues. In addition, skilled nursing homes are required to inform residents, their families and representatives of COVID-19 cases in their facilities; this notification is required to take place by 5 PM the next calendar day following the occurrence of a single confirmed infection of COVID-19, or of three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another. Further, the CDC provided a reporting tool to skilled nursing homes that will support Federal efforts to collect nationwide data to assist in COVID-19 surveillance and response. There could be civil monetary penalties for not meeting these reporting requirements.

Survey Activity and Enforcement

On March 20, 2020, CMS announced the initiation of focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic. CMS prioritized infection control surveys over annual recertification and complaint surveys at the non-immediate jeopardy level, confirming its commitment to infection prevention and control in the skilled nursing industry. Effective August 17, 2020, CMS provided guidance authorizing resumption of traditional survey activity.

On June 1, 2020, CMS introduced an enhanced enforcement program with respect to infection control deficiencies. The program contemplates more significant remedies against facilities with a prior history of infection control deficiencies, and imposes more stringent penalties with deficiencies identified at a higher scope and severity. The spectrum of remedies available to CMS for imposition on skilled nursing facilities in connection with this enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative penalties.

On January 4, 2021, CMS modified its guidance pertaining to the criteria requiring states to conduct focused infection control surveys as a result of the increased availability of resources for the testing of residents and staff, and factors related to the quality of

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care. CMS has also provided guidance in the form of frequently asked questions related to health, emergency preparedness and life-safety code surveys.

COVID-19 Vaccinations Programs

In December 2020, the U.S. Food and Drug Administration approved the use of COVID-19 vaccines, which have begun to be distributed and administered widely throughout the United States, including to our patients, residents, and employees. The CDC has recommended that the initial phase of the vaccine programs prioritize healthcare personnel and residents of long-term care facilities, with states holding the ultimate authority to determine the recipients of the vaccines. As of March 12, 2021, all of our eligible patients, residents and employees have been provided the opportunity to receive a vaccination. Over 80% of patients and residents and over 60% of eligible employees have received both doses of the COVID-19 vaccine. We plan to continue participating in COVID-19 vaccine programs, including the federal Pharmacy Partnership for Long-Term Care Program.

Independent Commission on Safety and Quality in Nursing Homes

On April 30, 2020, CMS announced that it would be convening an independent commission to conduct comprehensive assessments of nursing home responses to the COVID-19 pandemic. This Commission on Safety and Quality in Nursing Homes (Commission) was intended to identify opportunities for improvement to inform immediate and future actions. On September 16, 2020, the Commission issued its final report and recommendations to CMS. Based upon these recommendations, CMS may implement additional measures to combat COVID-19 in nursing facilities.

Provider Relief Fund Reporting Requirement

On July 20, 2020, HHS informed Provider Relief Fund (PRF) of future reporting requirements. The Secretary of HHS provided directions on reporting obligations in program instructions directed to all recipients. HHS previously planned to open the reporting portal on January 15, 2021, with the first deadline for submissions on February 15, 2021. In late December, however, Congress passed the Coronavirus Response and Relief Supplemental Appropriations Act which added another $3 billion in funding to the PRF program and included language specific to reporting requirements. HHS has been working to update the PRF reporting requirements to be consistent with this new law. That said, as HHS has done in the past, the department wanted to give recipients ample time to familiarize themselves with the updated reporting requirements well in advance of required submission deadlines. Consequently, PRF recipients will now be required to submit their reporting requirements on their use of these funds later than previously announced. A new reporting deadline has not been set.

Provider Relief Fund Single Audit Requirement

HHS indicates that PRF payments will be subject to the Office of Management and Budget Single Audit process, which requires an organization-wide audit of an entity that expends $750,000 or more of federal assistance. The objective of the Single Audit is to provide assurance that federal funds are used appropriately.

Human Capital

At Genesis, our mission is to “Improve the lives we touch through the delivery of high-quality healthcare and everyday compassion.” Our mission and the core values we espouse play a genuine role in the operations of the organization. Ensuring that our residents, patients, family members and our employees are cared for and supported is the common thread. At the same time the organization was navigating through the COVID-19 pandemic, we pivoted around a bold move with our human resources and people functions. This included a complete reorganization whereby the human resources operations leaders and the more progressive people function leaders (e.g. Talent Management/Acquisition, Learning, Compensation, Leadership Development, and People Analytics) were brought into the same eco-system and further reorganized into Centers of Expertise and Business Partner Networks. This move was highly intentional with the objective of streamlining the deployment of human capital best practices, greater efficiency with design/development of tools and resources, accelerated innovation, silo-busting and stronger operational partnerships that drive results.

In June 2020, Genesis officially launched a Diversity, Equity, and Inclusion (DEI) function boasting a formal chair, committee and advisory council. The committee reflects a highly diverse membership of employees across the organization, serving in various roles. Additional efforts included renewed focus on inclusivity and equity across all aspects of the employee lifecycle and journey.

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Over the last nine months, the DEI Committee has drafted a DEI Charter which establishes a mission, vision and objectives for achieving a sustainable path to increased diversity throughout all levels of the organization, and looks to promote equity and inclusivity as a method to achieve company goals. We are expanding representation to include members of the DEI Committee within existing company committees, including the Corporate Compliance Committee. More recently, the DEI Committee collaborated on elements of the annual employee antidiscrimination training and is collaborating with the COVID Vaccine for Residents, Patients and Staff Workgroup on solutions for vaccine hesitancy. Additional efforts will include establishing key performance indicators that will include a renewed focus on inclusivity and equity across all aspects of the employee lifecycle, in providing quality care to our patients and residents, and in establishing and maintaining relationships with our external business partners.

To support the workforce at large and in response to the pandemic, we activated an organizational well-being function to address the emotional well-being of our employees. While the organization affords employees with an Employee Assistance Program (EAP) through a vendor partner, we believed an equally robust internal solution was necessary to combat the impact of occupational stress.

In late 2019 and into 2020, the organization renewed its commitment to ensuring leaders at all levels of the organization were performing at their highest capacity. We know that competent and confident leaders are essential to operate the centers that serve our clients. The organization ushered in a new talent management process with both evaluative and development components. This system also created the foundation for a more intentional succession planning process, a bolstered workforce planning framework, a new leader competency/capability model and a refreshed development program to enhance both operational and leadership skills.

As of December 31, 2020, we had a workforce of approximately 44,000 employees, including 4,000 employees subject to collective bargaining agreements with unions. Our workforce declined by approximately 11,000 employees during the year ended December 31, 2020, primarily due to the divestiture or transition of facilities to joint ventures and other third parties. Our most significant operating cost is labor, which accounted for approximately 64% of our operating expenses for the year ended December 31, 2020.

The healthcare industry as a whole has been challenged by shortages of qualified healthcare professionals, resulting in increased competition for staffing services and increased employee turnover. Consequently, we have instituted various strategies, such as maintaining competitive labor rates and benefits, that seek to improve employee retention and reduce reliance on overtime compensation and temporary staffing services. Most of our skilled nursing facilities are subject to state-mandated minimum staffing requirements, so our ability to reduce labor costs by decreasing staff is limited and subject to government audits and penalties. Managing labor costs is proving to be increasingly difficult as reimbursement rate increases are often significantly exceeded by the annual inflationary wage increases. The issue is compounded by the shift in payor mix to lower reimbursed Medicaid as well as increases in the federal or state minimum wage rates.

We believe that attracting people to our mission, preparing them with education and tools to be successful and providing them with various types of opportunity for growth will be the enduring keys to our success.

Customers

With the exception of our rehabilitation therapy services segment, no individual customer or client accounts for a significant portion of our revenue. We do not expect that the loss of a single customer or client within our inpatient services segment would have a material adverse effect on our business, financial condition or results of operations. Within the rehabilitation services business, there are approximately 150 distinct customers, many of which are chain operators with more than one location. One customer, which is a related party of ours, comprises $30.5 million, approximately 44%, of the gross outstanding contract receivables in the rehabilitation services business at December 31, 2020. See Note 16 – “Related Party Transactions.”

Business Strategy

Our core strategy is to provide superior clinical outcomes with an approach that is patient-centered and focused on lowering costs by reducing lengths of stay and improving outcomes by developing programs to prevent avoidable rehospitalizations.

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The key elements of our business strategy include:

Commitment to quality care. We are focused on qualitative and quantitative clinical performance measures in order to enhance and improve the care provided in our facilities. We continually seek to enhance our reputation for providing clinical capabilities and favorable outcomes. Among other things, we have and will continue to increase our professional nursing mix and integrate nurse practitioners and employed physicians into our clinical model. We have incentivized our management team to improve clinical performance to further ensure accountability for the quality of care.

Position ourselves for success in a value-based environment. As healthcare reform continues to be implemented, we believe post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and operate with scale will have a competitive advantage in an episodic payment environment. Our ongoing clinical and operational initiatives position us as a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay, more effectively manage healthcare costs and develop new care delivery and payment models.

Improve operating efficiency. We are continually focused on improving operating efficiency and controlling costs, while maintaining quality patient care. Investments in information systems, the development of tools to more effectively manage operating costs and the reengineering of key business and operating processes are an effective way to grow cash flow and improve operating margins. Such investments involve significant upfront costs that must be assessed on a long-term cost-benefit basis and can be limited due to our available liquidity.

Focusing on core markets by optimizing our facility portfolio. We are continually evaluating the long-term strategic value of our portfolio of facilities and other operating businesses. In this regard, we will continue to pursue the sale, divestiture, closure or reconfiguration of facilities or businesses that are unprofitable, located in unattractive or saturated markets, physically obsolete or not core to our business strategy. Shedding non-core or non-strategic assets increases our focus and resources to assets in markets where we have geographic density, strong hospital partnerships and the greatest growth potential. We seek strategic acquisitions in selected target markets with strong demographic trends for growth in our service population. Expansion of existing facility clusters and the creation of new clusters in local markets will allow us to leverage existing operations and to achieve greater operating efficiencies.

Improving overall capital structure and focusing on real estate ownership and strategic partnerships. In early 2018, we executed a number of restructuring activities to provide increased liquidity and reduce annual cash fixed charges. These activities included closing on a new asset based lending facility, expansion of an existing term loan agreement, and the restructuring of several significant master leases, which resulted in more favorable terms. We currently lease the majority of the facilities used in our operations, many of which are subject to annual rent escalation clauses. We are continually focused on reducing the impact of rising rents through the restructuring of existing lease arrangements, the acquisition of real estate, and the execution of other strategic partnerships. Further, we seek to own facilities or acquire fixed price options to purchase them, thus allowing us to participate in the upside appreciation of the facilities and the opportunity to lower our future costs by replacing rent subject to escalators with debt financing. Since January 1, 2019, we entered into three strategic partnerships that provide us with fixed price options to purchase the underlying real property of an aggregate of 43 facilities. Beginning in January 2020, we entered into an additional strategic partnership under which we transferred operational responsibility for 26 facilities to an operator with local market expertise and relationships. Under the terms of the arrangement, we will continue to provide administrative support to the facilities and also provide certain ancillary services.

Competitive Strengths

We believe that the following competitive strengths support our business strategy:

Quality Patient Care, Differentiated Clinical Capabilities and Clinical Specialization. To ensure clinical oversight and continuity of patient care, our facilities contract with our physician services division to obtain services of physicians, physician assistants and nurse practitioners that are primarily involved in providing medical direction and/or direct patient care. Utilization of physicians and non-physician practitioners allows for significant patient involvement at all levels of the organization, thus ensuring an emphasis on quality care is maintained. In an effort to further enhance the quality of care we provide to our patients, we have made investments to expand rehabilitation gym capacity and develop clinical specialty units. The development of clinical specialty units in our facility portfolio has allowed us to better meet the needs of our patients. These specialty units, along with our advanced capabilities in post-acute cardiac and pulmonary management, differentiate us in local areas, as competitors often do not offer these programs. Our focus on quality patient

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care, differentiated clinical capabilities and clinical specialization allows us to care for higher acuity patients who are typically reimbursed by Medicare or managed care payors.

Strong Geographic Density in Regional Markets. We have developed geographic density in markets with 74% of our total licensed skilled nursing beds located in eight states: Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, Pennsylvania and West Virginia. Within these and other states, we seek to cluster our facilities to create a dense, localized footprint. By clustering our facilities, we are able to provide a larger and more diverse number of clinical services within a regional market. As a result, we are often the leading skilled nursing facility operator in many of the regional markets in which we operate, based on number of beds. Strategically clustered facilities in single or contiguous markets also allow us to achieve lower operating costs through greater purchasing power and operating efficiencies, facilitate the development of strong relations with state and local regulators and provide us with the ability to coordinate sales and marketing strategies. Our strong reputation and operating performance in regional markets also allows us to develop relationships with key referral sources, including hospitals and other managed care payors.

Experienced Management Team with Proven Operating Performance. We have an experienced management team with deep post-acute experience. Our management team has demonstrated an ability to adapt to a rapidly changing business climate, providing a distinct competitive advantage in navigating the complex and evolving post-acute care industry.

Key Partnerships and Relationships. We have partnered with hospitals in our local markets to enhance the coordination of patient care during and after a post-acute rehabilitation stay. The goal of these relationships is to provide quality care while lowering hospital readmission rates and reducing overall healthcare costs. Further, these relationships allow us to manage patient outcomes and coordinate care once a patient leaves the acute care setting and enters one of our facilities. We have also forged key relationships with managed care payors to better align quality goals and reimbursement, resulting in a more coordinated care approach that reduces hospital readmissions. As an increasing number of patients gain access to health insurance through healthcare reform or move to managed Medicare and Medicaid programs, we are poised to capture additional market share as managed care companies look to match quality patient care with a cost efficient setting. In addition, we created our own Accountable Care Organization (ACO). As the industry continues to migrate from fee-for-service to pay-for-value, our unique capabilities in the area of physician services has given us a competitive advantage in advancing participation in value-based programs. We offer the only captive SNFist company in the industry and the only post-acute sponsored ACO in the United States.

Leading Post-Acute Provider Well Positioned for Increased Demand for Post-Acute Care. The number of people in the U.S. aged 75 and above is projected to increase, and we believe overall demand for the services we provide will increase accordingly.  While the COVID-19 pandemic has had a significant, negative impact on our current census levels, we believe that as one of the largest operators of skilled nursing facilities and post-acute rehabilitation therapy services in the U.S., we are well positioned to benefit from these trends by delivering cost effective, high quality services.

Competition

Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with inpatient rehabilitation facilities (IRF) and long-term acute care (LTAC) hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility. In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. COVID-19 has had a significant adverse effect on our ability to compete as the industry has experienced a movement to more home health care from skilled nursing facilities to avoid exposure to the virus.

We seek to compete effectively in each market by establishing a reputation within the local community for quality of care, attractive and comfortable facilities, and providing specialized healthcare with an emphasized focus on high-acuity patients. Programs targeting high-acuity patients, including our PowerBack Rehabilitation facilities, generally have a higher staffing level per patient than

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our other inpatient facilities and compete more directly with an IRF or LTAC hospitals, in addition to other skilled nursing facilities. We believe that the average cost to a third-party payor for the treatment of our typical high-acuity patient is lower if that patient is treated in one of our skilled nursing facilities than if that same patient were to be treated in an IRF or LTAC hospital.

Our other services, such as assisted/senior living facilities and rehabilitation therapy provided to third-party facilities, also compete with local, regional, and national companies. The primary competitive factors in these businesses are similar to those for our skilled nursing facilities and include reputation, cost to provide the services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide support in other areas such as information management and patient recordkeeping.

Increased competition could limit our ability to attract and retain patients, attract and retain employees or to expand our business. Some of our competitors have greater financial and other resources than we have, may have greater brand recognition and may be more established in their respective communities than we are. Competing companies may also offer newer facilities or different programs or services than we do and may as a result be more attractive to our current patients, to potential patients and to referral sources.

Industry Trends

We believe the following post-acute care industry trends are likely to impact our business as the impact of COVID-19 subsides:

Increased Demand Due to Favorable Demographics. The majority are our services are provided to individuals aged 75 and older and that population is expected to increase. We expect that as the number of individuals aged 75 and older continues to increase, we will experience an increase in demand for our services.

Shift of Care to Lower Cost Alternatives. In response to rising healthcare costs, governmental and other payors have adopted various cost-containment measures that serve to reduce admissions and encourage reduced lengths of stay in hospitals and other post-acute settings. Consequently, these providers are discharging patients earlier and referring incremental high-acuity patients to lower cost settings, such as skilled nursing facilities.

Limited Supply of Facilities. There has been a moderate decline in the number of skilled nursing facilities over the past several years. Additionally, most states impose strict regulations that limit or restrict the development or expansion of healthcare projects. Consequently, we believe that as the industry demographics continue to trend positively, the supply and demand balance in the industry will continue to improve.

Reduced Reliance on Family Care. We believe that increases in the percentage of dual income earning families, reductions in the average family size, and an increased mobility in society will lessen seniors’ reliance on family as a form of care. We believe that it will be necessary for more seniors to seek alternative care options as they age, which will increase the demand for our services.

Healthcare Reform and Reimbursement Trends. In recent years, healthcare reforms and other policy changes have reshaped the healthcare payment and delivery landscape in the United States. A significant objective of these reforms is to transform delivery of and payment for healthcare services by holding providers accountable for the cost and quality of care provided. In response to these reforms, Medicare and many commercial third party payors have implemented ACO models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals. Other reimbursement methodology reforms include value-based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality and patient satisfaction metrics. In addition, the Centers for Medicare and Medicaid Services (CMS) has implemented demonstration and mandatory programs to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. As alternative payment models seek to incentivize delivery of better care at lower costs, providers are making fundamental changes in their day-to-day operations to better coordinate and manage the care of patients, improve care transitions, reduce lengths of stay and prevent avoidable rehospitalizations.

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Further, continuing efforts of governmental and private third party payors to contain the rate of payment for the provision of healthcare services has impacted providers like us. Federal Medicare and Medicaid reimbursement rates in many states are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. In recent years, those adjustments have not reflected actual increases in the cost of providing healthcare services. In addition to rate pressure, in recent years we have continued to see a shift from “traditional” Fee-for-Service (FFS) Medicare patients to Medicare Advantage patients. Reimbursement rates and average lengths of stay are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients, negatively impacting our profitability. In addition to the federal Medicare program, a number of states use managed care to coordinate long-term care support services and many states are interested in implementing or expanding existing ones. The emergence of managed Medicaid programs has resulted in lower rates of reimbursement for our services and has introduced new challenges and complexities with respect to billings and collections. We expect further migration towards managed Medicare and Medicaid programs.

Revenue Sources

We derive revenue primarily from the following programs: Medicaid, Medicaid Managed Care, Medicare, Medicare Advantage Plans, commercial insurance payors and private pay patients.

 Medicaid

Medicaid, which is the largest source of funding for skilled nursing facilities, typically covers patients that require standard room and board services, and provides reimbursement rates that are generally lower than rates earned from other sources. Medicaid is a program financed by state funds and matching federal funds administered by the states and their political subdivisions. Medicaid programs generally provide health benefits for qualifying individuals, and may supplement Medicare benefits for the disabled and for persons aged 65 and older meeting financial eligibility requirements. Medicaid reimbursement formulas are established by each state with the approval of the federal government in accordance with federal guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they have substantially depleted their assets.

Medicaid reimbursement varies from state to state and is based upon a number of different systems, including cost-based, prospective payment, case mixed adjusted payments and negotiated rate systems. Reimbursement rates are subject to a number of factors, such as a state’s annual budgetary requirements and funding, statutory and regulatory changes and interpretations and rulings by authoritative agencies.

Medicaid Managed Care

Medicaid Managed Care is a health care delivery system of Medicaid health benefits and additional services through contracted arrangements between state Medicaid agencies and managed care organizations (MCOs) designed to manage cost, utilization and quality of care. The delivery of long-term care services is provided through capitated payment programs. Such programs are in place in the majority of states in which we operate and states may implement such programs in the future if approved by CMS.

Medicare

Medicare is a federal program that provides healthcare benefits to individuals who are aged 65 years and older or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must sign a Medicare provider agreement and meet the CMS “Requirements of Participation” on an ongoing basis, as determined in periodic facility inspections or “surveys” conducted primarily by the state licensing agency in the state where the facility is located. Medicare pays for inpatient skilled nursing facility services under the prospective payment system (PPS). The prospective payment for each beneficiary is based upon the medical condition of and care needed by the beneficiary. Medicare Part A skilled nursing facility coverage is limited to 100 days per episode of illness for those beneficiaries who require daily care following discharge from an acute care hospital.

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Medicare Part A provides for inpatient services including hospital care, skilled nursing care, hospice and home healthcare, and end-stage renal disease.
Medicare Part B provides for outpatient services including physician services, diagnostic services, durable medical equipment, skilled therapy services and medical supplies.
Medicare Part C is a managed care option (Medicare Advantage) for beneficiaries who are entitled to Part A and enrolled in Part B and are administered by commercial health insurers that contract with Medicare or Medicaid.
Medicare Part D is a benefit that provides prescription drug benefits for both Medicare and Medicare/Medicaid dual eligible patients.

Medicare reimbursed our skilled nursing facilities under PPS for a defined bundle of inpatient covered services. Medicare coverage criteria require that a beneficiary spend at least three qualifying days in an inpatient acute setting before Medicare will cover the skilled nursing service. While beneficiaries are eligible for up to 100 days per episode of illness of skilled nursing care services (defined as requiring daily skilled nursing and/or skilled rehabilitation services), current law imposes a daily co-payment after the 20th day of covered services. Under PPS, facilities are paid a predetermined amount per patient, per day, for certain services based on the anticipated costs of treating patients. Effective October 1, 2019, the amount to be paid is determined based on a new case-mix classification system known as the Patient-Driven Payment Model (PDPM). Prior to this date, payment rates were determined by classifying each patient into a resource utilization group (RUG) category based upon each patient's acuity level.

Medicare rules and reimbursement rates are subject to statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past, and could in the future, result in substantial reductions in our revenue and operating margins.

For Medicare beneficiaries who qualify for the Medicare Part A coverage, rehabilitation services are included in the per diem payment. For beneficiaries who do not meet the coverage criteria for Part A services, rehabilitation services may be provided under Medicare Part B, subject to specific coverage and payment requirements.

Patient-Driven Payment Model (PDPM)

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV. PDPM is designed to increase focus on the clinical needs of the patient, as opposed to the volume of services provided, thereby improving payment accuracy and encouraging a more patient-driven care model. Under PDPM, there are only two required minimum data set (MDS) assessments, the admission assessment and discharge assessment, with one optional MDS assessment, the interim payment assessment.

PDPM utilizes a combination of six components to determine the amount of the per diem payment. Five of the components are case-mix adjusted, meaning they are intended to cover the utilization of skilled nursing facility resources that vary according to patient characteristics. These components are as follows: PT, OT, SLP, non-therapy ancillary (NTA) services, and nursing. The sixth component is non-case-mix adjusted, meaning it is intended to cover those skilled nursing facility resources that do not vary by patient. The PT, OT, and NTA components are also subject to a variable adjustment factor that serves to adjust the per diem payment over the course of the patient’s stay. The PT and OT components have a variable per diem adjustment beginning on the 21st day of the Medicare stay and further adjusted every seven days thereafter. The NTA component has a variable per diem adjustment beginning on the 4th day of the Medicare stay. PDPM utilizes patient specific, data-driven characteristics to classify patients into payment groups within each of the six components, which are used as the basis for the payment amount.

Effective October 1, 2019, CMS has also revised the definition of skilled nursing facility group therapy so that it aligns with the group therapy definition used in the inpatient rehabilitation facility setting. The new definition defines group therapy in the skilled nursing facility Medicare Part A setting as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

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PDPM also revises the limits on group and concurrent therapy. RUG-IV included a 25% limit per discipline (PT, OT, SLP), for group therapy and did not impose a limit for concurrent therapy. PDPM includes a 25% limit per discipline (PT, OT, SLP) for both combined group and concurrent therapy.

CMS has finalized the implementation of PDPM in a budget neutral manner and has updated the unadjusted federal per diems and related case mix groups (CMGs) and related Case Mix Indices (CMIs). Under CMIs, there are differences between RUG-IV and PDPM in terms of patient classifications and billing. CMS has reflected these differences by modifying the PDPM case mixed adjusted federal rates and associated indexes through the application of a CMI multiplier for each PDPM Group.

Medicare Part B Rehabilitation Requirements

We provide certain services under the Medicare Part B program, for which we are paid according to a fee schedule. Historically, such payments were limited by “therapy caps.” However, the Bipartisan Budget Act of 2018 permanently repealed all therapy caps while retaining and adding certain measures to ensure the appropriateness of therapy services. For instance, while there is no limit to the amount of medically necessary services a Medicare Part B beneficiary may receive, claims submitted in excess of certain thresholds must include a modifier as a confirmation that the services are medically necessary and are justified by appropriate documentation in the medical record. The modifier thresholds, which are defined separately for combined SLP and PT services and OT services, are $2,110 in 2021, $2,080 in 2020, and $2,040 in 2019. Additionally, claims submitted in excess of $3,000 for combined SLP and PT services and $3,000 for OT services are subject to a targeted medical review.

In November 2019, CMS issued the 2020 Medicare Physician Fee Schedule Final Rule that required the use of therapy assistant claim modifiers beginning in fiscal year 2020. Separately, the Balanced Budget Act of 2018 requires that beginning in fiscal year 2022, a 15% payment reduction must be applied when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day. The final rule clarified the meaning of “in whole or in part” to mean when 10% or more of the services are provided by a PTA or OTA. Under the 2020 Physician Fee Schedule, there were no decreases in PT and OT code payments in 2020.

In December 2020, CMS issued the 2021 Medicare Physician Fee Schedule Final Rule that updated payment rates and policies related to Medicare Part B services for fiscal year 2021. The changes effectively reduced payment rates for Medicare Part B therapy services by up to 9% across our industry. On December 27, 2020, in response to the ongoing COVID-19 pandemic, the Consolidated Appropriations Act of 2021 was signed into law and provided partial offsets to the rate reductions. For instance, the law provided rate relief of approximately 3.75% for fiscal year 2021 and suspended the 2.0% sequestration cuts through March 31, 2021. Additionally, the law delayed the implementation of a medical complexity add-on billing code for evaluation and management services by physicians through fiscal year 2023, which is expected to offset approximately one-third of the rate reductions over that period. We continue to evaluate options to mitigate the impact of the Medicare Part B rate reductions.

In May 2020, pursuant to its authority under COVID-19 emergency waivers, CMS approved the use of telehealth services for certain PT, OT, and SLP therapy services provided to Medicare Part B beneficiaries within a skilled nursing setting through the end of the public health emergency. CMS has permitted facilities to bill an originating site fee for telehealth services provided to Medicare Part B beneficiaries of the facility when the services are provided by a physician from a remote location through the end of the public health emergency.

The 2021 Medicare Physician Fee Schedule Final Rule also expanded coverage of certain telehealth therapy services, including increasing the frequency at which such services may be provided, through the end of the calendar year in which the COVID-19 public health emergency ends.

In December 2020, CMS updated the list of codes that describe Medicare Part B outpatient therapy services for fiscal year 2021. As part of this update, several new and existing codes that were introduced during the COVID-19 pandemic, including codes for certain telehealth services, were made permanent.

The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day. The implementation of MPPR includes 1) facilities that provide Medicare Part B SLP, OT, and

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PT services and bill under the same provider number; and 2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single day.

Medicare Annual Market Basket

Current law requires CMS to calculate an annual market basket update to the payment rates. Provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA) directed the agency to reduce that payment level by a calculated multi-factor productivity adjustment. The agency also retains the authority to review and adjust payments for corrections to previous year market baskets where over/under payment exceeded 0.05% between the projected market basket and the actual performance. Annually, on a federal fiscal year basis (October 1), the agency makes its payment changes. Normally, CMS issues proposed rules during April, providing 60-days for stakeholder input, and issues finalized rules 60 days prior to the start of the fiscal year. If there are no substantive changes in rules and regulations, the agency has the authority to issue rate adjustments in a notice, rather than a proposed rule. The notice must be issued 60 days before the beginning of the fiscal year.

On August 8, 2018, CMS issued a final rule for fiscal year 2019 outlining Medicare payment rates for skilled nursing facilities. A market basket increase of 2.4% was mandated by the Bipartisan Budget Act of 2018 effective October 1, 2018. Reimbursement for fiscal year 2019 was based on the current payment methodology using the Resource Utilization Group, Version IV (RUG-IV) model with one significant change, the addition of the Skilled Nursing Facility Value-Based Purchasing (see below) incentive multiplier.

On July 30, 2019, CMS released a final rule for skilled nursing facilities prospective payment services (SNF PPS) for fiscal year 2020 Medicare Part A services. The final rule made revisions from the proposed rule for the PDPM market basket increase and additional modifications to the skilled nursing facility Quality Reporting Program (QRP). PDPM replaced the existing case-mix classification methodology, RUG-IV, effective October 1, 2019. The final rule addresses specific issue areas, discussed below, related to the fiscal year 2020 requirements. The final rule provides for a net SNF PPS market basket update factor for skilled nursing facilities of 2.4% effective October 1, 2019. This is a full market basket update of 2.8% with no forecast error incurred and a 0.4% multifactor productivity adjustment.

On July 31, 2020, CMS issued a final rule providing a net market basket increase for skilled nursing facilities of 2.2 percent beginning October 1, 2020. This market basket update reflects a full market basket increase of 2.2 percentage points, no forecast error correction and no multifactor productivity adjustment. CMS estimates that the net market basket update would increase Medicare skilled nursing facility payments by approximately $750 million in fiscal year 2021.

Skilled Nursing Facility - Quality Measures Reporting Program (SNF QRP)

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed data reporting requirements for skilled nursing facilities and certain other post-acute care providers in an effort to improve Medicare beneficiary outcomes through shared-decision making, care coordination, and enhanced discharge planning. Beginning with federal fiscal year 2018, skilled nursing facilities that fail to submit required quality data are subject to a 2.0% reduction to the annual market basket update.

In March 2020, CMS granted providers temporary relief of SNF QRP reporting requirements in response to the COVID-19 pandemic. The reporting requirements were made optional for the period from October 1, 2019 through December 31, 2019 and waived entirely for the period from January 1, 2020 through June 30, 2020. Effective July 1, 2020, the reporting requirements resumed for providers.

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program

The Protecting Access to Medicare Act of 2014 (PAMA) required the establishment of a SNF-VBP Program. Effective October 1, 2018, the SNF-VBP Program allowed skilled nursing facilities to earn incentive payments based on the quality of care they provide to Medicare beneficiaries, as measured by a specified quality measure related to hospital readmissions. In order to fund the incentive payment pool, CMS withholds 2.0% of Medicare payments and then redistributes 60% of the withheld payments to skilled nursing facilities. Skilled nursing facilities are evaluated based on both improvement and achievement of their hospital readmission measure. Skilled nursing facilities also receive quarterly confidential feedback reports regarding their performance. CMS periodically publishes updates regarding the program’s administrative matters, such as scoring methodology.

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Sequestration of Medicare Rates

Medicare FFS payments are subject to mandatory reductions in federal spending of up to 2.0% per fiscal year, known as sequestration. In response to COVID-19, the CARES Act, as amended by the Consolidated Appropriations Act of 2021, temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements from May 1, 2020 through March 31, 2021. In exchange for this temporary suspension, the sequestration policy has been extended through 2030.

Medicare Advantage Plans

Medicare Advantage Plans, sometimes called Medicare Part C or MA Plans, are offered by private companies that are approved by CMS. Medicare Advantage Plans cover all Medicare services and manage care of patients through a network of doctors, hospitals and other providers. Reimbursement rates for nursing care are negotiated with the plans and are not set by skilled nursing facility PPS rules of payments. CMS has indicated that Medicare Advantage Plans can determine whether to incorporate any aspects of PDPM into their reimbursement methodology or use other appropriate reimbursement methodologies.

Commercial Insurance

A different type of insurance, commercial long-term care insurance, is also available to consumers. However, its role as a significant contributor to industry revenues has not been fully realized. Factors contributing to the lack of revenues include high premium costs and intermittent, often significant premium rate increases throughout the life of the policy and denials of coverage.

Private and Other Payors

Private and other payors consist primarily of self-pay individuals, family members or other third parties who directly pay for the services we provide.

Reimbursement for our Services

Reimbursement for Skilled Nursing Facilities

The majority of skilled nursing facility revenues in the U.S. come from Medicare and Medicaid, with the remainder of revenues derived from managed care and commercial insurance, other third-party sources and private pay. Typically, all patients that enter a skilled nursing facility begin as a short-term acute care patient and either get discharged or become long-term care residents. After a patient no longer qualifies for skilled care under Medicare, the reimbursement of costs incurred by a skilled nursing facility patient will be shifted to private pay (out of pocket) resources and then Medicaid if the patient qualifies.

Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Reimbursement for Assisted/Senior Living Facilities

Assisted/senior living facilities generate revenues primarily from private pay sources, including third-party insurance and self-pay, with only a small portion derived from government sources.

Reimbursement for Rehabilitation Services

Outside of therapy received during a Medicare Part A covered stay of up to 100 days, most of our rehabilitation therapy services are typically reimbursed under the Medicare Part B program. The payments made to our rehabilitation therapy services segment for services it provides to skilled nursing facilities are determined by negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered. In addition, this segment is also directly reimbursed from the Medicare Part B program, Medicaid, and other

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insurance companies through its certified outpatient rehabilitation agencies and group practices for services provided in assisted living facilities, homes and the community.

Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue

The revenue and operating environment for the post-acute and long-term care services we deliver has been significantly shaped by a series of healthcare laws passed by Congress and implemented by government entities. The broad healthcare reforms enacted as part of PPACA have been among the most significant of revisions. Embedded in this complex legislation were provisions redesigning the private insurance market place, expanding the obligations of Medicaid, empowering changes in Medicare and stimulating innovations in payment and care delivery. The implementation of the provisions of PPACA has shaped the policy landscape.

Our operating environment has been further influenced by specific provisions in other legislation, such as:

Provisions of PAMA mandated implementation of skilled nursing facilities value-based incentives based on hospital readmission performance; provisions including a 2% payment withholding and redistribution based on performance incentive provisions.
Provisions of the IMPACT Act established standardized patient assessment and quality performance measures for post-acute providers; provisions which are being implemented through specific regulations and instructions. This legislation mandated studies examining the feasibility of a unified post-acute care payment methodology.
Provisions of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) revised the payment methodology for physician and non-physician professional services stimulating the development of alternative payment models.
Provisions of the Bipartisan Budget Act of 2015 that required government agencies to update and annually index civil monetary penalties (CMPs). This provision has been implemented by rule making.
Provisions of the Notice of Observation Treatment and Implications for Care Eligibility Act implemented in 2016 requiring hospitals to inform Medicare beneficiaries whether services would qualify for the three-day inpatient requirement.
Provisions of the Bipartisan Budget Act of 2018, which, among other provisions, repeals effective January 1, 2018 the Medicare Part B Therapy Caps for PT/SLP and OT services. As signed into law, this legislation has provisions restricting the Medicare skilled nursing facilities PPS market basket index for fiscal year 2019 to 2.4%, limits the physician/non-physician fee schedules update for the coming year, and alters payment beginning in 2022 for services provided by therapy assistants.

The policies implemented by the former United States Presidential administration resulted in significant changes in legislation, regulation, implementation of Medicare, Medicaid, and government policy. Further, the 2020 United States Presidential and Congressional elections may significantly affect the existing regulatory framework and impact our business. We continually monitor these developments so we can respond to the changing regulatory environment impacting our business.

Medicaid Fiscal Accountability Regulation (MFAR)

In November 2019, CMS issued a proposed rule, the Medicaid Fiscal Accountability Regulation (MFAR), regarding the use of Medicaid supplemental payment programs and financing arrangements. In September 2020, CMS announced that it was withdrawing MFAR from its regulatory agenda. In January 2021, CMS formally withdrew MFAR from its regulatory agenda.

Medicaid Healthy Adult Opportunity (HAO) Demonstration Initiative

In January 2020, CMS announced an optional demonstration initiative, the Healthy Adult Opportunity (HAO), that would permit states to pursue a capped Medicaid financing model for certain Medicaid populations and the opportunity to share in program savings. The HAO will utilize Section 1115 waiver authority to provide coverage to adults not eligible for benefits under the state’s Medicaid state plan, while offering states increased flexibility in administering the benefits of such individuals. Specifically, the HAO targets adults under age 65 who are not eligible for Medicaid on the basis of disability or their need for long-term care services and supports, and who are not eligible under a state plan. Other very low-income parents, children, pregnant women, elderly adults, and people eligible on the basis of a disability will not be directly affected – except from the improvements that result from states reinvesting savings into strengthening their overall programs. Under this initiative, states may implement an “aggregate” (commonly referred to as a

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“block grant”) or per capita cap financing model. The HAO demonstrations generally will be approved for an initial five-year period from the date of implementation, and successful demonstrations may be renewed for a period of up to 10 years.

Skilled Nursing Facilities

Healthcare Reform Initiatives

We believe we have positioned our business and operations for success in a healthcare environment that rewards quality outcomes as opposed to volume of services provided. We believe that post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and payors and operate with scale will have a competitive advantage in an episodic payment environment. We believe our business strategies should position us to become a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay and hospital readmissions, more effectively manage healthcare costs and develop new care delivery and payment models. As the industry and its regulators continue to engage in this environment, we will continue to adapt to changes that are ultimately made to the delivery system.

Medicare Shared Savings Program (MSSP)

The Medicare Shared Savings Program (MSSP) is an alternative payment model created by CMS that moves the payment system towards a more value-based model through the promotion of accountability for a patient population, coordination of care for Medicare beneficiaries, and encouragement of investment in high quality and efficient services. Under MSSP, providers and suppliers are able to create an ACO, which in turn agrees to be held accountable for the quality, cost, and experience of care of an assigned Medicare FFS beneficiary population. MSSP has various risk-sharing tracks that allow ACOs to select an arrangement. Participation in the program grants certain advantages to ACOs. For example, eligible ACOs may apply for a waiver to the 3-day qualifying stay rule.

Effective January 1, 2016, LTC ACO, LLC (formerly known as Genesis Healthcare ACO, LLC) began participating in MSSP through our physician services division. Successful participation requires us to carefully document delivery, meet specific performance criteria and meet specific savings targets. Our physician services providers make more than half a million visits annually to both short- and long-stay patients, helping them improve overall healthcare quality and reduce unnecessary hospital readmissions. As of December 2020, LTC ACO had contracted with more than 200 unaffiliated long-term care facilities and in excess of 300 unaffiliated primary care providers. LTC ACO continues to execute against its plan to expand its resident attribution, not only inside Genesis but also more broadly throughout the skilled nursing industry. 

Effective July 1, 2019, we entered into a new MSSP agreement with CMS, which is scheduled to remain in effect through December 31, 2024. Under this agreement, we can share in up to 75% of the savings with CMS, but we are also at risk for 40% of any costs in excess of CMS-defined targets, which is further capped at 15% of our annualized benchmark costs under management. For the first half of 2019, we operated under our initial MSSP agreement, which allowed us to share in up to 50% of the savings with CMS, while assuming no downside risk. With five years of participation under MSSP, we have gained valuable experience driving better outcomes and improved quality, managing episodic cost and developing in-house capabilities to predict program performance. 

2020 Performance Year

Based upon the data available to us with respect to the 2020 performance year, which covered the period from January 1, 2020 through December 31, 2020, we have not recognized any cumulative MSSP income.  The final reconciliation and settlement of the 2020 performance year is expected to be received from CMS in the third quarter of 2021.  We will continue to closely monitor and evaluate our estimated performance under the 2020 performance year and will adjust our MSSP income accordingly.

2019 Performance Year

During the 2019 performance year, which covered the period from January 1, 2019 through December 31, 2019, we managed approximately 5,800 Medicare fee-for-service beneficiaries under the MSSP with annualized Medicare spend of more than $160.0 million. In August 2020, CMS notified Genesis that it reached the minimum savings rate set by CMS required for MSSP gain share for the 2019 performance year. In October 2020, we received our final reconciliation and settlement of the 2019 performance year, which yielded MSSP shared savings of approximately $18.8 million and income of approximately $17.0 million net of participating provider distributions.

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2018 Performance Year

During the 2018 performance year, which covered the period from January 1, 2018 through December 31, 2018, we managed, under an upside-only risk track, approximately 6,000 Medicare FFS beneficiaries under MSSP with annualized Medicare spend of more than $155.0 million.  In August 2019, we were informed by CMS that we reached the minimum savings rate set by CMS required for MSSP gain share for 2018.  As a result, in the third quarter of 2019, we recognized MSSP income of approximately $1.7 million, net of expenses and provider distributions.

Government Regulation

General

Healthcare is an area of extensive and frequent regulatory change. Changes in the law or new interpretations of existing laws may have a significant impact on our methods and costs of doing business. Our subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies. In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians. Such laws include, but are not limited to, the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect our skilled nursing facilities, assisted/senior living facilities and outpatient rehabilitation agencies to verify that we continue to comply with the applicable regulations and standards. We must pass these inspections to remain licensed under state laws, to comply with our Medicare and Medicaid provider agreements, and, in some instances, to continue our participation in the Veterans Administration program. We can only participate in these third-party payment programs if inspections by regulatory authorities reveal that our facilities and agencies are in substantial compliance with applicable requirements. In the ordinary course of business, we may receive notices from federal or state regulatory authorities alleging deficiencies in certain regulatory practices. These statements of deficiency may require us to take corrective action to regain and maintain compliance. In some cases, federal or state regulators may impose other remedies including imposition of CMPs, temporary payment bans, loss of certification as a provider in the Medicare and/or Medicaid program or revocation of a state operating license.

We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny. In the ordinary course of business, providers are subject to inquiries, investigations and audits by federal and state agencies related to compliance with participation and payment rules under government payment programs. These inquiries may originate from the HHS Office of the Inspector General (OIG) audits, state Medicaid agencies, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies. In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded CMPs that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs. We vigorously contest these matters where appropriate; however, there are significant legal and other expenses involved that consume our financial and personnel resources. Expansion of enforcement activity could adversely affect our business, financial condition or the results of our operations.

Five-Star Quality Rating

In 2008, CMS created the Five-Star Quality Rating System (the Star Ratings) to help consumers, families and caregivers compare skilled nursing facilities and choose providers more easily. Skilled nursing facilities receive an overall star rating from one to five stars based on three components: health inspection rating (survey results), quality measure calculations and staffing data. Each of the components receives star rankings as well. Skilled nursing facilities with five stars are considered to have much above average quality and skilled nursing facilities with one star are considered to have quality much below average. Families are increasingly consulting the Star Ratings prior to placing a family member in a skilled nursing facility and hospital referral partners are increasingly narrowing their panels of skilled nursing facilities to include only those with at least a three-star overall rating. However, CMS has acknowledged that there are limitations in using the Star Ratings to make inferences about nursing center quality, including (i) variations by state in survey processes, (ii) the use of payroll based data that may not fully reflect actual staffing patterns and (iii) quality measures do not represent all aspects of care that could be important to consumers. The foundation of the Star Ratings is the annual survey.

In April 2016, CMS added six quality measures to the Nursing Home Compare website. These quality measures include: successful discharges to the community; visits to the emergency department; rehospitalizations; improvements in function; long-stay

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residents whose ability to move independently worsened; and antianxiety or hypnotic medications. Five quality measures were used to compute Star Ratings in July 2016 (antianxiety or hypnotic medications were excluded). Starting in January 2017, the five quality measures have the same weight as the other quality measures. This change was the largest addition of quality measures to Nursing Home Compare since 2003 and nearly doubles the number of short-stay measures about key short-stay outcomes. Short-stay measures reflect care provided to residents who are in the nursing home for 100 days or less, while long-stay measures reflect care for residents who are in the nursing home for more than 100 days. The health inspection star rating for surveys was frozen in February 2018 and did not reflect surveys conducted between November 28, 2017 through the first quarter of 2019. This freeze was in anticipation of the phase 2 implementation of the Requirements of Participation on the same date, as well as the implementation of the new Long-Term Care Survey Process. CMS notified providers that all surveys conducted during the freeze would be incorporated into the health inspection star.

In April 2019, CMS implemented changes to the Five-Star Quality Rating System. These changes included a lifting of the freeze, revisions to the inspection process, adjustment of staffing rating thresholds, including increased emphasis on registered nurse staffing, implementation of new quality measures and changes in the scoring of various quality measures. CMS added two new quality measures: long-stay emergency department transfers and long-stay hospitalizations. CMS also established separate quality ratings for short-stay and long-stay residents and will now provide separate short-stay and long-stay ratings in addition to the overall quality measure rating.

The impact of the most recent five star rating methodology was significant across the industry. CMS initially estimated the changes would cause 47% of all nursing centers to lose stars in their "Quality" ratings. In addition, 33% would lose stars in their "Staffing" ratings, and 36% would lose stars in their "Overall" ratings. Accordingly, despite no significant changes in our staffing levels or quality of our care, these changes to the staffing and quality thresholds had a negative impact on our star rating in 2019.

As a result of the COVID-19 pandemic, CMS temporarily waived certain reporting timeframes and suspended certain inspections that impacted the underlying data used for calculating star-ratings. This resulted in CMS freezing affected quality measures by only using data collected for periods not impacted by the COVID-19 waivers. The star-rating calculations resumed on January 27, 2021.

The table below summarizes the Star Ratings of our qualified skilled nursing facilities:

    

Year ended December 31, 

    

2020

2019

 

Number of skilled nursing facilities

 

289

 

355

Number of 3, 4 and 5-Star skilled nursing facilities

 

171

 

193

Percentage of 3, 4 and 5-Star skilled nursing facilities

 

59

%  

 

54

%  

Payroll-Based Journal

One of the CMS initiatives authorized by the PPACA was to improve the accuracy of nursing home staffing data. CMS initiated and rolled-out an electronic payroll-based journal (PBJ) requirement effective July 1, 2016. This system allows staffing and census information to be collected on a regular and more frequent basis than previously collected. It is also auditable to ensure accuracy. All long-term care facilities have access to this system at no cost to facilities. Effective January 2018, the Staffing Star component of 5 star is calculated using the data collected from PBJ coupled with MDS data.

Requirements of Participation

In October 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.

Changes finalized in this rule include:

Strengthening the rights of long-term care facility residents.
Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse.
Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents.

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Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences.
Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services.
Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use.

The new requirements were implemented in three phases. The regulations included in the first phase were effective November 28, 2016; the regulations included in the second phase were effective November 28, 2017; the regulations included in third phase were effective November 28, 2019. The total costs associated with implementing the new regulations have been absorbed into our general operating costs. Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations. We have timely implemented the changes required under the three phases, in all material respects. In July 2019, CMS proposed revisions to the requirements of participation, which if finalized, would result in the removal or simplification of certain requirements that could potentially impede or divert resources away from the provision of high-quality resident care, thus increasing facilities’ ability to devote their resources to improving resident care.

Civil and Criminal Fraud and Abuse Laws and Enforcement

Federal and state healthcare fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for submitting claims for services that are not provided; that have been inadequately provided; billed in an incorrect manner, intentionally or accidentally, or other than as actually provided; not medically necessary; provided by an improper person; accompanied by an illegal inducement to utilize or refrain from utilizing a service or product; or billed or coded in a manner that does not otherwise comply with applicable governmental requirements. Penalties also may be imposed for violation of anti-kickback and patient referral laws.

Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate healthcare fraud and abuse, including exclusion of the provider from participation in the Medicare and Medicaid programs, imposition of civil and criminal fines, suspension of payments and, in the case of individuals, imprisonment.

We have internal policies and procedures, including a program designed to facilitate compliance with and to reduce exposure for violations of these and other laws and regulations. However, because enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that our internal policies and procedures will significantly reduce or eliminate exposure to civil or criminal sanctions or adverse administrative determinations.

Anti-Kickback Statute

Federal law commonly referred to as the Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of anything of value, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by a federal healthcare program such as Medicare or Medicaid. Violation of the Anti-Kickback Statute is a felony, and sanctions for each violation include imprisonment of up to five years, significant criminal fines, significant CMPs plus three times the amount claimed or three times the remuneration offered, and exclusion from federal healthcare programs (including Medicare and Medicaid). Additionally, violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals applicable to all payors.

We are required under the Medicare Requirements of Participation and some state licensing laws to contract with numerous healthcare providers and practitioners, including physicians, hospitals and hospice agencies and to arrange for these individuals or entities to provide services to our residents and patients. In addition, we have contracts with other suppliers, including pharmacies, laboratories, x-ray companies, ambulance services and medical equipment companies. Some of these individuals or entities may refer, or be in a position to refer, patients to us, and we may refer, or be in a position to refer, patients to these individuals or entities. Certain safe harbor provisions have been created so that although a relationship could potentially implicate the federal anti-kickback statute, it would not be treated as an offense under the statute. We attempt to structure these arrangements in a manner that falls within one of the safe harbors. Some of these arrangements may not ultimately satisfy the applicable safe harbor requirements, but failure to meet the safe harbor does not necessarily mean an arrangement is illegal.

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We believe that our arrangements with providers, practitioners and suppliers are in compliance with the Anti-Kickback Statute and similar state laws. However, if any of our arrangements with third parties were to be challenged and found to be in violation of the Anti-Kickback Statute, we could be required to repay any amounts we received, subject to criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business, financial condition or results of operations.

Stark Law

Federal law commonly known as the Stark Law prohibits a physician from making referrals for particular healthcare services to entities with which the physician (or an immediate family member of the physician) has a financial relationship if the services are payable by Medicare or Medicaid. If an arrangement is covered by the Stark Law, the requirements of a Stark Law exception must be met for the physician to be able to make referrals to the entity for designated health services and for the entity to be able to bill for these services. Although the term “designated health services” does not include long-term care services, some of the services provided at our skilled nursing facilities and other related business units are classified as designated health services, including PT, SLP and OT services. The term “financial relationship” is defined very broadly to include most types of ownership or compensation relationships. The Stark Law also prohibits the entity receiving the referral from seeking payment from the patient or the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral.

The Stark Law contains exceptions for certain physician ownership or investment interests in, and certain physician compensation arrangements with, certain entities. If a compensation arrangement or investment relationship between a physician, or immediate family member, and an entity satisfies the applicable requirements for a Stark Law exception, the Stark Law will not prohibit the physician from referring patients to the entity for designated health services. The exceptions for compensation arrangements cover employment relationships, personal services contracts and space and equipment leases, among others.

If an entity violates the Stark Law, it could be subject to significant civil penalties. The entity also may be excluded from participating in federal and state healthcare programs, including Medicare and Medicaid. If the Stark Law were found to apply to our relationships with referring physicians and no exception under the Stark Law were available, we would be required to restructure these relationships or refuse to accept referrals for designated health services from these physicians. If we were found to have submitted claims to Medicare or Medicaid for services provided pursuant to a referral prohibited by the Stark Law, we would be required to repay any amounts we received from Medicare or Medicaid for those services and could be subject to CMPs. Further, we could be excluded from participating in Medicare and Medicaid and other federal and state healthcare programs. If we were required to repay any amounts to Medicare or Medicaid, subjected to fines, or excluded from the Medicare and Medicaid Programs, our business, financial condition or results of operations could be harmed significantly.

As directed by PPACA, in 2010 CMS released a self-referral disclosure protocol (SRDP) for potential or actual violations of the Stark Law. Under SRDP, CMS states that it may, but is not required to, reduce the amounts due and owing for a Stark Law violation, and will consider the following factors in deciding whether to grant a reduction: (1) the nature and extent of the improper or illegal practice; (2) the timeliness of the self-disclosure; (3) the cooperation in providing additional information related to the disclosure; (4) the litigation risk associated with the matter disclosed; and (5) the financial position of the disclosing party.

Many states have physician relationship and referral statutes that are similar to the Stark Law. These laws generally apply regardless of the payor. We believe that our operations are structured to comply with the Stark Law and applicable state laws with respect to physician relationships and referrals. However, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties. This, in turn, could significantly harm our business, financial condition or results of operations.

False Claims Act

Federal and state laws prohibit the submission of false claims and other acts that are considered fraudulent, wasteful or abusive. Under the federal FCA, actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties, who are often referred to as “qui tam relators” or “relators,” are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam relator actions have increased significantly in recent years. The use of private enforcement actions against healthcare providers has increased dramatically, in part because the relators are entitled to share in a portion of any settlement or judgment.

An FCA violation occurs when a provider knowingly submits a claim for items or services not provided. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by creating liability for knowingly retaining an overpayment received from the government and broadening protections for whistleblowers. The submission of false claims or the failure to timely repay

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overpayments may lead to the imposition of significant CMPs, significant criminal fines and imprisonment, and/or exclusion from participation in state and federally-funded healthcare programs, including the Medicare and Medicaid programs.

Allegations of poor quality of care can also lead to FCA actions under a theory of worthless services. Worthless services cases allege that although care was provided it was so deficient that it was tantamount to no service at all.

In recent years, prosecutors and relators are increasingly bringing FCA claims based on the implied certification theory as an expansion of the scope of the FCA. Under the implied certification theory, a violation of the FCA occurs when a provider’s request for payment implies a certification of compliance with the applicable statutes, regulations or contract provisions that are preconditions to payment. This development has increased the risk that a healthcare company will have to defend a false claims action, pay fines and treble damages or settlement amounts or be excluded from the federal and state healthcare programs as a result of an investigation arising out of the FCA. Many states have enacted similar laws providing for imposition of civil and criminal penalties for the filing of fraudulent claims.

Because we submit thousands of claims to Medicare each year, and there is a relatively long statute of limitations under the FCA, there is a risk that intentional, or even negligent or recklessly submitted claims that prove to be incorrect, or even billing errors, cost reporting errors or lapses in statutory or regulatory compliance with regard to the provision of healthcare services (including, without limitation the Anti-Kickback Statue and the federal self-referral law discussed above), could result in significant civil or criminal penalties against us. For information regarding matters in which the government is pursuing, or has expressed an intent to pursue, legal remedies against us under the FCA and similar state laws, see Note 21 – "Commitment and Contingencies - Legal Proceedings."

We believe that our operations comply with the FCA and similar state laws. However, if our claims practices were challenged and found to violate the applicable laws, any finding that we are not in compliance with these laws could require us to change our operations or could subject us to penalties or make us ineligible to participate in certain government funded healthcare programs, which could in turn significantly harm our business, financial condition or results of operations.

Patient Privacy and Security Laws

There are numerous legislative and regulatory requirements at the federal and state levels addressing patient privacy and security of health information. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains provisions that require us to adopt and maintain business procedures designed to protect the privacy, security and integrity of patients' individual health information. States also have laws that apply to the privacy of healthcare information. We must comply with these state privacy laws to the extent that they are more protective of healthcare information or provide additional protections not afforded by HIPAA.

HIPAA's security standards were designed to protect specified information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure. These standards have had and are expected to continue to have a significant impact on the healthcare industry because they impose extensive requirements and restrictions on the use and disclosure of identifiable patient information. In addition, HIPAA established uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of certain individually identifiable health information.

The Health Information Technology for Clinical Health Act of 2009 (HITECH Act) expanded the requirements and noncompliance penalties under HIPAA and require correspondingly intensive compliance efforts by companies such as ours, including self-disclosures of breaches of unsecured health information to affected patients, federal officials, and, in some cases, the media. These laws make unauthorized employee access illegal and subject to self-disclosure and penalties. Other states may adopt similar or more extensive breach notice and privacy requirements. Compliance with these regulations could require us to make significant investments of money and other resources. We believe that we are in substantial compliance with applicable state and federal regulations relating to privacy and security of patient information. However, if we fail to comply with the applicable regulations, we could be subject to significant penalties and other adverse consequences.

Certificates of Need (CON) and Other Regulatory Matters

There are CON programs in the majority of states and the District of Columbia, many of which are states in which we operate skilled nursing facilities. We are required in these jurisdictions to obtain CON approval or exemption prior to certain changes including without limitation, change in ownership, capital expenditures over certain limits, development of a new facility or expansion of services of an existing facility or service in order to control overdevelopment of healthcare projects. Certain states that do not have CON programs may have other laws or regulations that limit or restrict the development or expansion of healthcare projects. In the event we choose to develop or expand the operations of our subsidiaries, the development or expansion could be affected adversely by the inability to obtain the necessary approvals, changes in the standards applicable to such approvals or possible delays and expenses

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associated with obtaining such approvals. Failure to comply with state requirements with CON or other regulations that address development or expansion of services could adversely affect the progress or completion of a healthcare project.

State Operating License Requirements

We are required to obtain state licenses, certificates or permits to operate each of our skilled nursing facilities. Many states require similar licenses or certificates for assisted/senior living facilities, and some states require a license to operate outpatient agencies. Medicare requires compliance with applicable state laws as a requirement of participation. In addition, healthcare professionals and practitioners are required to be licensed in most states. We take measures to ensure that our healthcare professionals are properly licensed and participate in required continuing education programs. We believe that our operating companies and personnel that provide these services have required licenses or certifications necessary for our current operations. Failure to obtain, maintain or renew a required license, permit or certification could adversely affect our ability to bill for services or operate in the ordinary course of business.

Federal Health Care Reform

In addition to the matters described above affecting Medicare and Medicaid participating providers, PPACA enacted several reforms with respect to skilled nursing facilities, including payment measures to realize significant savings of federal and state funds by deterring and prosecuting fraud and abuse in both the Medicare and Medicaid programs. While many of the provisions of PPACA will not take effect for several years or are subject to further refinement through the promulgation of regulations, some key provisions of PPACA are presently effective.

Expanded CMPs and Escrow Provisions. PPACA includes expanded CMP and related provisions applicable to all Medicare and Medicaid providers. CMS rules adopted to implement applicable provisions of PPACA also provide that assessed CMPs may be collected and placed in whole or in part into an escrow account pending final disposition of the applicable administrative and judicial appeals processes. To the extent our businesses are assessed large CMPs that are collected and placed into an escrow account pending lengthy appeals, such actions could adversely affect our liquidity and results of operations.
Nursing Home Transparency Requirements. In addition to expanded CMP provisions, PPACA imposes new transparency requirements for Medicare-participating nursing facilities. In addition to previously required disclosures regarding a facility's owners, management and secured creditors, PPACA expanded the required disclosures to include information regarding the facility's organizational structure, additional information on officers, directors, trustees and "managing employees" of the facility (including their names, titles, and start dates of services), and information regarding certain parties affiliated with the facility. The transparency provisions could result in the potential for greater government scrutiny and oversight of the ownership and investment structure for skilled nursing facilities, as well as more extensive disclosure of entities and individuals that comprise part of skilled nursing facilities' ownership and management structure.
Suspension of Payments During Pending Fraud Investigations. PPACA provides the federal government with expanded authority to suspend Medicare and Medicaid payments if a provider is investigated for allegations or issues of fraud. This suspension authority creates a new mechanism for the federal government to suspend both Medicare and Medicaid payments for allegations of fraud, independent of whether a state exercises its authority to suspend Medicaid payments pending a fraud investigation. To the extent the suspension of payments provision is applied to one of our businesses for allegations of fraud, such a suspension could adversely affect our liquidity and results of operations.
Overpayment Reporting and Repayment; Expanded False Claims Act Liability. PPACA enacted several important changes that expand potential liability under the federal FCA. Overpayments related to services provided to both Medicare and Medicaid beneficiaries must be reported and returned to the applicable payor within specified deadlines, or else they are considered obligations of the provider for purposes of the federal FCA. This new provision substantially tightens the repayment and reporting requirements generally associated with operations of healthcare providers to avoid FCA exposure.
Home- and Community-Based Services. PPACA provides that states can provide home- and community-based attendant services and supports through the Community First Choice State plan option. States choosing to provide home- and community-based services under this option must make such services available to assist with activities of daily living and health related tasks under a plan of care agreed upon by the individual and his/her representative. PPACA also includes additional measures related to the expansion of home- and community-based services and authorizes states to expand coverage of home- and community-based services to individuals who would not otherwise be eligible for them. The expansion of home- and community-based services could reduce the demand for the facility-based services that we provide.

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Health Care-Acquired Conditions. PPACA provides that the Secretary of HHS must prohibit payments to states for any amounts expended for providing medical assistance for certain medical conditions acquired during the patient's receipt of healthcare services. The CMS regulation implementing this provision of PPACA prohibits states from making payments to providers under the Medicaid program for conditions that are deemed to be reasonably preventable. It uses Medicare's list of preventable conditions in inpatient hospital settings as the base (adjusted for the differences in the Medicare and Medicaid populations) and provides states the flexibility to identify additional preventable conditions and settings for which Medicaid payment will be denied.

The provisions of PPACA discussed above are examples of recently enacted federal health reform provisions that we believe may have a material impact on the long-term care industry generally and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that other provisions of PPACA may be interpreted, clarified, or applied to our businesses in a way that could have a material adverse impact on our business, financial condition and results of operations. Similar federal and/or state legislation that may be adopted in the future could have similar effects.

Insurance and Related Risks

We maintain a variety of types of insurance, including general and professional liability, workers' compensation, fiduciary liability, property, cyber/privacy liability, directors' and officers' liability, crime, boiler and machinery, automobile liability, employment practices liability and earthquake and flood. We believe that our insurance programs are adequate and where there has been a direct transfer of risk to the insurance carrier, our risk is limited to the cost of the premium. We self-insure a significant portion of our potential liabilities for several risks, including certain types of general and professional liability, workers’ compensation, automobile liability and health benefits. To the extent our insurance coverage is insufficient or unavailable to cover losses that would otherwise be insurable, or to the extent that our estimates of anticipated liabilities that we self-insure are significantly lower than the actual self-insured liabilities that we incur, our business, financial condition or results of operations could be materially and adversely affected. For additional information regarding our insurance programs, see Note 21 – “Commitments and Contingencies – Loss Reserves for Certain Self-Insured Programs,” in the financial statements included elsewhere in this report.

We have developed a risk management program intended to control our insurance and professional liability costs. As part of this program, we have implemented an arbitration agreement program at each of our nursing facilities under which, upon admission and to the extent permitted under existing regulations, patients are requested (but not required) to execute an agreement that requires disputes to be arbitrated instead of litigated in court. We believe that this program accelerates resolution of disputes and reduces our liability exposure and related costs. We have also established an incident reporting process that involves the provision of tracking and trending data to our facility administrators for purposes of quality assurance and improvement. We apply an enterprise risk management program to continually evaluate risks and opportunities impacting the business.

Environmental Matters

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. As a healthcare provider, we face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste management and disposal, asbestos management, response to mold and lead-based paint in our facilities and employee safety.

In our role as owner of subsidiaries which operate our facilities (including our leased facilities), we also may be required to investigate and remediate hazardous substances that are located on the property, including any such substances that may have migrated off, or discharged or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. These activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. We believe that we are in material compliance with applicable environmental and occupational health and safety requirements. However, there can be no assurance that we will not incur environmental liabilities in the future, and such liabilities may result in material adverse consequences to our business, financial condition or results of operations.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are filed with the SEC. Such reports and other information filed by us with the SEC are available free of charge at the investor relations section of our website at www.genesishcc.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Copies are also available, without charge, by writing to Genesis Healthcare, Inc. Investor Relations, 101 East State Street, Kennett Square, PA

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19348. The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The inclusion of our website address in this annual report does not include or incorporate by reference the information on our website into this annual report.

Company History

Genesis Healthcare, Inc., a Delaware corporation, was incorporated in October 2005 under the name of SHG Holding Solutions, Inc., and subsequently changed its name to Skilled Healthcare Group, Inc. (Skilled). On February 2, 2015, Skilled combined its businesses and operations (the Combination) with FC-GEN Operations Investment, LLC, a Delaware limited liability company (FC-GEN), pursuant to a Purchase and Contribution Agreement dated August 18, 2014. In connection with the Combination, Skilled changed its name to Genesis Healthcare, Inc.

In 2007, private equity funds managed by affiliates of Formation Capital, LLC and certain other investors acquired all the outstanding shares of Genesis HealthCare Corporation (GHC). In 2011, (i) GHC transferred to FC-GEN its business of operating and managing senior housing and care facilities, its joint venture entities and its other ancillary businesses, (ii) all the outstanding shares of GHC were sold to Welltower Inc. (Welltower) for purposes of transferring the ownership of GHC’s senior housing facilities to Welltower and (iii) FC-GEN entered into a master lease agreement with Welltower pursuant to which FC-GEN leased back the senior housing facilities that it had transferred ownership to Welltower.

Unless the context otherwise requires, references in this report to the "Company" include the predecessors of Genesis Healthcare, Inc., including GHC, prior to 2011.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, results of operations or liquidity in future periods. We operate in a rapidly changing and highly regulated environment that involves a number of risks and uncertainties, some of which are highlighted below and others are discussed elsewhere in this report. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. The following risk factors are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, results of operations, liquidity and stock price.

Risk Factors Summary

Risks Related to Reimbursement and Regulation of our Business

reductions and/or delays in Medicare or Medicaid reimbursement rates, or changes in the rules governing the Medicare or Medicaid programs could have a material adverse effect on our revenues, financial condition and results of operations;
reforms to the U.S. healthcare system that have imposed new requirements on us and uncertainties regarding potential material changes to such reforms;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
recently enacted changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical professionals;
we are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance;
our physician services operations are subject to corporate practice of medicine laws and regulations. Our failure to comply with these laws and regulations could have a material adverse effect on our business and operations;
we face inspections, reviews, audits and investigations under federal and state government programs, such as the Department of Justice. These investigations and audits could result in adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition, and reputation;

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Risks Relating to Our Operations

the extent to which the COVID-19 pandemic continues to materially and adversely affect our patients, staff, operations, financial condition, results of operations, compliance with financial covenants and liquidity will depend on future developments, including the measures taken by public and private entities in response to the pandemic, which are highly uncertain and cannot be predicted;
litigation or investigations regarding COVID-19 could materially and adversely affect our financial condition, results of operations, compliance with financial covenants and liquidity;
our success being dependent upon retaining key executives and personnel;
it can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees;
significant legal actions, which are commonplace in our industry, could subject us to increased operating costs, which could materially and adversely affect our results of operations, liquidity, financial condition, and reputation;
insurance coverages, including professional liability coverage, may become increasingly expensive and difficult to obtain for health care companies, and our self-insurance may expose us to significant losses;
failure to maintain effective internal control over financial reporting could have an adverse effect on our ability to report on our financial results on a timely and accurate basis;
we may be unable to reduce costs to offset decreases in our patient census levels or other expenses timely and completely;
completed and future acquisitions may consume significant resources, may be unsuccessful and could expose us to unforeseen liabilities and integration risks;
we lease a significant number of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions, special charges and leases that are not economically efficient in the current business environment;
our substantial indebtedness, scheduled maturities and disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock;
exposure to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses;

Risks Related to Ownership of Our Class A Common Stock

the liquidity of our shares of common stock will be adversely affected by our delisting from the New York Stock Exchange (NYSE) and the plan to deregister, and our ability to raise capital could be significantly impaired;
some of our directors are significant stockholders or representatives of significant stockholders, which may present issues regarding diversion of corporate opportunities and other potential conflicts.

Risks Related to Reimbursement and Regulation of our Business

Reductions in Medicare reimbursement rates, or changes in the rules governing the Medicare program could have a material adverse effect on our revenues, financial condition and results of operations.

We receive a significant portion of our revenue from Medicare, which accounted for 21% of our consolidated revenue during 2020 and 20% in 2019. In addition, many private payors base their reimbursement rates on the published Medicare rates or, in the case of our rehabilitation therapy services customers, are themselves reimbursed by Medicare for the services we provide. Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicare program that are disadvantageous to our business or industry, our business and results of operations will be adversely affected.

The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other

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types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. For example, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013. Subsequent actions by Congress extended sequestration through 2023.

In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business include:

administrative or legislative changes to base rates or the bases of payment;

limits on the services or types of providers for which Medicare will provide reimbursement;

changes in methodology for patient assessment and/or determination of payment levels;

the reduction or elimination of annual rate increases; or

an increase in co-payments or deductibles payable by beneficiaries.

Among the important changes in statute that are being implemented by CMS include provisions of the IMPACT Act. This law imposes a stringent timeline for implementing benchmark quality measures and data metrics across post-acute care providers (Long Stay Hospitals, IRFs, Skilled Nursing Facilities and Home Health Agencies). The enactment also mandates specific actions to design a unified payment methodology for post-acute providers. CMS is in the process of promulgating regulations to implement provisions of this enactment. Depending on the final details, the costs of implementation could be significant. The failure to meet implementation requirements could expose providers to fines and payment reductions.

Reductions in reimbursement rates or the scope of services being reimbursed could have a material, adverse effect on our revenue, financial condition and results of operations or even result in reimbursement rates that are insufficient to cover our operating costs. Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Reductions in Medicaid reimbursement rates or changes in the rules governing the Medicaid program could have a material, adverse effect on our revenues, financial condition and results of operations.

A significant portion of reimbursement for long-term care services comes from Medicaid, a joint federal-state program purchasing healthcare services for the low income and indigent as well as certain higher-income individuals with significant health needs. Under broad federal criteria, states establish rules for eligibility, services and payment. Medicaid is our largest source of revenue, accounting for 59% of our consolidated revenue during 2020 and 58% in 2019. Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federal efforts to continue for the foreseeable future. The Medicaid program and its reimbursement rates and rules are subject to frequent change at both the federal and state level. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which our services are reimbursed by state Medicaid plans. To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements commonly referred to as provider taxes. Under provider tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider's total revenue. There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider tax-related Medicaid expenditures could have a significant and adverse effect on states' Medicaid expenditures, and as a result could have a material and adverse effect on our business, financial condition or results of operations.

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Our revenue could be impacted by a shift to value-based reimbursement models, such as PDPM.

Effective October 1, 2019, a new case-mix classification system called PDPM replaced the existing case-mix classification system, RUG-IV. PDPM will focus more on the clinical condition of the patient and less on the volume of services provided. The following represent examples of potential risks associated with PDPM:

Future reimbursement levels. The final rule indicates that payments under PDPM will be budget neutral. CMS has made assumptions in the final rule as to the comparison of payments under RUG-IV to PDPM in fiscal year 2020. This estimate determined that a parity adjustment would be required to increase PDPM payments to bring them equal to what they would have been under RUG-IV payments. This increase, for fiscal year 2020, would achieve budget neutrality. However, the risk to providers is that going forward from fiscal year 2020 a lower parity adjustment could be applied to recapture any exceptional overpayments to providers caused by overestimating the parity adjustment. With the increased focus on therapy utilization under RUGs IV, there is concern as to the accuracy of the parity adjustment and how closely it will reflect the data that will be captured under PDPM where the focus is on the clinical condition of the patient in lieu of resource utilization. In addition, the entire parity adjustment could be removed by CMS and this would cause a drastic reduction in payments.

Medicare Managed Care Programs and Rates. The introduction of PDPM in October of 2019 was anticipated to create reimbursement challenges due to many insurance plans reliance on RUG-IV. Most managed care plans that had reimbursed the skilled nursing industry through the RUG-IV methodology, converted to PDPM. Plans that converted to PDPM did not result in any negative reimbursement impact to us. A number of managed care plans elected to not convert to PDPM. Instead, these managed care plans changed their reimbursement methodology into a levels of care per diem rate. The adoption of this methodology resulted in reimbursement below the prior RUG-IV levels of reimbursement.

Impact on Medicaid Reimbursement. Certain state Medicaid programs currently use patient data collected from the MDS to support RUG-based reimbursement models. CMS has delayed changes to the MDS that would impact the availability of data elements needed to support some RUG-based reimbursement models. As a result of this delay PDPM has had minimal impact to state reimbursement models. Currently all MDS reimbursement items needed to maintain an existing state reimbursement model are available on the Omnibus Budget Reconciliation Act (OBRA) MDS.

Reforms to the U.S. healthcare system have imposed new requirements upon us.

PPACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) included sweeping changes to how healthcare is paid for and furnished in the U.S. It has imposed new obligations on skilled nursing facilities, requiring them to disclose information regarding ownership, expenditures and certain other information. Moreover, the law requires skilled nursing facilities to electronically submit verifiable data on direct care staffing. CMS rules implementing these reporting requirements became effective on July 1, 2016.

To address potential fraud and abuse in federal healthcare programs, including Medicare and Medicaid, PPACA includes provider screening and enhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting false claims. It also provides funding for enhanced anti-fraud activities. PPACA imposes an enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs. PPACA also provides the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the Secretary of HHS determines that good cause exists not to suspend payments. If one or more of our affiliated facilities were to experience an extended payment suspension for allegations of fraud, such a suspension could adversely affect our consolidated results of operations and liquidity.

PPACA gave authority to HHS to establish, test and evaluate alternative payment methodologies for Medicare services. Various payment and services models have been developed by the Centers for Medicare and Medicaid Innovations. Current models provide incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

PPACA attempts to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care. One of these key delivery system reforms is the encouragement of ACOs, which will facilitate coordination

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and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such categories as clinical processes and outcomes of care, patient experience and utilization of services. Initiatives by managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital readmissions and to divert referrals to home health or other community-based care settings may have an adverse impact on our census and length of stays.

In addition, PPACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities, including measures and performance standards regarding preventable hospital readmissions. Beginning October 1, 2018, HHS began withholding 2% of Medicare payments from all skilled nursing facilities and distributing this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to hospitals. In addition to the requirements that are being implemented, legislation is pending in Congress to broaden the value-based purchasing requirements featuring a payment withholding designed to fund the program across all post-acute services. We are unable to determine the degree to which our participation in “pay for value” programs with other providers of service will affect our financial results versus traditional business models for the long-term care industry.

The provisions of PPACA discussed above are examples of some federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that these and other provisions of PPACA may be interpreted, clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the results of operations.

It is difficult to predict the full effect that all healthcare reforms will have on our business, including the demand for our services or the amount of reimbursement available for those services. However, it is possible these laws may reduce reimbursement and adversely affect our business.

PPACA and the implementation of provisions not yet effective could impact our business.

PPACA has resulted in and could continue to result in sweeping changes to the existing U.S. system for the delivery and financing of healthcare. As an employer, we must abide by the numerous reporting requirements imposed by the law and regulations implementing PPACA. These provisions could impact our compensation costs and force changes in how the company supports health benefits for its employees. The details for implementation of many of the requirements under PPACA will depend on the promulgation of regulations by a number of federal government agencies, including HHS. It is impossible to predict the outcome of these changes, what many of the final requirements of PPACA will be, and the net effect of those requirements on us. As such, we cannot fully predict the impact of PPACA on our business, operations or financial performance.

Our business may be materially impacted if certain aspects of PPACA are amended, repealed, or successfully challenged.

A number of lawsuits have been filed challenging various aspects of PPACA and related regulations. In addition, the efficacy of PPACA is the subject of much debate among members of Congress and the public. Revisions could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy that could significantly impact our business and the health care industry. In the event that legal challenges are successful or PPACA is repealed or materially amended, particularly any elements of PPACA that are beneficial to our business or that cause changes in the health insurance industry, including reimbursement and coverage by private, Medicare or Medicaid payors, our business, operating results and financial condition could be harmed. While it is not possible to predict whether and when any such changes will occur, such changes could harm our business, operating results and financial condition. In addition, even if PPACA is not amended or repealed, the executive branch of the federal government has significant influence on the implementation of the provisions of PPACA, and the administration could make changes impacting the implementation and enforcement of PPACA, which could harm our business, operating results and financial condition. If we are slow or unable to adapt to any such changes, our business, operating results and financial condition could be adversely affected. PPACA significantly expanded Medicaid and it provided states incentives for broadening coverage beyond the traditional Medicaid program assisting eligible aged, blind and disabled individuals. Major Medicaid policy revisions under consideration could potentially alter fundamental structure of the Medicaid program; such revisions could be significantly challenging with the potential of undermining funding adequacy and essential coverage requirements.

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Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.

Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with investigative audits by regulatory and governmental authorities, could adversely affect our business, financial condition or results of operations.

Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the service provided. Overpayments may result from a variety of factors, including insufficient documentation supporting the services rendered or medical necessity of the services, other failures to document the satisfaction of the necessary requirements for payment, or in some cases providing services that are deemed to be worthless. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us. Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other requirements for payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties, including pursuant to the FCA and the Federal Civil Monetary Penalties Law (FCMPL). Violations of the FCA could lead to any combination of a variety of criminal, civil and administrative fines and penalties. CMPs under the FCA range from approximately $11,700 to $23,600 and are adjusted annually for inflation. Treble damages can be assessed on each claim that was submitted to the government for payment. We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law. Our repayment of any such amounts, as well as any fines, penalties or other sanctions that we may incur, could be significant and could have a material and adverse effect on our business, financial condition or results of operations.

From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits and investigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. For example, the OIG conducts a variety of routine, regular and special investigations, audits and reviews across our industry. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our business, financial condition or results of operations. Furthermore, becoming subject to these governmental investigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperate with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues. For example, as discussed in Note 21 – “Commitments and Contingencies - Legal Proceedings – Settlement Agreement,” in the notes to the consolidated financial statements included elsewhere in this report, in June 2017, we and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare Group, Inc. prior to their operations becoming part of our operations (collectively, the Successor Matters). We have agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation. The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program. We will continue to remit the remaining Settlement Amount balance of $22.6 million as of December 31, 2020 through 2023.

Changes in Medicare reimbursements for physician and non-physician services could impact reimbursement for medical professionals.

MACRA revised the payment system for physician and non-physician services. Section 1 of that law, the sustainable growth rate repeal and Medicare Provider Payment Modernization impacted payment provisions for medical professional services. There was a combined cap for PT and SLP and a separate cap for OT services that apply subject to certain exceptions. On February 9, 2018, the Bipartisan Budget Act of 2018 was signed into law, which provides for the repeal of all therapy caps retroactively to January 1, 2018. The law retained the MMR process reducing the threshold on claims for SLP and PT at $3,000 and OT at $3,000. Prior to January 1, 2018, the MMR requirement generally provided that, on a per beneficiary basis and subject to limited exceptions, services above $3,700 for PT and SLP services combined and/or $3,700 for OT services would be subject to MMR. The reduction in the MMR services

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threshold could result in increased number of reviews, which could in turn have a negative effect on our business, financial condition or results of operations.

We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance.

We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

licensure and certification;

adequacy and quality of healthcare services;

qualifications of healthcare and support personnel;

quality of medical equipment;

confidentiality, maintenance and security issues associated with medical records and claims processing;

relationships with physicians and other referral sources and recipients;

constraints on protective contractual provisions with patients and third-party payors;

operating policies and procedures;

addition of facilities and services; and

billing for services.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant guidance or judicial interpretation of these laws and regulations. In addition, many of these laws and regulations evolve to include additional obligations and restrictions, sometimes with retroactive effect. Certain other regulatory developments, such as revisions in the building code requirements for assisted/senior living and skilled nursing facilities, mandatory increases in scope and quality of care to be offered to residents, revisions in licensing and certification standards, mandatory staffing levels, regulations regarding conditions for payment and regulations restricting those we can hire could also have a material adverse effect on us. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

In addition, federal and state government agencies have increased and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, including skilled nursing facilities. This includes investigations of:

fraud and abuse;

quality of care;

financial relationships with referral sources; and

the medical necessity of services provided.

In the ordinary course of our business, we are subject regularly to inquiries, investigations, and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. Audits may include enhanced medical necessity reviews pursuant to the Medicare, Medicaid, and the SCHIP Extension Act of 2007 (the SCHIP Extension Act) and audits under the CMS Recovery Audit Contractor (RAC) program.

We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and state governments continue to impose intensive enforcement policies resulting in a significant number of inspections, citations of regulatory deficiencies, and other regulatory penalties, including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and CMPs. These enforcement policies, along with the costs incurred to respond to and defend reviews, audits, and investigations, could have a material adverse effect on our

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business, financial position, results of operations, and liquidity. We vigorously contest such penalties where appropriate; however, these cases can involve significant legal and other expenses and consume our resources.

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations. Designated health services include inpatient and outpatient hospital services, PT, OT, SLP, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies, home health services, and clinical laboratory services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity is prohibited from submitting or claiming payment under the Medicare or Medicaid programs or from collecting from the patient or other payor. Many of the compensation arrangements exceptions permit referrals if, among other things, the arrangement is set forth in a written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. Exceptions may have other requirements. Any funds collected for an item or service resulting from a referral that violates the Stark Law must be repaid to Medicare or Medicaid, any other third-party payor, and the patient. In addition, CMPs, which are adjusted for annual inflation, and treble damages may be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the designated health services under the Stark Law.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (the Anti-Kickback Statute) prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce the referral of an individual, in return for recommending, or to arrange for, the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or Medicaid. The OIG has issued regulations that create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-Kickback Statute. In order to receive safe harbor protection, all of the requirements of a safe harbor must be met. The fact that a given business arrangement does not fall within one of these safe harbors, however, does not render the arrangement per se illegal. Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities. Potential fines under the Anti-Kickback Statute range from $25,000 to $100,000 per violation, up to ten years in prison, or both. We believe that business practices of providers and financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels. State Medicaid programs are required to enact an anti-kickback statute. Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care.

The DOJ may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. The FCA clarifies that if an item or service is provided in violation of the Anti-Kickback Statute, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim. CMPs under the FCA range from approximately $11,700 to $23,600 and are adjusted annually for inflation. Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery. Due to these whistleblower incentives, lawsuits have become more frequent.

In addition to the penalties described above, if we violate any of these laws, we may be excluded from participation in federal and/or state healthcare programs. These fraud and abuse laws and regulations are complex, and we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. While we do not believe we are in violation of these prohibitions, we cannot assure you that governmental officials charged with the responsibility for enforcing these prohibitions will not assert that we are violating the provisions of such laws and regulations.

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, the intensity of federal and state enforcement actions or the extent and size of any potential sanctions, fines or

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penalties. Changes in the regulatory framework, our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other enforcement sanctions, fines or penalties could have a material adverse effect upon our business, financial condition or results of operations. Furthermore, should we lose licenses or certifications for a number of our facilities or other businesses as a result of regulatory action, legal proceedings such as those described in Note 21 – “Commitments and Contingencies - Legal Proceedings,” or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and the report of such issues at one of our facilities could harm our reputation for quality care and lead to a reduction in our patient referrals and ultimately our revenue and operating income.

Our physician services operations are subject to corporate practice of medicine laws and regulations. Our failure to comply with these laws and regulations could have a material adverse effect on our business and operations.

One line of our business that we continue to develop is physician services.  Certain states have laws and regulations prohibiting the corporate practice of medicine and fee-splitting, which generally prohibit business entities from owning or controlling medical practices or may limit the ability of clinical professionals to share professional service income with non-professional or business interests. These requirements may vary significantly from state to state.  Compliance with applicable regulations may cause us to incur expenses that we have not anticipated, and if we are unable to comply with these additional legal requirements, we may incur liability, which could have a material adverse effect on our business, financial condition or results of operations.

We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit or investigation could result in:

refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;

state or federal agencies imposing fines, penalties and other sanctions on us;

temporary suspension of payment for new patients to the facility or agency;

decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;

self-disclosure of violations to applicable regulatory authorities;

damage to our reputation;

the revocation of a facility's or agency's license; and

loss of certain rights under, or termination of, our contracts with managed care payors.

We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties, as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

Our operations are subject to environmental and occupational health and safety regulations, which could subject us to fines, penalties and increased operational costs.

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Regulatory requirements faced by healthcare providers such as us include those relating to air emissions, wastewater discharges, air and water quality control, occupational health and safety (such as standards regarding blood-borne pathogens and ergonomics), management

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and disposal of low-level radioactive medical waste, biohazards and other wastes, management of explosive or combustible gases, such as oxygen, specific regulatory requirements applicable to asbestos, lead-based paints, polychlorinated biphenyls and mold, other occupational hazards associated with our workplaces, and providing notice to employees and members of the public about our use and storage of regulated or hazardous materials and wastes. Failure to comply with these requirements could subject us to fines, penalties and increased operational costs. Moreover, changes in existing requirements or more stringent enforcement of them, as well as discovery of currently unknown conditions at our owned or leased facilities, could result in additional cost and potential liabilities, including liability for conducting cleanup, and there can be no guarantee that such increased expenditures would not be significant.

Risks Relating to Our Operations

The COVID-19 pandemic has materially and adversely affected, and will continue to materially and adversely affect, our patients, staff and operations, which in turn has materially and adversely affected our revenues and expenses. The extent to which the COVID-19 pandemic continues materially and adversely to affect our patients, staff, operations, financial condition, results of operations, compliance with financial covenants and liquidity will depend on future developments, including the measures taken by public and private entities in response to the pandemic, which are highly uncertain and cannot be predicted.

On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions. According to the WHO up to half of the COVID-19 related deaths in European countries were individuals residing in long-term care facilities, similar to the ones we operate in the United States. Furthermore, a significant number of our facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 has materially and adversely affected our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures.

Our future operations, financial condition, results of operations, compliance with financial covenants and liquidity will continue to be impacted materially by developments related to the COVID-19 pandemic, including, but not limited to: the duration and severity of the spread of COVID-19 in our core markets and among our patients and staff; the effectiveness of measures we are taking to respond to COVID-19; the volume of patients and/or staff infected by COVID-19 who reside or work at our facilities and the resulting impact to the volume of new admissions to our facilities; the volume of cancelled or rescheduled elective procedures occurring at referring hospitals in our markets and the resulting impact to the volume of new admissions to our facilities; the volume of patients infected by COVID-19 who are discharged from or pass away while at our facilities and the resulting impact to our occupancy; the impacts of governmental and administrative regulations as well as the nature and adequacy of financial relief and other forms of support for the skilled nursing and post-acute industry; the extent of disruptions and shortages to center-based staffing needs; the extent of disruptions and shortages to the supply chain of critical services and supplies, including personal protective equipment and the capacity to test patients and employees for COVID-19; increases in expenses related to staffing, supply chain or other expenditures; the impact of our substantial indebtedness and lease obligations, as well as risks associated with disruptions in the financial markets as a result of the COVID-19 pandemic which could impact us from a financing perspective; and changes in and deteriorating macroeconomic conditions nationally and regionally in our markets resulting from the COVID-19 pandemic.

Further, the scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, financial condition, results of operations, compliance with financial covenants and liquidity described in our other risk factors. These and other potential impacts of COVID-19 have materially and adversely affected, and will continue to materially and adversely affect, our business, financial condition, results of operations, compliance with financial covenants and liquidity. We are not able to fully quantify or predict the impact these factors have had, or will have, on our business, financial condition, results of operations, compliance with financial covenants and liquidity, but we expect that the COVID-19 pandemic, including the measures taken in response to the pandemic, will materially affect our current and future financial performance. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition, results of operations, compliance with financial covenants and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including the pace of recovery in occupancy, the future scope and severity of COVID-19 and the actions taken by public and private entities, including the effectiveness of governmental vaccination programs, in response to the pandemic, among others.

In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within 12 months following the date our financial statements were

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issued. Without giving effect to the prospect of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.

We have now and will for the foreseeable future continue to have a significant amount of indebtedness and lease obligations. At December 31, 2020, our total indebtedness was $1.5 billion, excluding debt issuance costs and other non-cash debt discounts and premiums, and our total lease obligations are $4.0 billion. Our substantial indebtedness and lease obligations could have important consequences. For example, it could:

increase our vulnerability to adverse economic and industry conditions;

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and lease obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

place us at a competitive disadvantage compared to our competitors that have less debt or lease obligations;

increase the cost or limit the availability of additional financing, if needed or desired, to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;

require us to maintain debt coverage and financial ratios at specified levels, reducing our financial flexibility; and

limit our ability to make strategic acquisitions and develop new or expanded facilities.

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in our leases and loans is dependent upon, among other things, our ability to attain a sustainable capital structure.  In recent years, we restructured agreements with certain of our landlord and lenders in an effort to attain a sustainable capital structure.  However, there can be no assurance that the reduction in our annual fixed charges that we have projected in connection with such restructuring will be realized or will be sufficient to sustain us in the event our business suffers from reductions in occupancy and/or inflation in costs continues to outpace the rate of third party reimbursement rate growth.

If we are unable to extend (or refinance, as applicable) any of our maturing credit facilities prior to their scheduled maturity or accelerated maturity dates, our liquidity and financial condition will be adversely impacted. In addition, even if we are able to extend or refinance our maturing debt credit facilities, the terms of the new financing may be less favorable to us than the terms of the existing financing.

Much of our indebtedness is subject to floating interest rates and/or payment in kind features. Changes in interest rates or discontinuation of payment in kind terms could result in increased interest payments, and accordingly, reduce our future earnings and cash flows limiting our ability to obtain additional financing. Payment in kind terms defer cash payment obligations until maturity of the debt instrument. Such a feature increases the debt obligation due at maturity, which could make it difficult to obtain additional financing.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These contractual obligation increases may outpace any increase in our results of our operations placing an additional burden on our results of operations, liquidity and financial position. Such a burden could limit our ability to obtain additional financing.

In recent years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to

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widen considerably. These circumstances materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.

A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. Disruptions in the financial markets could have an adverse effect on us and our business. If we are not able to obtain additional or replacement financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.

We lease a significant number of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.

We face risks because of the number of facilities we lease.  As of December 31, 2020, we leased approximately 72% of our centers; 43% were leased pursuant to master lease agreements with four landlords.  The loss or deterioration of a favorable relationship with any of such landlords may adversely affect our business. Subsequent to year end, we executed transactions related to facilities leased from certain of these four landlords. See Note 23 – “Subsequent Events.”

Each of our lease agreements provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including, the defaults in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease.  Termination of certain of our lease agreements could result in a cross-default under our debt agreements or other lease agreements.

Our lease obligations often include annual fixed rent escalators ranging between 2.0% and 2.5% or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and covenants, specifically coverage ratios. If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity and financial position. Our annual rent escalators are oftentimes outpacing our annual reimbursement escalators. This issue is compounded by the shift in payor mix to lower reimbursed Medicaid.

Our leases generally provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension.  In addition, if we are unable to renew or extend any of our master leases, we may lose all of the facilities subject to that master lease agreement.  If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Leasing facilities pursuant to master lease agreements may limit our ability to exit markets. For instance, if one facility under a master lease becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility.   We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition or results of operations.

Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other master lease agreements and agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity.

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We are subject to numerous covenants and requirements under our various credit and leasing agreements and a breach of any such covenants or requirements could, unless timely and effectively remediated, lead to default and potential cross default under such agreements.

Our credit and leasing agreements contain various covenants, restrictions and events of default. Among other things, these provisions require us to maintain certain financial ratios. Breaches of these covenants could result in defaults under the instruments governing the applicable loans and leases, in addition to any other indebtedness or leases cross-defaulted against such instruments. These defaults could have a material adverse impact on our business, results of operations and financial condition.

Despite our substantial indebtedness, we may still be able to incur more debt. This could intensify the risks associated with this indebtedness.

The terms of our credit facilities contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these exceptions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. The more we become leveraged, the more we become exposed to the risks described above under “Our substantial indebtedness, scheduled maturities, lease obligations and disruptions in the U.S. and global financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our results of operations, liquidity, financial condition and the market price of our common stock.

Our credit and leasing agreements may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

The terms of our credit and leasing agreements include a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our and our restricted subsidiaries’ ability to, among other things:

incur additional indebtedness;

consolidate or merge;

make or incur capital improvements;

sell assets; and

make investments, loans and acquisitions.

These restrictions could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities.

Floating rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

We have significant indebtedness in multiple instruments that bear interest at variable rates. Interest rate changes could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could have a material adverse effect on our liquidity, financial condition and results of operations. See Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources” for a description of the types and level of indebtedness.

We may be adversely affected by changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. We have a significant number of debt instruments with

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attributes that are dependent on LIBOR. The transition from LIBOR to an alternative reference rate could have a material adverse effect on our liquidity, financial condition and results of operations.

We are presently operating under waivers of certain of our master leases. There can be no assurance such waivers will be received in future periods. In the event future waivers are not extended and our creditors accelerate our loan and lease obligations, it would have a material adverse effect on our liquidity, financial condition and results of operations.

At December 31, 2020, we were not in compliance with or had not received waivers with respect to the financial covenants contained in certain of our leases containing cross-default provisions with other material lease agreements and material debt agreements. The lease and debt obligations associated with these agreements have been classified as current liabilities. If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not obtained, the defaults can cause acceleration of our financial obligations, which we may not be in a position to satisfy. In the event this occurs and we are unable to satisfy an acceleration of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.

Significant legal actions, which are commonplace in our industry, could subject us to increased operating costs, which would materially and adversely affect our results of operations, liquidity, financial condition and reputation.

The long-term care industry has experienced an increasing trend in the number and severity of litigation claims. We believe that this trend is endemic to the industry and is a result of a variety of factors, including the number of large verdicts, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiffs' lawyers of potentially large recoveries. While some states have enacted tort reform legislation that limits plaintiffs' recoveries in some respects, should our professional liability and general liability costs increase significantly in the future our operating income could suffer.

We also may be subject to lawsuits under the FCA and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse. See Note 21 - “Commitments and Contingencies - Legal Proceedings,” in the notes to the consolidated financial statements included elsewhere in this report for pending litigation and investigations which, based upon information currently available, could have a potentially material adverse effect on our results of operations, liquidity and financial condition.

We may incur significant liabilities in conjunction with legal actions against us, including as a result of damages, fines and penalties that may be assessed against us, as well as a result of the sometimes significant commitments of financial and management resources that are often required to defend against such legal actions. The incurrence of such liabilities and related commitments of resources could materially and adversely affect our business, financial condition and results of operations.

Insurance coverages, including professional liability and workers’ compensation coverage, may become increasingly expensive and difficult to obtain for healthcare companies, and our self-insurance may expose us to significant losses.

It may become more difficult and costly for us to obtain coverage for patient care liabilities and certain other risks, including property and casualty insurance. Insurance carriers may require healthcare companies to increase significantly their self-insured retention levels and/or pay substantially higher premiums for reduced coverage for most insurance coverages, including workers' compensation, employee healthcare and patient care liability.

We self-insure a significant portion of our potential liabilities for several risks, including certain types of professional and general liability, workers' compensation and employee healthcare benefits. Due to our self-insured retentions under many of our professional and general liability, workers' compensation and employee healthcare benefits programs, there is no limit on the maximum number of claims or amount for which we can be liable in any policy period. We base our loss estimates and related accruals on actuarial analyses, which determine expected liabilities on an undiscounted basis, including incurred but not reported losses, based upon the available information on a given date. It is possible, however, for the ultimate amount of losses to exceed our estimates and related accruals, as well as our insurance limits as applicable. In the event our actual liability exceeds our estimates for any given period, our results of operations and financial condition could be materially adversely impacted. Additionally, we may from time to time need to increase our accruals as a result of future actuarial reviews and claims that may develop. Such increases could have an adverse impact on our

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business and results of operations. An adverse determination in legal proceedings, whether currently asserted or arising in the future, could have a material adverse effect on our business, liquidity, financial condition and results of operations.

Changes in the acuity mix of patients as well as payor mix and payment methodologies may significantly reduce our profitability or cause us to incur losses.

Our revenue is affected by our ability to attract a favorable patient acuity mix and by our mix of payment sources. Changes in the type of patients we attract, as well as our payor mix among private payors, managed care companies, Medicare (both traditional Medicare and Medicare Advantage) and Medicaid significantly affect our profitability because not all payors reimburse us at the same rates. Particularly, if we fail to maintain our proportion of high-acuity patients or if there is any significant increase in the percentage of our population for which we receive Medicaid reimbursement, our financial position, results of operations and liquidity may be adversely affected. Furthermore, in recent periods we have continued to see a shift from “traditional” FFS Medicare patients to Medicare Advantage patients.  Reimbursement rates are generally lower for services provided to Medicare Advantage patients than they are for the same services provided to traditional FFS Medicare patients.  This trend may continue in future periods.  Our financial results have been negatively affected by this shift to date.  Our financial results will continue to be negatively affected if the trend towards Medicare Advantage continues, and particularly if it accelerates.

Federal, state and local employment-related laws and regulations could increase our cost of doing business and subject us to significant back pay awards, fines and lawsuits.

Our operations are subject to a variety of federal, state and local employment-related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, the Family Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, Title VII of the Civil Rights Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of the Department of Labor (DOL), regulations of state attorneys general, federal and state wage and hour laws, and a variety of similar laws enacted by the federal and state governments that govern these and other employment-related matters. Because labor represents such a large portion of our operating costs, compliance with these evolving federal and state laws and regulations could substantially increase our cost of doing business while failure to do so could subject us to significant back pay awards, fines and lawsuits. We are currently subject to employee-related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. In addition, federal proposals to introduce a system of mandated health insurance and flexible work time and other similar initiatives could, if implemented, adversely affect our operations. Our failure to comply with federal and state employment-related laws and regulations could have a material adverse effect on our business, financial position, results of operations and liquidity.

It can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees.

Our employees are our most important asset. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel, especially center executive directors, nurses, therapists, certified nurses' aides and other important healthcare personnel. The risks associated with COVID-19 have significantly increased the difficulty in attracting and retaining personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges.

Tight labor markets and high demand for such employees can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected facilities. In addition, turnover of such employees will result in additional expenses related to recruiting and training replacement employees. If we are unable to attract and retain qualified professionals, our ability to provide adequate services to our residents and patients may decline and our ability to grow may be constrained.

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Our cost of labor may be influenced by unanticipated factors in certain markets or, with respect to collective bargaining agreements that we are a party to, we may experience above-market increases. A substantial number of our employees are hourly employees whose wage rates are affected by increases in the federal or state minimum wage rate. As collective bargaining agreements are renegotiated or minimum wage rates increase we may need to increase the wages paid to employees. This may be applicable to not only minimum wage employees but also to employees at wage rates which are currently above the minimum wage.

Because we are largely funded by government programs, we do not have an ability to pass such wage increases through to revenue sources. Any such mandated wage increases could have a material adverse effect on our results of operations, liquidity and financial condition.

If we are unable to comply with state minimum staffing requirements at one or more of our facilities, we could be subject to fines or other sanctions.

In most of the states where we operate, our skilled nursing facilities are subject to state mandated staffing ratios that require minimum nursing hours of direct care per resident per day. Our ability to satisfy any minimum staffing requirements depends upon our ability to attract and retain qualified healthcare professionals, including nurses, certified nurse's assistants and other personnel. Attracting and retaining qualified personnel is difficult, given a tight labor market for these professionals in many of the markets in which we operate. Furthermore, if states do not appropriate additional funds (through Medicaid program appropriations or otherwise) sufficient to pay for any additional operating costs resulting from minimum staffing requirements, our profitability may be materially adversely affected.  Failure to comply with these requirements can, among other things, jeopardize a facility's compliance with the Requirements of Participation under relevant state and federal healthcare programs. In addition, if a facility is determined to be out of compliance with these requirements, it may be subject to a notice of deficiency, a citation, or a significant fine or litigation risk. Deficiencies (depending on the level) may also result in the suspension of patient admissions and/or the termination of Medicaid participation, or the suspension, revocation or nonrenewal of the skilled nursing facility's license. If the federal or state governments were to issue regulations which materially change the way compliance with the minimum staffing standard is calculated or enforced, our labor costs could increase and the current shortage of healthcare workers could impact us more significantly.

If we fail to attract patients and residents and to compete effectively with other healthcare providers, our revenue and profitability may decline and we may incur losses.

The healthcare services industry is highly competitive. Our skilled nursing facilities compete primarily on a local and regional basis with other skilled nursing facilities and with assisted/senior living facilities, from national and regional chains to smaller providers owning as few as a single facility. Competitors include other for-profit providers as well as non-profits, religiously-affiliated facilities, and government-owned facilities. We also compete under certain circumstances with IRFs and LTAC hospitals. Increasingly, we are competing with home health and community based providers who have developed programs designed to provide services to seniors outside an institutional setting, extending the time period before they need the higher level of care provided in a skilled nursing facility. In addition, some competitors are implementing vertical alignment strategies, such as hospitals who provide long-term care services. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our caregivers, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. If we are unable to attract patients, particularly high-acuity patients, to our facilities and agencies, our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing long-term care companies may also offer newer facilities or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current patients, potential patients and referral sources. Furthermore, while we budget for routine capital expenditures at our facilities to keep them competitive in their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be negatively affected.

We believe we adhere to a conservative approach in complying with laws prohibiting kickbacks and referral payments to referral sources. If our competitors use more aggressive methods than we do with respect to obtaining patient referrals, our competitors may from time to time obtain patient referrals that are not otherwise available to us.

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The primary competitive factors for our assisted/senior living and rehabilitation therapy services are similar to those for our skilled nursing businesses and include reputation, the cost of services, the quality of services, responsiveness to patient/resident needs and the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping. Furthermore, given the relatively low barriers to entry and continuing healthcare cost containment pressures, we expect that the markets we service will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain patients and residents, maintain or increase our fees, or expand our business.

If our referral sources fail to view us as an attractive healthcare provider, our patient base would likely decrease.

We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities in which we deliver our services to attract the kinds of patients we target. Our referral sources are not obligated to refer business to us and generally also refer business to other healthcare providers. We believe many of our referral sources refer business to us as a result of the quality of our patient care and our efforts to establish and build a relationship with them. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships or if we are perceived by our referral sources for any reason as not providing quality patient care, our volume of referrals would likely decrease, the quality of our patient mix could suffer and our revenue and results of operations could be adversely affected.

If we do not achieve or maintain a reputation for providing quality of care, our business may be negatively affected.

Our ability to achieve and to maintain a reputation for providing quality of care to our patients at each of our skilled nursing and assisted/senior living facilities, or through our rehabilitation therapy, is important to our ability to attract and retain patients, particularly high-acuity patients. In some instances, our referral sources are affiliated with healthcare systems that may have affiliated businesses that offer services that compete with ours, and the frequency of this occurring may increase in the future as ACOs are formed in the markets we serve. We believe that the perception of our quality of care by a potential patient or potential patient's family seeking to contract for our services is influenced by a variety of factors, including physician and other healthcare professional referrals, community information and referral services, newspapers and other print and electronic media, results of patient surveys, recommendations from family and friends, and quality care statistics or rating systems compiled and published by CMS or other industry data. Through our focus on retaining quality staffing, reviewing feedback and surveys from our patients and referral sources to highlight areas of improvement and integrating our service offerings at each of our facilities, we seek to maintain and to improve on the outcomes from each of the factors listed above in order to build and to maintain a strong reputation at our facilities. If we fail to achieve or to maintain a reputation for providing quality care, or are perceived to provide a lower quality of care than competitors within the same geographic area, our ability to attract and to retain patients would be adversely affected. If our businesses fail to maintain a strong reputation in the areas in which we operate, our business, revenue and profitability could be adversely affected.

If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar monitoring activities, or if the frequency of CMS surveys and enforcement sanctions increases, our business may be negatively affected.

CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available to the public on its website, rating every skilled nursing facility operating in each state based upon quality of care indicators. These quality of care indicators include such measures as percentages of patients with infections, bedsores and unplanned weight loss. In addition, CMS previously increased the number of Medicaid and Medicare surveys and enforcement activities, to focus more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified. We have found a correlation between negative Medicaid and Medicare surveys and the incidence of professional liability litigation. From time to time, we experience a higher than normal number of negative survey findings in some of our affiliated facilities.

CMS publishes Star Ratings to help consumers, their families and caregivers compare nursing homes more easily. The Star Ratings give each nursing home a rating of between one and five stars for (i) staffing, (ii) health inspections, (iii) quality measures and (iv) overall score. CMS from time to time revises the manner in which the Star Ratings are calculated, and such revisions could have a negative impact on our Star Ratings. If we are unable to achieve and to maintain Star Ratings that are comparable or superior to those of our competitors, our ability to attract and to retain patients could be adversely affected.

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Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.

We produce our consolidated financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America (U.S. GAAP). Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting.

Testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law or if our independent registered public accounting firm does not issue an unqualified attestation report. See Item 9A. "Controls and Procedures—Management's Report on Internal Control over Financial Reporting," for management’s disclosure on its responsibility for establishing and maintaining adequate internal controls.

We also cannot provide assurance that our internal control over financial reporting will be operating effectively in the future. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

Our success is dependent upon retaining key executives and personnel.

Our senior management team has extensive experience in the healthcare industry. We believe that they have been instrumental in guiding our businesses, instituting valuable performance and quality monitoring, and driving innovation. Our future performance is substantially dependent upon the continued services of our senior management team or their successors. The loss of the services of any of these persons could have a material adverse effect upon us.

We may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely.

We depend on implementing adequate cost management initiatives in response to fluctuations in levels of patient census in our businesses in order to maintain our current cash flow and earnings levels. Fluctuation in our patient census levels may become more common as we continue our emphasis in our skilled nursing facilities on patients with shorter stays but higher acuities. A decline in patient census levels would likely result in decreased revenue. If we are unable to put in place corresponding reductions in costs in response to decreases in our patient census or other revenue shortfalls, our financial condition and operating results would be adversely affected. There are limits in our ability to reduce the costs of our centers because we must maintain required staffing levels.

Consolidation of managed care organizations and other third-party payors or reductions in reimbursement from these payors may adversely affect our revenue and income or cause us to incur losses.

Managed care organizations and other third-party payors have in many instances consolidated in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. These organizations have become an increasingly important source of revenue and referrals for us. To the extent that such organizations terminate us as a preferred provider or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected.

In addition, private third-party payors, including managed care payors, are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization reviews, or reviews of the propriety of, and charges for, services provided, and greater enrollment in managed care programs and preferred provider organizations. As these private payors increase their purchasing power, they are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the

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financial risk associated with the provision of care. Significant reductions in reimbursement from these sources could materially adversely affect our business and financial condition.

Managed Long Term Services and Supports (MLTSS) programs granted under waivers of the Social Security Act are currently being extended and or modified in some states with approval by CMS. SNF-VBP programs are therefore being submitted by some states which may include changes from Any Willing Provider, a model that permits all licensed providers to serve the Medicaid population, to programs that may exclude nursing home providers that do not score high enough under certain metrics thus causing a narrowing of network participation for some providers. The narrowing of a skilled nursing facility’s participation in MLTSS would cause providers not to be able to accept Medicaid Managed Care enrollees into their facility until the facility meets the metrics standard as set by the state’s Medicaid program.

Under Section 1115 of the Social Security Act, the Secretary of HHS can waive specific provisions of the Medicaid program and that in order to apply for the Section 1115 waivers states must follow specific procedures for notice and stakeholder input established by CMS. Giving states permission to use federal Medicaid funds in ways that are not otherwise allowed under the federal rules, as long as the Secretary of HHS determines that the initiative is an experimental or demonstration project that is likely to assist in promoting the objectives of the Medicaid program. States can obtain Section 1115 waivers that make broad changes in Medicaid eligibility, benefits and cost-sharing, and provider payments. CMS has recently approved, in some Section 1115 waivers, the elimination of retroactive eligibility benefits for Medicaid beneficiaries.

Delays in reimbursement may cause liquidity problems.

If we have information systems problems or payment or other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. On occasion, states have delayed reimbursement at fiscal year ends for budget balancing purposes. Any significant payment timing delay could cause us to experience working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

Our rehabilitation and other related healthcare services are also subject to delays in reimbursement, as we act as vendors to other providers who in turn must wait for reimbursement from other third-party payors. Each of these customers is therefore subject to the same potential delays to which our nursing homes are subject, meaning any such delays would further delay the date we would receive payment for the provision of our related healthcare services. To the extent we grow and expand the rehabilitation and other complementary services that we offer to third parties, these payment delays could have an increased adverse effect on our liquidity and financial condition. We may also experience delays in reimbursement related to change of ownership applications for our acquired facilities, as well as changes in fiscal intermediaries.

We are exposed to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses.

Deterioration in the financial condition of our customer relationships due to systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may result in a reduction in services provided, an inability to collect receivables and payment delays or losses due to a customer’s bankruptcy, receivership, liquidation, reorganization or insolvency. Such actions could result in our customers seeking to cancel or to renegotiate the terms of current agreements or renewals, and failure to meet contractual obligations. Our inability to collect receivables may decrease profitability and liquidity.

We provide rehabilitation therapy services and other healthcare related services to numerous customers of varying size and significance on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency and credit limits, as well as prevailing terms with customers having similar characteristics. Despite an initial credit assessment, customers deemed creditworthy may experience an undetected decline in their financial condition while contracting with us. Our rehabilitation therapy services segment, in particular, has several significant contracts with national skilled nursing home chains that increases our exposure to potential material losses. Even when existing contract customers exhibit factors indicating negative credit trends, it can be costly to implement measures to reduce our exposure to those customers. Challenging systemic industry pressures, economic conditions,

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regulatory uncertainty and tight credit markets may impair the ability of our customers to pay for services that have been provided by us, and as a result, our write-off of accounts receivable could increase. Our exposure to credit risks may increase if such unpaid balances serve as collateral under our revolving credit facilities and we have drawn funds thereunder. If one or more of these customers delay payments or default on credit extended to them, it could adversely impact our business, financial condition, operating results and liquidity.

We are subject to federal and state income taxes. Changes in tax laws and regulations and the interpretation of those tax law changes could have a material adverse effect on our effective tax rate, provision for income taxes and income tax obligations.

We are a U.S. domiciled company subject to income tax in multiple U.S. tax jurisdictions and China. Significant judgment is required in determining our provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our provision for income taxes.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. If U.S. or China tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

Completed and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities and integration risks.

We have in the past pursued, and expect to pursue in the future, selective acquisitions and the development of skilled nursing facilities, contract rehabilitation therapy businesses, and other related healthcare operations. Acquisitions may involve significant cash expenditures, debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions involve numerous risks, including:

difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;

diversion of management's attention from other business concerns;

potential loss of key employees or customers of acquired companies;

entry into markets in which we may have limited or no experience;

increased indebtedness and reduced ability to access additional capital when needed;

assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and

straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Certain events or circumstances could result in the impairment of our assets or other charges, including, without limitation, impairments of goodwill and identifiable intangible assets that result in material charges to earnings.

We review the carrying value of certain long-lived assets, definite-lived intangible assets and indefinite-lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period may be necessary, such as when the market value of our common stock is below book equity value. On an ongoing basis, we also evaluate, based upon the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If circumstances suggest that the recorded amounts of any of these assets cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value. If the carrying value of any of these assets is impaired, we may incur a material charge to earnings. See Note 19 – “Asset Impairment Charges.

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Future adverse changes in the operating environment and related key assumptions used to determine the fair value of our reporting units and indefinite-lived intangible assets or a decline in the value of our common stock may result in future impairment charges for a portion or all of these assets. Moreover, the value of our goodwill and indefinite-lived intangible assets could be negatively impacted by potential healthcare reforms. Any such impairment charges could have a material adverse effect on our business, financial position and results of operations.

A portion of our workforce is unionized and our operations may be adversely affected by work stoppages, strikes or other collective actions.

As of December 31, 2020, approximately 4,000 of our 47,000 active employees were represented by unions and covered by collective bargaining agreements. In addition, certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. We cannot predict the effect that continued union representation or future organizational activities will have on our business or future operations. There can be no assurance that we will not experience a material work stoppage in the future.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes, floods and wildfires, may cause damage or disruption to us, our employees and our facilities, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability of employees to provide services at our facilities and other locations. If the delivery of goods or the ability of employees to reach our facilities and patients were interrupted in any material respect due to a natural disaster or other reasons, it could have a significant impact on our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients and employees. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

Litigation and/or investigations regarding COVID-19 could materially and adversely affect our financial condition, results of operations, compliance with financial covenants and liquidity.

A number of professional liability and employment related claims have been filed or have been threatened to be filed against us and our subsidiaries related to COVID-19. The professional liability claims relate to the death of residents of nursing centers who contracted COVID-19. Such claims may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation. The applicability of such protection has not yet been adjudicated in any pending claim against us. The employment related claims have been filed by our employees or by the Equal Employment Opportunity Commission or state agencies, and these claims primarily relate to allegations of disability or Family and Medical Leave Act discrimination or the inadequacy of the personal protective equipment made available to the employees who work in our nursing centers.

A U.S. House of Representatives subcommittee, the Select Subcommittee on the Coronavirus Crisis, announced an investigation into the ongoing COVID-19 crisis in nursing homes, demanding information from both the federal government and five large operators, including us. In addition, the Attorneys General of several states have initiated inquiries into the nursing facility industry’s and/or our response to the COVID-19 pandemic and have requested information from us. We intend to cooperate fully with these investigations.

While we deny any wrongdoing and will vigorously defend ourselves in these matters, managing litigation and responding to governmental investigations is costly and may involve a significant diversion of management attention. Such proceedings are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these lawsuits or investigations may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on our reputation, business, results of operations and cash flows.

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The operation of our business is dependent on effective and secure information systems.

Our business is dependent on the proper functioning, reliability and availability of our business systems and technology. While we believe we have implemented strong security controls and continue to enhance those controls to protect the safety and security of our information systems, and the patient health information, personal information, and other data maintained within those systems, we cannot assure you that our safety and security measures and disaster recovery plan will prevent damage, interruption or breach of our information systems and operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect, we may be unable to anticipate these techniques or implement adequate preventive measures.

In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our information systems. Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees or contractors.

If our business and technology systems are compromised and personal or other protected information regarding patients, employees or others with whom we do business is stolen, tampered with or otherwise improperly accessed, our ability to conduct our business and our reputation may be impaired. If personal or other protected information of our patients, employees or others with whom we do business is tampered with, stolen or otherwise improperly accessed, we may incur significant costs to remediate possible injury to the affected persons, compensate the affected persons, pay any applicable fines, or take other action with respect to judicial or regulatory actions arising out of the incident, including under HIPAA, the HITECH Act or any other similar federal or state privacy laws, as applicable. Any of the foregoing could have a material adverse effect on our financial position, results of operations and liquidity.

Furthermore, while we budget for changes and upgrades to our business and technology systems, it is possible that we may underestimate the actual costs of those changes and upgrades. Failure to make necessary changes and upgrades due to financial or other concerns could negatively impact the effectiveness of our business and technology systems, as well as our operations and financial performance. The board of directors is kept abreast of significant changes, updates or issues regarding our information systems as the need arises.

We employ a wide range of perimeter, endpoint, infrastructure, and business application controls, and device, email, file and website encryption to limit our risk and exposure. As our third party software suppliers move the services we use to public cloud services, we are implementing security configurations and conducting appropriate reviews to ensure the protection of our data and compliance with our security policies and business continuity plans.

We conducted annual internal and third party cybersecurity risk assessments with the goal of identifying areas of exposure, focusing our resources on remediating those risks, and strengthening our overall cybersecurity profile and infrastructure.

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Risks Related to Ownership of Our Class A Common Stock

The liquidity of our shares of common stock will likely be adversely affected by our delisting from the NYSE and our ability to raise capital could be significantly impaired.

On March 3, 2021, we announced that we would voluntarily delist our common stock from the NYSE and deregister our common stock under the Securities and Exchange Act of 1934, as amended (the Exchange Act). After our shares have been delisted from the NYSE, we expect that the Company’s Class A common stock may be quoted on the OTCQX Best Market or the Pink Open Market. However, we can provide no assurance that trading in our common stock will continue. Moreover, even if our trading in our common stock continues, our common stock will likely become more illiquid after it is no longer traded on the NYSE, which could negatively impact market prices for our stock and make it more difficult for shareholders to sell their shares. Moreover, once we complete the deregistration of our common stock under the Exchange Act, we will no longer be required to file periodic and other reports with the SEC. As a consequence, there will be less public information available about our business, operations, financial condition, results of operations or other matters. In addition, the trading of our common stock on the OTCQX Best Market or the Pink Open Market may materially adversely affect our access to the capital markets and the limited liquidity and potentially reduced price of our common stock could materially adversely affect our ability to raise capital through alternative financing sources or on terms acceptable to us.

The issuance and subsequent conversion or exercise of debt securities or stock warrants, respectively, into our common stock may dilute the ownership of existing stockholders.

We may, from time to time, issue convertible debt securities or common stock warrants. For example, in connection with a transaction with Welltower we issued a note, which was subsequently converted into our common stock. The conversion, if any, of such convertible debt or exercise of stock warrants may dilute the ownership interest of our existing stockholders. Any sales in the public market of the shares of common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes and stock warrants may encourage short selling by market participants because the conversion of the notes or exercise of stock warrants could depress the market price of our common stock. Issuance of such common stock upon conversion or exercise also may affect our (loss) earnings on a per share basis.

A small group of stockholders owns a large quantity of our common stock, thereby potentially exerting significant influence over the Company.

Ownership of our common stock is concentrated among certain stockholders. Based upon the information currently available to us, the four largest holders of our common stock and rights to acquire common stock, assuming conversion of all rights to acquire common stock, beneficially own shares representing approximately 55% of the Company’s voting power as of March 12, 2021.  This concentration of ownership could influence matters requiring approval by our stockholders and/or our board of directors, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions.  Accordingly, this concentration of ownership may impact the market price of our common stock. In addition, the interest of our significant stockholders may not always coincide with the interest of our other stockholders. In deciding how to vote on such matters, they may be influenced by interests that conflict with our other stockholders.

Some of our directors are significant stockholders or representatives of significant stockholders, which may present issues regarding the diversion of corporate opportunities and other potential conflicts.

Our board of directors includes certain of our significant stockholders and representatives of certain of our significant stockholders. Those stockholders and their affiliates may invest in entities that directly or indirectly compete with us, companies in which we transact business, or companies in which they are currently invested or in which they serve as an officer or director may already compete with us. As a result of these relationships, when conflicts between the interests of those stockholders or their affiliates and the interests of our other stockholders arise, these directors may not be disinterested.

Also, in accordance with Delaware law, our board of directors adopted resolutions to specify the obligation of certain of our directors to present certain corporate opportunities to us.  Such directors are required to present any corporate opportunities in our main lines of business, which may be expanded by our board of directors, as well as any other opportunity that is expressly offered for us. The resolutions renounce our rights to certain other business opportunities that do not meet those criteria.  The resolutions further provide that such directors will not be liable to us or to our stockholders for breach of any fiduciary duty that would otherwise exist by

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reason of the fact that any such individual directs a corporate opportunity (other than those certain types of opportunities set forth in the resolutions) to any person instead of us or is engaged in certain current business activities, or does not refer or communicate information regarding certain corporate opportunities to us.  Accordingly, we may not be presented with certain corporate opportunities that we may find attractive and may wish to pursue.

Purchasers of our Class A common stock could incur substantial losses because of the volatility of our stock price.

Our stock price has been and is likely to continue to be volatile. The stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. The price for our Class A common stock may be influenced by many factors, including:

the depth and liquidity of the market for our Class A common stock;

developments generally affecting the healthcare industry;

investor perceptions of us and our business;

actions by institutional or other large stockholders;

strategic actions, such as acquisitions or restructurings, or the introduction of new services by us or our competitors;

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

litigation and governmental investigations;

changes in accounting standards, policies, guidance, interpretations or principles;

adverse conditions in the financial markets, state and federal government or general economic conditions, including those resulting from statewide, national or global financial and deficit considerations, overall market conditions, war, incidents of terrorism and responses to such events;

sales of Class B common stock;

sales of units by certain significant stockholders and members of our management team;

additions or departures of key personnel; and

our results of operations, financial performance and future prospects.

These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our Class A common stock is significantly influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

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We do not intend to pay dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and lease obligations as well as to fund the operation of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, lease obligations, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

Our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our Class A common stock.

In addition to the effect that the concentration of ownership and voting power in our significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management, even if doing so might be beneficial to our stockholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our Class A common stock. The provisions in our amended and restated certificate of incorporation or amended and restated bylaws include:

our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of our Class A common stock, Class B common stock and Class C common stock;

advance notice requirements for stockholders to nominate individuals to serve on our board of directors or to submit proposals that can be acted upon at stockholder meetings;

our board of directors is classified so not all of the members of our board of directors are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

special meetings of the stockholders are permitted to be called only by the chairman of our board of directors, our chief executive officer, a majority of our board of directors or a majority of the voting power of the shares entitled to vote in connection with the election of our directors;

stockholders are not permitted to cumulate their votes for the election of directors;

newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors will be filled only by majority vote of the remaining directors;

a majority of our board of directors is expressly authorized to make, alter or repeal our bylaws; and

the affirmative vote of the holders of at least 66 2/3% of the combined voting power of the shares entitled to vote in connection with the election of our directors is required to amend, alter, change, or repeal, or to adopt any provision inconsistent with the purpose and intent of certain articles of the Restated Charter relating to the management of our business and conduct of the affairs; the rights to call special meetings of the stockholders; the ability to take action by written consent in lieu of a meeting of stockholders; our obligations to indemnify our directors and officers; amendments to the bylaws; and amendments to the certificate of incorporation.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could discourage acquisition proposals and make it more difficult or expensive for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our Class A common stock to decline.

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Risks Related to Our Organizational Structure

We will be required to pay the members of FC-GEN for certain tax benefits we may claim as a result of the tax basis step-up we receive in connection with exchanges of the members of FC-GEN for our shares. In certain circumstances, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual tax benefits we realize.

FC-GEN Class A Common Units may be exchanged for shares of Class A common stock. Such exchanges of Class A Common Units in FC-GEN may result in increases in the tax basis of the assets of FC-GEN that otherwise would not have been available. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax we would otherwise be required to pay in the future. These increases in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those capital assets.

On February 2, 2015 we entered into a tax receivable agreement (the TRA) with the members of FC-GEN that provides for the payment by us to such members of FC-GEN of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (a) the increases in tax basis attributable to the members of FC-GEN and (b) tax benefits related to imputed interest deemed to be paid by us as a result of this TRA. While the actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, the payments that we may make to the members of FC-GEN could be substantial.

Although we are not aware of any issue that would cause the Internal Revenue Service (the IRS) to challenge a tax basis increase, the IRS may challenge all or part of these tax basis increases, and a court could sustain such a challenge. In such event, the FC-GEN members generally will not reimburse us for any payments that may previously have been made to them under the TRA. As a result, in certain circumstances we could make payments to the FC-GEN members under the TRA in excess of our cash tax savings.

In addition, the TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we elect an early termination of the TRA, our (or our successor's) obligations with respect to exchanged or acquired Class A Common Units (whether exchanged or acquired before or after such change of control or early termination) would be based on certain assumptions, including that (i) in a case of an early termination, we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the TRA; (ii) in the case of a change of control, we would have taxable income at least equal to our taxable income for the 12-month period ending on the last day of the month immediately preceding the change of control; and (iii) any Class A Common Units that have not been exchanged will be deemed exchanged for the market value of the Class A common stock at the time of early termination or change of control. Consequently, it is possible, in these circumstances also, that the actual cash tax savings realized by us may be significantly less than the corresponding TRA payments.

If we were deemed an “investment company” under the Investment Company Act of 1940 as a result of our ownership of FC-GEN, applicable restrictions could make it impractical for us to continue our business as contemplated and could materially and adversely affect our operating results.

If we were to cease participation in the management of FC-GEN, our interests in FC-GEN could be deemed an "investment security" for purposes of the Investment Company Act of 1940 (the 1940 Act). Generally, a person is deemed to be an "investment company" if it owns investment securities having a value exceeding 40% of the value of our total assets (exclusive of U.S. government securities and cash items), absent an applicable exemption. We have substantially no assets other than our equity interests in the managing member of FC-GEN and FC-GEN’s interests in our subsidiaries. A determination that this interest in FC-GEN was an investment security could result in our being an investment company under the 1940 Act and becoming subject to the registration and other requirements of the 1940 Act. We intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and have a material adverse effect on our business and operating results and the price of our Class A common stock.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

As of December 31, 2020, our 341 long-term care facilities consisted of 10 which were owned, 246 which were leased, 12 which were managed and 73 which were joint ventures. As of December 31, 2020, our operated facilities had a total of 40,193 licensed beds.

The following table provides the facility count and licensed beds by state as of December 31, 2020 for all owned, leased, managed or joint venture skilled nursing and assisted/senior living facilities.

Owned Facilities

Leased Facilities

Managed Facilities

Joint Venture Facilities (1)

Total Facilities

State

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

    

Count

    

Beds

Alabama

9

940

9

940

Arizona

5

722

5

722

California

1

51

5

650

1

150

18

1,810

25

2,661

Colorado

10

1,437

10

1,437

Connecticut

2

300

12

1,815

3

480

17

2,595

Delaware

5

590

1

110

6

700

Idaho

1

168

1

168

Indiana

1

88

1

88

Kentucky

18

1,580

18

1,580

Maine

11

953

11

953

Maryland

18

2,318

7

992

25

3,310

Massachusetts

2

225

11

1,473

4

370

9

1,286

26

3,354

Nevada

1

100

1

190

2

290

New Hampshire

1

108

25

2,636

2

160

28

2,904

New Jersey

25

3,538

1

154

4

565

30

4,257

New Mexico

2

208

23

2,588

25

2,796

North Carolina

7

837

7

837

Pennsylvania

22

2,575

5

727

11

1,584

38

4,886

Rhode Island

7

905

7

905

Tennessee

2

259

2

259

Vermont

1

103

3

309

4

412

Virginia

2

208

2

208

Washington

3

285

5

554

8

839

West Virginia

22

2,018

12

1,074

34

3,092

Total

10

1,095

246

28,804

12

1,489

73

8,805

341

40,193

Skilled nursing

9

1,044

227

27,282

12

1,489

71

8,674

319

38,489

Assisted/Senior living

1

51

19

1,522

2

131

22

1,704

(1)Our 73 joint venture facilities include 47 skilled nursing facilities and one assisted/senior living facility that are consolidated in our financial statements and 24 skilled nursing facilities and one assisted/senior living facility which are not consolidated. In the years ended December 31, 2019 and 2020, we entered into four strategic partnerships, three of which include fixed-price purchase options to acquire the real property of 43 skilled nursing facilities, in which we operate, beginning in 2023. See Note 4 – “Significant Transactions and EventsStrategic Partnerships.” The remaining 30 joint venture facilities are subject to management agreements.

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The following table provides the leased and joint venture facility count and licensed beds by state as of December 31, 2020, for our five master lease agreements in which we have a fixed-price purchase option.

Leased Facilities

Joint Venture Facilities

Total Fixed Price Purchase Option Facilities

State

    

    

    

Count

    

Beds

    

Count

    

Beds

Count

    

Beds

Connecticut

3

480

3

480

Delaware

1

110

1

110

Maine

11

850

11

850

Maryland

3

320

3

320

Massachusetts

8

1,062

8

1,062

New Hampshire

4

334

1

70

5

404

New Jersey

4

565

4

565

Pennsylvania

11

1,546

11

1,546

West Virginia

12

1,074

12

1,074

Total

15

1,184

43

5,227

58

6,411

Our executive offices are located in Kennett Square, Pennsylvania and we have several other corporate offices, including Andover, Massachusetts; Towson, Maryland; Albuquerque, New Mexico; and Irvine, California. We own our executive offices in Kennett Square, Pennsylvania.

Item 3. Legal Proceedings

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 21 - “Commitments and Contingencies – Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A common stock is listed on the NYSE under the symbol "GEN." Information with respect to sales prices and record holders of our Class A common stock is set forth below. There is no established trading market for our Class B common stock or Class C common stock.

Holders

On March 12, 2021, there were 60 holders of record of our Class A common stock, 10 holders of record of our Class B common stock, and 60 holders of record of our Class C common stock.

Dividends

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We have made and will continue to make distributions on the behalf of FC-GEN members to satisfy tax obligations. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and to fund the operation of our business.

Securities Authorized for Issuance Under Equity Compensation Plans

We primarily issue restricted stock units under our share-based compensation plans, which are part of a broad-based, long-term retention program that is intended to attract and retain talented employees and directors, and align stockholder and employee interests.

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The Company maintains two stock-based employee compensation plans: the 2020 Omnibus Equity Incentive Plan (the 2020 Plan) and the Amended and Restated 2015 Omnibus Equity Incentive Plan (the Prior Plan). During the second quarter of 2020, the Company’s shareholders approved the 2020 Plan. As of the effective date of the 2020 Plan, no further grants may be made under the Prior Plan. Any shares that were available for issuance under the Prior Plan and that were not subject to outstanding awards under the Prior Plan became available for issuance (in addition to the newly authorized shares) under the 2020 Plan. The 2020 Plan provides for the grant of incentive and non-qualified stock options as well as stock appreciation rights, restricted stock, restricted stock units, performance units and shares, and other stock-based awards. Generally, restricted stock unit grants to employees vest over three to four years, certain of which are subject to performance based criteria that must be met in order for the awards to vest. The Board of Directors may terminate the 2020 Plan at any time. Only shares of our Class A common stock can be issued or transferred pursuant to awards under the 2020 Plan.

Additional information regarding our stock plan activity for fiscal years 2020 and 2019 is provided in the notes to our consolidated financial statements in this annual report. See Note 14 - “Stock-Based Compensation."

The equity compensation plan information set forth in Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" of this report contains information concerning securities authorized for issuance under our equity compensation plans.

Item 6. Selected Financial Data

This item is not applicable to smaller reporting companies.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented. Historical results may not indicate future performance. Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in Item 1A. “Risk Factors,” of this report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included in this report.

Business Overview

Genesis is a healthcare services holding company that through its subsidiaries owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. We have an administrative service company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. We provide inpatient services through 341 skilled nursing, assisted/senior living and behavioral health centers located in 24 states. Revenues of our owned, leased and otherwise consolidated centers constitute approximately 86% of our revenues.

We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% of our revenues.

We provide an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of our revenues.

Going Concern Considerations

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions. Our primary focus as the effects of COVID-19 began to impact the United States was the health and safety of our patients, residents, employees and

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their respective families. We implemented various measures to provide the safest possible environment within our sites of service during this pandemic and will continue to do so.

The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the healthcare industry and our businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system across the United States. A significant number of our facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 is having and will likely continue to have a material and adverse effect on our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures.

We performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of our plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:

We applied for and received government-sponsored financial relief related to the pandemic;
We are utilizing the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;
While we vigorously advocate, for ourselves and the skilled nursing industry, regarding the need for additional government-sponsored funding, we continue to explore and to take advantage of existing government-sponsored funding programs implemented to support businesses impacted by COVID-19;
We continue to seek and implement measures to adapt our operational model to function for the long-term in a COVID-19 environment;
We have pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity;
We executed a series of transactions, as described at Note 23 – “Subsequent Events – Restructuring Transactions,” that are expected to improve our liquidity position; and
We are exploring and evaluating a number of strategic and other alternatives to manage and to improve our liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.

These measures and other plans and initiatives of ours are designed to provide us with adequate liquidity to meet our obligations for at least the twelve-month period following the date our financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond our control or may not be available on terms acceptable to us, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if we receive additional funding support from government sources and/or are able to execute successfully all of our plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, our operating plans and resulting cash flows together with our cash and cash equivalents and other sources of liquidity

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may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events and circumstances could force us to seek reorganization under the U.S. Bankruptcy Code.

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.

Significant Transactions and Events

COVID-19

The Centers for Disease Control and Prevention (CDC) has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19. In addition, our employees are at risk of contracting or spreading the disease due to the nature of the work environment when caring for patients. In an effort to prevent the introduction of COVID-19 into our facilities, and to help control further exposure to infections within communities, we have implemented policies restricting visitors at all of our facilities except for essential healthcare personnel and for families and friends, under certain compassionate care circumstances, such as but not exclusively, end-of-life situations. We also implemented policies for screening employees and anyone permitted to enter the building, implemented in-room only dining, activities programming and therapy. Our policy is to follow government guidance to minimize further exposure, including personal protection protocols, restricting new admissions, and isolating patients. Due to the vulnerable nature of our patients, we expect many of these restrictions will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed. Notwithstanding these restrictions and our other response efforts, the virus has had, and likely will continue to have, introduction to, and transmission within, certain facilities due to the easily transmissible nature of COVID-19.

COVID-19 has materially and adversely affected our operations and supply chains, resulting in a reduction in our operating occupancy and related revenues, and an increase in our expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures serve to outline the estimated impact of COVID-19 on our business through December 31, 2020, as well as further developments through the filing date of this Annual Report on Form 10-K, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19.

Operations

Our first report of a positive case of COVID-19 in one of our facilities occurred on March 16, 2020. Since that time, 292 of our 341 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 71% of the patient and resident positive COVID-19 cases in our facilities have occurred in the states of Connecticut, Maryland, Massachusetts, Pennsylvania, New Jersey, New Mexico, and West Virginia, which correspond to many of the largest community outbreak areas across the country. Our facilities in these seven states represent 60% of our total operating beds.

Our occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.

Net Revenues

Our net revenues for the year ended December 31, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. Our skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 76.6% for the year ended December 31, 2020. However, the revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as

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discussed below. See “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue - COVID-19 Regulatory and Reimbursement Relief.”

After considering a commensurate reduction in related and direct operating expenses, we estimate lost revenue caused by COVID-19 reduced earnings by approximately $185.9 million for the year ended December 31, 2020. The ongoing impact of COVID-19 on our occupancy and net revenues will depend on future developments, which are highly uncertain and cannot be predicted, including the pace of recovery in occupancy, the future scope and severity of COVID-19 and the actions taken by public and private entities in response to the pandemic.

Operating Expenses

Our operating expenses for the year ended December 31, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the year ended December 31, 2020, we estimate we incurred approximately $257.9 million of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs, the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate.

We are not reasonably able to predict the total amount of costs we will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.

COVID-19 Vaccinations Programs

In December 2020, the U.S. Food and Drug Administration approved the use of COVID-19 vaccines, which have begun to be distributed and administered widely throughout the United States, including to our patients, residents, and employees. The CDC has recommended that the initial phase of the vaccine programs prioritize healthcare personnel and residents of long-term care facilities, with states holding the ultimate authority to determine the recipients of the vaccines. As of March 12, 2021, all of our eligible patients, residents and employees have been provided the opportunity to receive a vaccination. Over 80% of patients and residents and over 60% of eligible employees have received both doses of the COVID-19 vaccine. We plan to continue participating in COVID-19 vaccine programs, including the federal Pharmacy Partnership for Long-Term Care Program.

Restructuring Transactions

The Investment Agreement

On March 2, 2021, we entered into an investment agreement (the Investment Agreement) with FC-GEN Operations Investment, LLC (FC-GEN), a subsidiary of ours, and ReGen Healthcare, LLC, (the Investor).

(a) The Notes

In accordance with the terms of the Investment Agreement, on March 2, 2021 (the Initial Closing Date), the Investor purchased for $50.0 million a convertible promissory note of FC-GEN (the Initial Note), which is convertible into 69,500,755 baskets of securities (Conversion Baskets), each comprised of one Class A common unit of FC-GEN (Class A Unit) and one Class C common stock of Genesis (Class C Share), subject to adjustment, which represent 25% of our fully diluted share capital (the Initial Closing). Under the Investment Agreement, the Investor has an option exercisable on or prior to March 31, 2021 to purchase for $25.0 million (the Supplemental Purchase) a second convertible promissory note (the Supplemental Note), which is convertible into 34,594,079 Conversion Baskets which, together with the Conversion Baskets issuable upon conversion of the Initial Note, represent 33.3% of our fully diluted share capital as of the Initial Closing Date, subject to certain adjustments (the Second Closing). The conversion of the Notes are subject to, among other things, receipt of certain regulatory approvals.

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The number of Conversion Baskets issuable upon conversion assumes that the Welltower Shares (as defined below) have been issued. If such Welltower Shares have not been issued in part or in full, the Investor would receive a lesser amount of Conversion Baskets upon conversion and be issued the remainder of the Conversion Baskets upon the issuance of the Welltower Shares or the remainder of the Welltower Shares, as applicable.

(b) The ReGen Warrant

Under the Investment Agreement, upon the closing of the Supplemental Purchase, the Investor will receive a warrant (the ReGen Warrant) to purchase baskets of Class A Units and Class C Shares, with each such basket consisting of one Class A Unit and one Class C Share, subject to adjustment pursuant to the terms of the ReGen Warrant (together, the Exercise Basket) at an exercise price equal to $1.00 per Exercise Basket, subject to adjustment pursuant to the terms of the ReGen Warrant. The ReGen Warrant will be exercisable for 55,600,604 Exercise Baskets (subject to certain adjustments) by the Investor during the term commencing on the date of the Second Closing and ending on the third anniversary of the Second Closing. 

(c) Governance Matters

In accordance with the terms of the Investment Agreement, the board of directors (the Board) has fixed the size of the Board at seven (7) members. In accordance with the terms of the Investment Agreement, at the Initial Closing, two directors resigned from the Board and the vacancies were filled with two directors selected by the Investor (each, an Investor Director). Any change in the size of the Board from seven (7) must be approved by (i) the Independent Committee at any time prior to the one year anniversary of the Investment Agreement and (ii) the Investor, if the change is made at a time when the Investor is entitled to elect one Investor Director to the Board. Effective March 2, 2021, Robert Fish resigned as Chairman of the Board and David Harrington, an Investor Director, was appointed as Chairman. So long as the Investor is entitled to two seats on the Board, one of the Investor Directors will be the Chairman. Mr. Fish continues to be CEO as well as a director on the Board.

In the event that the Second Closing occurs, we are obligated to cause an additional director who is not an Investor Director (a Non-Investor Director) to resign from the Board and for the vacancy to be filled with an Investor Director. In the event that the Second Closing occurs, the Investor will continue to be entitled to designate three Investor Directors to the Board so long as the Investor and its Affiliates beneficially own in the aggregate at least 75% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing (the 3 Director Beneficial Ownership Requirement). If at any time the 3 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate two Investor Directors to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 50% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 75% of the Class A Units and Class C Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 2 Director Beneficial Ownership Requirement) and the Investor will cause one Investor Director then on the Board to resign. If at any time the 2 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate one Investor Director to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 25% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 25% of the Class A Units and Class C Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 1 Director Beneficial Ownership Requirement) and the Investor will cause any Investor Director(s) then on the Board in excess of one to resign. If at any time the 1 Director Beneficial Ownership Requirement is not met, the Investor will not be entitled to designate any Investor Directors to the Board and the Investor will cause all Investor Directors then on the Board to resign. Until the one year anniversary of the date of the Investment Agreement, the Investor will cause all Investor Directors to recuse themselves from any meetings of the Board or any committee thereof regarding any related party transaction involving the Investor.

In accordance with the terms of the Investment Agreement, so long as the 1 Director Beneficial Ownership Requirement is satisfied, the Investor has the right to designate an observer to the Board (the Observer), who (i) may attend meetings of the Board but may not vote or otherwise participate in them and (ii) is bound to confidentiality obligations as set forth in the Investment Agreement.

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In accordance with the terms of the Investment Agreement, we have formed an independent committee of the Board comprised of up to three (3) directors (the Independent Committee), each of whom must be a Non-Investor Directors and qualify as an independent director under the listing standards of the NYSE except that the CEO as of the Initial Closing Date may serve on the Independent Committee if he is a director. The initial Independent Committee is comprised of James McKeon, James Bloem and Robert Fish. At any time prior to the one year anniversary of the date of the Investment Agreement: (i) the size of the Independent Committee may not be changed, (ii) none of the initial directors on the Independent Committee may be removed therefrom, except and only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be, (iii) a vacancy on the Independent Committee, arising for any reason, may be filled only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be and (iv) in the event of the death, resignation or removal of any Non-Investor Director as a member of the Board, the Independent Committee shall fill such vacancy, except that the Investor shall fill the vacancy resulting from the resignation of a Non-Investor Director in connection with the Second Closing. The Independent Committee has the authority to enforce our rights under the Investment Agreement and will make all determinations therefor regarding the performance and exercise of any rights or obligations of us or our subsidiaries. Further, the Independent Committee has the authority to approve certain related party transactions involving the Investor. The Independent Committee must also approve (i) any amendment to our Bylaws that limits or reduces the authority of the Independent Committee and (ii) any amendment to certain sections of the Investment Agreement that affects the governance of us or the rights of ours or Independent Committee. The Independent Committee will be disbanded at the one year anniversary of the Investment Agreement.

The Investment Agreement further provides that the Investor may not convert Class A Units that would be issued upon conversion of the Initial Note or Supplemental Note or exercise of the ReGen Warrant into shares of Class A common stock of us (the Class A Shares).

The Waiver Agreement

The Investment Agreement requires us to use reasonable best efforts to (i) delist the Class A Shares from the NYSE, (ii) deregister the Class A Shares under the Exchange Act, and (iii) suspend any Exchange Act reporting obligations in respect of the Class A Shares (collectively, the Delisting and Deregistration). In connection with the Delisting and Deregistration, on March 2, 2021, we entered into a Waiver Agreement (the Waiver Agreement) with certain stockholders of us (the Waiving Holders) who are parties to the Registration Rights Agreement, dated as of August 18, 2014, by and among us and the stockholders signatory thereto (the Registration Rights Agreement). Under the Waiver Agreement, the Waiving Holders have agreed to waive the provisions of the Registration Rights Agreement that require that we maintain a shelf registration statement, provide the stockholders party thereto with demand registration rights and file with the Securities and Exchange Commission (the SEC) reports required under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act. In the event that subsequent to the completion of the Delisting and Deregistration, the Class A Shares are both registered under the Exchange Act and listed on a national securities exchange, the Waiver Agreement automatically becomes null and void.

The Transaction Agreement

On March 2, 2021 (the Effective Date), we entered into a Transaction Agreement (together with the exhibits and schedules thereto, the Transaction Agreement) with Welltower, pursuant to which we have agreed to support Welltower in connection with the sale to third party purchasers of Welltower’s interests in certain facilities that our leases from Welltower (the Facilities), terminate the leases on 51 of its facilities leased from Welltower and transition operations to new operators (the New Operators) in return for an $86 million payment; the $86 million will be used to repay our obligations to Welltower which shall occur incrementally over time upon the transition of the Facilities. In connection therewith, we have agreed to transfer management and/or operations of such Facilities to designated replacement operators (the Transitions), subject to the retention of certain liabilities related thereto by us, the assumption of certain liabilities by the New Operators and the delivery of certain indemnities by Welltower relating to the Transitions.

The Transaction Agreement further provides that, upon our satisfying certain conditions, including transition of the Facilities, in consideration for our undertaking the transactions contemplated in the section below entitled “The Welltower Warrant and Shares” (a) an additional approximately $170 million of outstanding unsecured indebtedness owed to Welltower will be written off and (b) our obligations in respect of the yet outstanding secured and unsecured indebtedness will be restructured (the Debt Write-Down).

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Concurrently with the Debt Write-Down, we will issue a warrant to Welltower for our purchase of shares in us and Class A Shares, in each case as more particularly described below.

(a) The Welltower Warrant and Shares

Pursuant to the Transaction Agreement, concurrently with the debt restructure, we will (i) issue to a subsidiary of Welltower (TRS Holdco) a warrant (the Welltower Warrant) to purchase 900,000 Class A Shares at an exercise price equal to $1.00 per share, which Welltower Warrant will be exercisable by TRS Holdco during the period commencing on the date which is six months following the issuance date of the Welltower Warrant (the Issuance Date), and ending on the date which is five years following the Issuance Date; and (ii) issue to Welltower Class A Shares (the Welltower Shares) representing 20% of the indirect ownership of FC-GEN, provided that such issuance will be subject to dilution from new capital (including the Initial Note and the Supplemental Note).

(b) The Term Loan Amendments

Pursuant to the Transaction Agreement, we and Welltower have agreed to certain amendments (the Term Loan Amendments) to the Term Loan Agreement, dated as of July 29, 2016 (as may be amended, restated, amended and restated, extended, supplemented or otherwise modified from time to time, including as amended by the Term Loan Amendments, the Term Loan Agreement), among us, FC-GEN Operations Investment, LLC, as the borrower (the Term Borrower), certain other subsidiaries of us party thereto, Markglen, Inc. (the Welltower Lender) and OHI Mezz Lender, LLC and any other lender from time to time party thereto and Welltower, as administrative agent and collateral agent.

Among other things, the Term Loan Agreement (i) provides that all interest payable on the term loans of the Welltower Lender (the Welltower Term Loans) may be paid in-kind at the option of us, (ii) extends the maturity of the term loans to January 1, 2024, (iii) removes the financial covenants (except for the covenant with respect to capital expenditures), (iv) includes additional negative covenants restricting, among other things, asset sales and the issuance of capital stock by certain subsidiaries of us and (v) permits us and our subsidiaries to enter into certain other transactions, including the Transitions and the transactions contemplated by the Transaction Agreement.

The Term Loan Amendments to the Term Loan Agreement are effective as of the Effective Date. However, if we have not completed any Transitions by September 1, 2021, then several of the Term Loan Amendments (including the changes that permit all interest payable on the Welltower Term Loans to be paid in-kind) will no longer be effective. Moreover, if we do not complete Transitions with respect to 85% of the Facilities by September 1, 2021, then a portion of the interest payable with respect to the Welltower Term Loans will require interest to be paid with cash instead of in-kind until the Transitions are completed.

(c) The Asset Based Lending Facility

On the Effective Date, we also entered into an Amendment No. 7 (the ABL Amendment) to the Fourth Amended and Restated Credit Agreement, dated as of March 6, 2018 (as may be amended, restated, amended and restated, extended, supplemented or otherwise modified from time to time, the ABL Credit Agreement), among us, certain subsidiaries of us party thereto as borrowers and/or as guarantors, the lenders party thereto, the letter of credit issuers party thereto and MidCap Funding IV Trust, as administrative agent.

Among other things, the ABL Amendment, permits us and our subsidiaries to enter into certain transactions, including, among other things, the Transitions, the Term Loan Amendments and certain other transactions contemplated by the Transaction Agreement.

Tax Benefit Preservation Plan

On March 11, 2021, we entered into a Tax Benefits Preservation Plan (the Plan) with Equiniti Trust Company as rights agent (the Rights Agent), and our Board of Directors declared a dividend distribution of one right (a Right) for each outstanding share of our common stock, par value $0.001 per share, to stockholders of record at the close of business on March 11, 2021 (the Record Date). Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from us a unit consisting of one one-hundredth

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of a share (a Unit) of Series A Junior Participating Preferred Stock, par value $0.001 per share (the Series A Preferred Stock), at a purchase price of $4.50 per Unit, subject to adjustment (the Purchase Price). The Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets (Tax Benefits) by deterring any person from becoming the beneficial owner of 4.9% or more of the shares of our Common Stock then outstanding.

The Right will be triggered upon the acquisition of 4.9% or more of our outstanding common stock or future acquisitions by any existing holder of 4.9% or more of our outstanding common stock. If a person or group acquires 4.9% or more of our common stock, all rights holders, except the acquirer, will be entitled to acquire, at the then exercise price of a Right, that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the Right.

 

In connection with the adoption of the Plan, the Board of Directors approved the Certificate of Designation, Preferences, and Rights of Series A Preferred Stock, which designates the rights, preferences and privileges of 4,000,000 shares of a series of our preferred stock, par value $0.001 per share, designated as Series A Junior Participating Preferred Stock.

Strategic Partnerships

NewGen Partnership

On February 1, 2020, we transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to a partnership with New Generation Health, LLC (the NewGen Partnership). We sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for $78.7 million. Net transaction proceeds were used by us to repay indebtedness, including prepayment penalties, of $33.7 million, fund our initial 50% equity contribution and working capital requirement of $14.9 million, and provide financing to the partnership of $9.0 million. We recorded a gain on sale of assets and transition of leased facilities of $58.8 million and loss on early extinguishment of debt of $1.0 million. Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements.

On May 15, 2020, we transitioned operational responsibility for four additional leased facilities in California to the NewGen Partnership. The four facilities generated annual revenues of $55.0 million and pre-tax loss of $0.5 million. On October 1, 2020, we transitioned operational responsibility for one additional leased facility in the state of Washington to the NewGen Partnership. The facility generated annual revenues of $12.3 million and pre-tax income of $0.2 million. Subsequent to the transition of these five facilities, we have applied the equity method of accounting for our 50% interest in these operations.

On February 1, 2021, we sold the real estate and operations of two skilled nursing facilities in California and Nevada to the NewGen Partnership for a price of $19.2 million, which represented the outstanding HUD insured loans as of the closing date. The associated asset and loan balances were presented as held for sale in the consolidated balance sheet at December 31, 2020. The facilities generated annual revenues of $15.7 million and pre-tax income of $1.7 million. We recorded a long-lived asset impairment charge of $0.7 million associated with one of the facilities during the year ended December 31, 2020. We are assessing the full impact these sales will have on our consolidated financial statements.

We do not hold a controlling financial interest in the NewGen Partnership. As such, we have applied the equity method of accounting for our 50% interest in the NewGen Partnership. Our investment in the NewGen Partnership, $25.1 million, is included within other long-term assets in the consolidated balance sheet as of December 31, 2020.

Cascade Partnership

On July 2, 2020, we sold one facility to an affiliate of Cascade Capital Group, LLC (Cascade) for $26.1 million, using proceeds from the sale to retire U.S. Department of Housing and Urban Development (HUD) financed debt of $10.5 million, pay aggregate prepayment penalties and other closing costs of $1.0 million, and partially fund our investment in a partnership with Cascade (the Cascade Partnership). Cascade also acquired eight facilities that we operated under a master lease agreement with Second Spring Healthcare Investments (Second Spring). We continue to operate all nine of these facilities subject to a new master lease agreement with affiliates of the Cascade Partnership. The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of $20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. The master

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lease agreement includes a fixed price option to purchase the nine facilities for $251.6 million that is exercisable from July 2023 through June 2025. We executed a promissory note with the Cascade Partnership for $20.3 million, which was subsequently converted into a 49% membership interest in the Cascade Partnership.

The Cascade Partnership is a VIE of which we are the primary beneficiary. Consequently, we have consolidated all of the accounts of the Cascade Partnership in the accompanying consolidated financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Cascade Partnership acquired its nine skilled nursing facilities from the Company and Second Spring for an aggregate purchase price of $223.6 million. The initial consolidation primarily resulted in property and equipment of $208.6 million, non-recourse debt of $190.3 million, net of debt issuance costs, and noncontrolling interests of $21.2 million.

Next Partnership

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which we acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next Healthcare (Next), a related party. See Note 16 – “Related Party Transactions.” In conjunction with the facility sales, we received aggregate annual rent credits of $17.2 million. We will continue to operate these facilities pursuant to a master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the net price paid by the partnership to acquire the facilities from Welltower.

We have concluded the Next Partnership qualifies as a VIE and we are the primary beneficiary. As such, we have consolidated all of the accounts of the Next Partnership in the accompanying consolidated financial statements. The ROU assets and lease obligations related to the Next Partnership lease agreement have been fully eliminated in our consolidated financial statements. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million. The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million.

Vantage Point Partnership

On September 12, 2019, Welltower and Second Spring sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which we invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million. In conjunction with the facility sales, we received aggregate annual rent credits of $30.3 million. We will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require us to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.

We have concluded the Vantage Point Partnership qualifies as a VIE and we are the primary beneficiary. As such, we have consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements. The ROU assets and lease obligations related to the Vantage Point Partnership lease agreement have been fully eliminated in our consolidated financial statements. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million. The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million.

During the third quarter of 2019, we sold the real property of seven skilled nursing facilities and one assisted/senior living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire our interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested. Three of the facilities were subject to real estate loans and two were subject to loans insured

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by the U.S. Department of Housing and Urban Development (HUD). See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” We also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $57.8 million.

On January 10, 2020, Welltower sold the real estate of one skilled nursing facility located in Massachusetts to the Vantage Point Partnership. The sale represents the final component of the transaction. As a result of the January 10, 2020 transaction, we will receive an annual rent credit of $0.7 million under its master lease with Welltower and recorded a gain of $0.2 million as a result of the lease termination. The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million. The consolidation of this additional skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing. We operate all 19 facilities owned by the Vantage Point Partnership.

Divestiture of Non-Strategic Facilities

2020 Divestitures

In addition to the 24 facilities transitioned into the NewGen Partnership, we divested the operations of 39 owned and leased facilities in 2020.

During the first quarter of 2020, we sold four owned skilled nursing facilities and divested the operations of one leased senior/assisted living facility. Additionally, Omega Healthcare Investors, Inc. (Omega) sold the real estate of one skilled nursing facility located in Massachusetts that we leased under a master lease agreement, but had closed on July 1, 2019. The facilities generated annual revenues of $55.2 million and pre-tax income of $0.5 million. The sales resulted in aggregate proceeds of $82.6 million, of which, $49.6 million was used to repay indebtedness. We recognized an aggregate gain on the sale of the facilities of $27.4 million and a loss on early extinguishment of debt of $3.0 million.

During the second quarter of 2020, we sold three owned skilled nursing facilities and divested the operations of 12 leased skilled nursing facilities. The facilities generated annual revenues of $136.1 million and pre-tax loss of $1.8 million. The sales resulted in aggregate proceeds of $45.8 million, of which, $22.7 million was used to repay indebtedness. We recognized an aggregate gain on the sale of the facilities of $16.1 million and a loss on early extinguishment of debt of $1.4 million.

During the third quarter of 2020, we sold one owned skilled nursing facility and several rehab clinics. The facility generated annual revenues of $9.9 million and pre-tax income of $0.2 million. The sale resulted in proceeds of $10.5 million, of which, $5.5 million was used to repay indebtedness. We recognized a gain on the sale of the facility and rehab clinics of $5.5 million.

During the fourth quarter of 2020, we sold five owned facilities and divested the operations of 13 leased skilled nursing facilities. The facilities generated annual revenues of $173.9 million and pre-tax loss of $8.8 million. The sales resulted in aggregate proceeds of $40.9 million, of which, $22.4 million was used to repay indebtedness. We recognized an aggregate gain on the sale and divestitures of $10.8 million and a loss on early extinguishment of debt of $2.4 million.

2019 Divestitures

In addition to the nine divestitures noted in the Vantage Point Partnership transaction, we divested the operations of 35 owned and leased facilities in 2019. We also sold the real property of seven previously divested facilities.

During the first quarter of 2019, we divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million. We recognized a loss on exit reserves of $3.5 million. We also completed the closure of one facility located in Ohio. The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

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During the second quarter of 2019, we sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. We incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million. We also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million. In addition, we divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

During the third quarter of 2019, we divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility. Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $3.5 million. In addition, we sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing. The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $0.6 million.

During the fourth quarter of 2019, we sold the real property of seven facilities in Texas for a sales price of $20.1 million. The operations of these facilities were divested in 2018. The net proceeds were used principally to repay the indebtedness of the facilities. We recognized a net gain of $3.3 million associated with the sale of the facilities. We recognized a gain on early extinguishment of debt of $2.6 million associated with the write off of the debt premiums and issuance costs on the underlying HUD loans.

Also during the fourth quarter of 2019, we divested the operations of two leased skilled nursing facilities. The facility generated annual revenues of $28.1 million and pre-tax net loss of $1.7 million. The divestitures resulted in a loss of $1.3 million, which was primarily attributable to exit costs.

Lease Transactions

Gains, losses and termination charges associated with master lease terminations and amendments are recorded as non-recurring charges. These amendments and terminations resulted in net gains of $98.6 million and of $95.8 million for the years ended December 31, 2020 and 2019, respectively. These gains are included in other income on the consolidated statements of operations. Below is a summary of the more material lease transactions.

NewGen Partnership

As noted above, we transitioned the operations of 18 leased skilled nursing, behavioral health and assisted living facilities to the NewGen Partnership during the year ended December 31, 2020. In total, the lease transitions resulted in a net reduction to operating lease ROU assets and obligations of $17.0 million and $26.8 million, respectively, and a gain of $19.7 million, which includes proceeds from the sale of leasehold rights.

Welltower

During the year ended December 31, 2020, we amended the Welltower Master Lease several times to reflect the lease termination of one facility and rent credits associated with the sale of previously closed locations. We received annual rent credits of approximately $1.1 million. In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of $31.4 million and $51.2 million, respectively, and a gain of $19.8 million.

During the year ended December 31, 2019, we amended the Welltower Master Lease several times to reflect the lease termination of 30 facilities, including the 15 facilities sold to and now leased from the Next Partnership. As a result of the lease termination on the 30 facilities, we received annual rent credits of approximately $25.9 million. For those facilities remaining under the Welltower Master Lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain

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threshold. Lease modification analyses were performed at each amendment date and as of December 31, 2019, all facilities subject to the Welltower Master Lease were classified as operating leases. In total, the amendments resulted in a net reduction to finance lease ROU assets and obligations of $11.7 million and $22.4 million, respectively, a net reduction to operating lease ROU assets and obligations of $112.8 million and $150.4 million, respectively and a gain of $48.3 million.

Omega

During the year ended December 31, 2020, we amended the Omega Master Lease several times to reflect the lease termination of five facilities. We received annual rent credits of approximately $2.6 million. In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of $16.0 million and $24.6 million, respectively, and a gain of $8.6 million.

During the year ended December 31, 2019, we amended our master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $23.4 million. In addition, we recorded a gain of $1.9 million in the reassessment of the assumed timing of a variable rent buyout.

During the year ended December 31, 2019, we amended our master lease with Omega to reflect the inclusion of nine skilled nursing facilities and one assisted living facility in New Mexico and Arizona. These facilities were previously leased from Omega, following the terms of a separate lease agreement, and all facilities were classified as operating leases. There was no change in base rent for the 10 facilities upon addition to the master lease. The lease assessment and measurement resulted in operating lease classification with a $10.6 million ROU asset and lease liability gross up. In addition, we received $15.0 million as a short-term note payable. See Note 12 – “Long-Term Debt – Notes Payable.”

Second Spring

On March 12, 2021, Second Spring sold the real estate of 16 of the 21 skilled nursing facilities, in which we operate and lease from Second Spring, to affiliates of Cascade. We continue to operate all 16 centers under an interim master lease, with a reduced monthly lease rate. As part of the transaction, we entered into operations transfer agreements with two prospective new operators and anticipate transferring operations of the facilities as early as May 1, 2021. Upon transfer, we will receive a payment of $9.3 million from Cascade, and $13.8 million of facility related liabilities will be assumed by the new operators or reimbursed to us. We have signed operations transfer agreements for four of the facilities and expect to transfer those operations upon the receipt of licensure approval. No definitive plans have been determined as to the fifth remaining facility.

The 21 facilities leased from Second Spring generated annual revenues of $276.4 million and pre-tax loss of $35.3 million during the year ended December 31, 2020. The ROU assets and lease obligations associated with the facilities were $174.0 million and $189.0 million, respectively, as of December 31, 2020. We are evaluating the accounting for these transactions, which is expected to be finalized later in 2021 upon the satisfaction of certain conditions and the related timing.

During the year ended December 31, 2020, we amended our master lease several times with Second Spring to reflect the lease termination of 22 facilities subject to the lease and received annual rent credits of $41.2 million. In conjunction with the lease termination, operating lease ROU assets and lease obligations of $304.0 million and $340.1 million, respectively, were written off. The lease termination and remeasurement resulted in a gain of $36.1 million.

During the year ended December 31, 2019, we amended our master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, we reassessed the likelihood of exercising our renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating

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leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

Other Lease Transactions

During the year ended December 31, 2020, we amended three master lease agreements to reflect the lease termination of a combined 13 facilities from the master lease agreements. In conjunction with the lease terminations, operating lease ROU assets and lease obligations of $59.6 million and $64.0 million, respectively, were written off, resulting in a gain of $4.4 million.

During the year ended December 31, 2020, we extended the lease agreements of several facilities and offices resulting in an increase in ROU assets and lease liabilities of $28.0 million.

During the year ended December 31, 2019, we amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed our option to purchase certain facilities under the lease and adjusted certain financial covenants. We had previously determined that the renewal option period was not reasonably certain of exercise. Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

During the year ended December 31, 2019, we amended a master lease agreement to reflect the lease termination of six facilities subject to the lease. In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

Critical Accounting Policies and Estimates

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires us to consolidate company financial information and make informed estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in our consolidated financial statements relate to valuation of revenues and accounts receivable, self-insurance reserves, income taxes, leases and impairments of long-lived assets.  Actual results could differ from those estimates.

Revenue Recognition

We generate revenues, primarily by providing healthcare services to our customers. We apply Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) in determining the amount and timing of revenue recognition. Under Topic 606, revenues are recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled from patients, third-party payors (including government programs and insurers) and others, in exchange for those goods and services. Amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues.

Performance obligations are determined based on the nature of the services provided. The majority of our healthcare services are highly interrelated and represent multiple inputs to deliver the combined output for which a customer has entered into a contract with us. As such, the bundle of services is treated as a single performance obligation satisfied over time as services are rendered. We also provide certain ancillary services, such as activities, meals, security, housekeeping and assistance in the activities of daily living, including barber and beauty services. Separate and distinct performance obligations exist relative to the performance of the non-medical ancillary services. As such, revenues from ancillary services are recognized at a point in time, if and when those services are rendered.

We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. We utilize the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. We constrain the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from our estimates, we adjust these estimates, which would affect net revenues in the period such variances become known. We do not adjust the promised amount of consideration for the effects of a significant financing

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component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

We are entitled to compensation for the value of the services provided, as they are performed, so we recognize the related revenue in the statements of operations as the services are performed. Since we have performed our obligation under the contract, we have unconditional rights to the consideration recorded and, therefore, classify those billed and unbilled rights as accounts receivable. Payments that we receive from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. See Note 5 – “Net Revenues and Accounts Receivable.

Self-Insurance Reserves

We provide for self-insurance reserves for both general and professional liabilities and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported. Estimated losses from asserted and incurred but not reported claims are accrued based on our estimate of the ultimate costs of the claims, which include costs associated with litigating and settling claims, and the relationship of past reported incidents to eventual claim payments. All relevant information, including our own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims. The reserves for loss for workers’ compensation claims are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability claims are recorded on an undiscounted basis. Estimated insurance recoveries related to recorded liabilities are reflected as assets in our consolidated balance sheets when the receipt of such amounts is deemed to be probable. See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs – General and Professional Liability and Workers’ Compensation.”

Income Taxes

Our effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. We account for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.

We evaluate, on a quarterly basis, our ability to realize deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of pre-tax earnings, our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. We record accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations.

Leases

We lease skilled nursing facilities and assisted/senior living facilities, as well as certain office space, land, and equipment. We evaluate at contract inception whether a lease exists and recognizes a lease liability and right-of-use (ROU) asset for all leases with a term greater than 12 months. Leases are classified as either finance or operating. While many of our facilities are subject to master lease

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agreements, leases are assessed, classified, and measured at the facility level.

All lease liabilities are measured as the present value of the future lease payments using a discount rate, which is generally our incremental borrowing rate for collateralized borrowings. The future lease payments used to measure the lease liability include both fixed and variable payments that depend on a rate or index, as well as the exercise price of any options to purchase the underlying asset that have been deemed reasonably certain of being exercised. Future lease payments for optional renewal periods that are not reasonably certain of being exercised are excluded from the measurement of the lease liability. Regarding variable payments that depend on a rate or index, the lease liability is measured using the applicable rate or index as of lease commencement and is only remeasured under certain circumstances, such as a change in the lease term. Lease incentives serve to reduce the amount of future lease payments included in the measurement of the lease liability. For all leases, the ROU asset is initially derived from the measurement of the lease liability and adjusted for certain items, such as initial direct costs and lease incentives received. ROU assets are subject to long-lived asset impairment testing.

Amortization of finance lease ROU assets, which is generally recognized on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset, is included within depreciation and amortization expense in the consolidated statements of operations. Interest expense associated with finance lease liabilities is included within interest expense in the consolidated statements of operations. Operating lease expense is recognized on a straight-line basis over the lease term and included within lease expense in the consolidation statements of operations. The lease term is determined based on the date we acquire control of the leased premises through the end of the lease term. Optional renewals periods are not initially included in the lease term unless they are deemed to be reasonably certain of being exercised at lease commencement. For further discussion, see Note 10 – “Leases.”

Impairment of Long-Lived Assets

Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less costs to sell. See Note 19 – “Asset Impairment Charges.”

Key Performance and Valuation Measures

In order to assess our financial performance between periods, we evaluate certain key performance and valuation measures for each of our operating segments separately for the periods presented. Results and statistics may not be comparable period-over-period due to the impact of acquisitions and dispositions, or the impact of new and lost therapy contracts.

The following is a glossary of terms for some of our key performance and valuation measures and non-GAAP measures:

“Actual Patient Days” is defined as the number of residents occupying a bed (or units in the case of an assisted/senior living center) for one qualifying day in that period.

“Adjusted EBITDA” is defined as EBITDA adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental performance measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

“Adjusted EBITDAR” is defined as EBITDAR adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental valuation measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

“Available Patient Days” is defined as the number of available beds (or units in the case of an assisted/senior living center) multiplied by the number of days in that period.

“Average Daily Census” or “ADC” is the number of residents occupying a bed (or units in the case of an assisted/senior living center) over a period of time, divided by the number of calendar days in that period.

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“EBITDA” is defined as EBITDAR less lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

“EBITDAR” is defined as net income or loss attributable to Genesis Healthcare, Inc. before net income or loss of non-controlling interests, net income or loss from discontinued operations, depreciation and amortization expense, interest expense and lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

“Insurance” refers collectively to commercial insurance and managed care payor sources, including Medicare Advantage beneficiaries, but does not include managed care payors serving Medicaid residents, which are included in the Medicaid category.

“Occupancy Percentage” is measured as the percentage of Actual Patient Days relative to the Available Patient Days.

“Skilled Mix” refers collectively to Medicare and Insurance payor sources.

“Therapist Efficiency” is computed by dividing billable labor minutes related to patient care and customer value added services by total labor minutes for the period.

Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results:

Year ended December 31, 

    

2020

    

2019

Financial Results (in thousands)

Financial Performance Measures:

Net revenues (GAAP)

$

3,906,223

$

4,565,834

Net (loss) income attributable to Genesis Healthcare, Inc. (GAAP)

(58,963)

14,619

EBITDA (Non-GAAP)

 

136,295

 

312,779

Adjusted EBITDA (Non-GAAP)

 

206,829

 

199,027

Valuation Measure:

Adjusted EBITDAR (Non-GAAP)

$

573,168

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INPATIENT SEGMENT:

Year ended December 31, 

    

2020

    

2019

    

Occupancy Statistics - Inpatient

Available licensed beds in service at end of period

 

 

35,864

 

 

43,252

 

Available operating beds in service at end of period

 

 

34,525

 

 

41,370

 

Available patient days based on licensed beds

 

 

13,127,083

 

 

15,777,465

 

Available patient days based on operating beds

 

 

12,615,911

 

 

15,119,996

 

Actual patient days

 

 

10,037,688

 

 

13,252,851

 

Occupancy percentage - licensed beds

 

 

76.5

%  

 

84.0

%  

Occupancy percentage - operating beds

 

 

79.6

%  

 

87.7

%  

Skilled mix

 

 

17.8

%  

 

18.3

%  

Average daily census

 

 

27,425

 

 

36,309

 

Revenue per patient day (skilled nursing facilities)

Medicare Part A

 

$

574

 

$

535

 

Insurance

 

496

 

462

Private and other

 

369

 

366

Medicaid

 

259

 

236

Medicaid (net of provider taxes)

 

236

 

215

Weighted average (net of provider taxes)

 

$

305

 

$

282

 

Patient days by payor (skilled nursing facilities)

Medicare

 

1,012,184

 

1,318,793

Insurance

 

661,325

 

961,329

Total skilled mix days

 

1,673,509

 

2,280,122

Private and other

 

561,767

 

732,888

Medicaid

 

7,149,917

 

9,466,310

Total Days

 

9,385,193

 

12,479,320

Patient days as a percentage of total patient days (skilled nursing facilities)

Medicare

 

 

10.8

%  

 

10.6

%  

Insurance

 

 

7.0

%  

 

7.7

%  

Skilled mix

 

17.8

%  

 

18.3

%  

Private and other

 

 

6.0

%  

 

5.9

%  

Medicaid

 

 

76.2

%  

 

75.8

%  

Total

 

100.0

%  

 

100.0

%  

Facilities at end of period

Skilled nursing facilities

Leased

 

227

 

278

Owned

 

9

 

29

Joint Venture

 

71

 

38

Managed

 

12

 

12

Total skilled nursing facilities

 

319

 

357

Total licensed beds

 

38,489

 

43,195

Assisted/Senior living facilities:

Leased

 

19

 

21

Owned

 

1

 

1

Joint Venture

 

2

 

1

Managed

 

 

1

Total assisted/senior living facilities

 

22

 

24

Total licensed beds

 

1,704

 

1,941

Total facilities

 

341

 

381

Total Jointly Owned and Managed— (Unconsolidated)

 

36

 

13

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REHABILITATION THERAPY SEGMENT*:

Year ended December 31, 

    

2020

    

2019

    

Revenue mix %:

Company-operated

33.4

%  

35.8

%  

Non-affiliated and affiliated third party

66.6

%  

64.2

%  

Sites of service (at end of period)

1,056

1,155

Revenue per site

$

579,877

$

620,016

Therapist efficiency %

 

60.5

%  

 

68.0

%  

* Excludes respiratory therapy services.

Reasons for Non-GAAP Financial Disclosure

The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). A Non-GAAP Financial Measure is a numerical measure of a registrant’s value, historical or future financial performance, financial position and cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. We have provided reconciliations of the Non-GAAP Financial Measures to the most directly comparable GAAP financial measures.

We believe the presentation of Non-GAAP Financial Measures provides useful information to investors regarding our results of operations because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these Non-GAAP Financial Measures:

allow investors to evaluate our performance from management’s perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;

facilitate comparisons with prior periods and reflect the principal basis on which management monitors financial performance;

facilitate comparisons with the performance of others in the post-acute industry;

provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our company; and

allow investors to view our financial performance and condition in the same manner as our significant landlords and lenders require us to report financial information to them in connection with determining our compliance with financial covenants.

We use two Non-GAAP Financial Measures primarily (EBITDA and Adjusted EBITDA) as performance measures and believe that the GAAP financial measure most directly comparable to these two Non-GAAP Financial Measures is net (loss) income attributable to Genesis Healthcare, Inc. We use one Non-GAAP Financial Measure (Adjusted EBITDAR) as a valuation measure and believe that the GAAP financial measure most directly comparable to this Non-GAAP Financial Measure is net (loss) income attributable to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the value of our business and the performance of our operating businesses, as well as the employees responsible for operating such businesses. Non-GAAP Financial Measures are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, we are better able to evaluate value and the operating performance of the business unit and the employees responsible for business unit performance. Consequently, we use

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these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore the extent to which they may or may not be eligible for incentive compensation awards.

We also use Non-GAAP Financial Measures in our annual budget process. We believe these Non-GAAP Financial Measures facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. The presentation of these Non-GAAP Financial Measures is consistent with our past practice and we believe these measures further enable investors and analysts to compare current non-GAAP measures with non-GAAP measures presented in prior periods.

Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business. These costs include our lease expense (only in the case of Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, loss (gain) on early extinguishment of debt, transaction costs, long-lived asset impairment charges, estimated impact of COVID-19, federal and state income tax (benefit) expense, the operating results of our divested businesses and the loss attributable to non-controlling interests. Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributable to Genesis Healthcare, Inc. as an important measure of its financial performance because it provides the most complete measure of our performance.

Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies. Non-GAAP Financial Measures do not represent net (loss) income, as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.

We use the following Non-GAAP Financial Measures that we believe are useful to investors as key valuation and operating performance measures:

EBITDA

We believe EBITDA is useful to an investor 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 capital structure (interest expense) and our asset base (depreciation and amortization expense) from our operating results. In addition, financial covenants in our debt agreements use EBITDA as a measure of compliance.

Adjustments to EBITDA

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with GAAP net (loss) income attributable to Genesis Healthcare, Inc., and EBITDA, is beneficial to an investor’s complete understanding of our operating performance. In addition, such adjustments are substantially similar to the adjustments to EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

We adjust EBITDA for the following items:

Loss (gain) on early extinguishment of debt. We recognize losses or gains on the early extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees. We exclude the effect of gains or losses recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.
Other income. We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets. We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.

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Transaction costs. In connection with our restructuring, acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs. We exclude restructuring, acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses.
Long-lived asset impairments. We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing performance of our operating businesses. Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is excluded from EBITDA.
Severance and restructuring. We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment. We believe these costs do not reflect the underlying performance of our operating businesses. We do not exclude severance costs that are not associated with such restructuring activities.
(Income) loss of newly acquired, constructed or divested businesses. Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition. Newly constructed or developed businesses also generate losses while in their start-up phase. We view these losses as both temporary and an expected component of our long-term investment in the new venture. We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business. The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA. The divestiture of underperforming or non-strategic facilities is also an element of our business strategy. We eliminate the results of divested facilities beginning in the quarter in which they become divested. We view the losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating businesses.
Stock-based compensation. We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying operating performance of our operating businesses.
Estimated impact of COVID-19. We excluded the net impact of the COVID-19 pandemic on our revenues and expenses for the year ended December 31, 2020 due to the extraordinary nature of the virus and its impact across the globe. We view the incremental expenses, lost revenue and government relief grants as not indicative of the underlying potential long-term performance of our operating businesses. Our estimate of the pandemic’s impact on earnings for the year ended December 31, 2020 includes the following components: (1) incremental funding received to address escalating expenses and lost revenue; (2) incremental expenses incurred as a result of the pandemic; and (3) the net impact of lost revenue, after considering a resulting reduction in operating expenses. For the year ended December 31, 2020, we excluded funding recognized under the CARES Act and additional funding provided by certain states totaling approximately $394.0 million. For the year ended December 31, 2020, we excluded incremental expenses incurred in connection with the COVID-19 pandemic of approximately $258.0 million. For the year ended December 31, 2020, we excluded the estimated net impact of lost revenue offset by any resulting reduction in operating expenses, of approximately $186.0 million.

Regulatory defense and related costs. We exclude the costs of investigating and defending the inherited legal matters associated with prior transactions. We also exclude costs of disputed settlements with state agencies. We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.
Other non-recurring costs. In the year ended December 31, 2019, we excluded $1.1 million in insurance recoveries and costs related to 2017 hurricane damage and the partial recovery of receivables written down in 2018.

Adjusted EBITDAR

We use Adjusted EBITDAR as one measure in determining the value of our business and the value of prospective acquisitions or divestitures. Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare and other industries. In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of compliance. The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

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Supplemental Information

We provide supplemental information about certain capital costs we believe are beneficial to an investor’s understanding of our capital structure and cash flows.  This supplemental information includes (1) cash interest payments on our recourse and HUD guaranteed indebtedness (2) cash rent payments made to partially owned real estate joint ventures that is eliminated in consolidation, net of any distributions returned to us, and (3) total cash lease payments made pursuant to operating leases and finance leases.

This supplemental information is used by us to evaluate our leverage, fixed charge coverage and cash flow.  This supplemental information is consistent with information used by our major creditors in evaluating compliance with financial covenants contained in our material lease and loan agreements.

The following table provides a reconciliation of net (loss) income attributable to Genesis Healthcare, Inc. to Non-GAAP financial information (in thousands):

Year ended December 31, 

    

    

2020

    

2019

Net (loss) income attributable to Genesis Healthcare, Inc.

$

(58,963)

$

14,619

Adjustments to compute EBITDA:

Net loss attributable to noncontrolling interests

(44,404)

(7,145)

Depreciation and amortization expense

107,833

123,159

Interest expense

135,439

180,392

Income tax (benefit) expense

(3,610)

1,754

EBITDA

136,295

312,779

Adjustments to compute Adjusted EBITDA:

Loss (gain) on early extinguishment of debt

8,979

(122)

Other income

(202,272)

(173,505)

Transaction costs

34,279

26,362

Long-lived asset impairments

179,000

16,937

Severance and restructuring

1,530

4,705

(Income) loss of newly acquired, constructed, or divested businesses

(7,529)

4,883

Stock-based compensation

6,480

7,309

Estimated impact of COVID-19

50,067

Regulatory defense and related costs

804

Other non-recurring income

(1,125)

Adjusted EBITDA

$

206,829

$

199,027

Lease expense

366,339

387,063

Adjusted EBITDAR

$

573,168

Supplemental information:

Cash interest payments on recourse and HUD debt

$

62,648

$

84,360

Cash payments made to partially owned real estate joint ventures, net of distributions received

55,920

22,270

Total cash lease payments made pursuant to operating leases and finance leases

$

353,340

$

408,230

Results of Operations

Same-store Presentation

We define our same-store inpatient operations as those skilled nursing and assisted/senior living centers which have been operated by us, in a steady-state, for each comparable period in this Results of Operations discussion. We exclude from that definition those skilled nursing and assisted/senior living facilities recently acquired that were not operated by us for the entire period, as well as those that were divested prior to or during the most recent period presented. In cases where we are developing new skilled nursing or assisted/senior living centers, those operations are excluded from our “same-store” inpatient operations until the revenue driven by operating patient census is stable in the comparable periods.

Since the nature of our rehabilitation therapy services operations experiences a high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of

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that business, a same-store presentation based solely on the contract or gym count does not provide an accurate depiction of the business. Accordingly, we do not reference same-store figures in this MD&A with regard to that business.

The volume of services delivered in our other services businesses can also be affected by strategic transactional activity. To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

A summary of our results of operations for the year ended December 31, 2020 as compared with the same period in 2019 follows (in thousands, except percentages):

Year ended December 31, 

2020

2019

Increase / (Decrease)

    

Revenue

    

Revenue

    

Revenue

    

Revenue

    

Dollars

Percentage

Dollars

Percentage

Dollars

Percentage

Revenues:

Inpatient services:

Skilled nursing facilities

$

3,254,715

 

83.4

%  

$

3,857,793

 

84.4

%  

$

(603,078)

(15.6)

%

Assisted/Senior living facilities

 

79,314

 

2.0

%  

 

93,054

 

2.0

%  

 

(13,740)

(14.8)

%

Administration of third party facilities

 

7,866

 

0.2

%  

 

8,310

 

0.2

%  

 

(444)

(5.3)

%

Elimination of administrative services

 

(3,040)

 

(0.1)

%  

 

(3,125)

 

(0.1)

%  

 

85

2.7

%

Inpatient services, net

 

3,338,855

 

85.5

%  

 

3,956,032

 

86.5

%  

 

(617,177)

 

(15.6)

%

Rehabilitation therapy services:

Total therapy services

 

622,601

 

15.9

%  

 

738,124

 

16.2

%  

 

(115,523)

(15.7)

%

Elimination of intersegment rehabilitation therapy services

 

(221,397)

 

(5.7)

%  

 

(275,578)

 

(6.0)

%  

 

54,181

19.7

%

Third party rehabilitation therapy services, net

 

401,204

 

10.2

%  

 

462,546

 

10.2

%  

 

(61,342)

 

(13.3)

%

Other services:

Total other services

 

263,806

 

6.8

%  

 

198,920

 

4.4

%  

 

64,886

32.6

%

Elimination of intersegment other services

 

(97,642)

 

(2.5)

%  

 

(51,664)

 

(1.1)

%  

 

(45,978)

(89.0)

%

Third party other services, net

 

166,164

 

4.3

%  

 

147,256

 

3.3

%  

 

18,908

 

12.8

%

Net revenues

$

3,906,223

 

100.0

%  

$

4,565,834

 

100.0

%  

$

(659,611)

(14.4)

%

Year ended December 31, 

2020

2019

Increase / (Decrease)

    

    

Margin

    

    

Margin

    

    

Dollars

Percentage

Dollars

Percentage

Dollars

Percentage

EBITDA:

Inpatient services

$

229,829

 

6.9

%  

$

371,210

 

9.4

%  

$

(141,381)

 

(38.1)

%

Rehabilitation therapy services

 

92,086

 

14.8

%  

 

92,469

 

12.5

%  

 

(383)

 

(0.4)

%

Other services

 

21,271

 

8.1

%  

 

12,456

 

6.3

%  

 

8,815

 

70.8

%

Corporate and eliminations

 

(206,891)

 

%  

 

(163,356)

 

%  

 

(43,535)

 

(26.7)

%

EBITDA

$

136,295

 

3.5

%  

$

312,779

 

6.9

%  

$

(176,484)

 

(56.4)

%

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A summary of our condensed consolidating statement of operations follows (in thousands):

Year ended December 31, 2020

Rehabilitation

Inpatient

Therapy

Other

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

$

3,341,895

$

622,601

$

263,806

$

$

(322,079)

$

3,906,223

Salaries, wages and benefits

 

1,593,013

 

501,093

 

162,094

 

 

 

2,256,200

Other operating expenses

1,482,488

 

31,431

 

79,194

 

 

(322,542)

 

1,270,571

General and administrative costs

175,057

175,057

Lease expense

362,384

 

1,019

 

1,739

 

1,197

 

 

366,339

Depreciation and amortization expense

91,084

 

6,731

 

825

 

9,457

 

(264)

 

107,833

Interest expense

57,634

 

27

 

38

 

82,460

 

(4,720)

 

135,439

Loss on early extinguishment of debt

 

 

 

8,979

 

 

8,979

Investment income

 

 

 

(8,709)

 

4,720

 

(3,989)

Other (income) loss

(203,100)

 

621

 

207

 

 

 

(202,272)

Transaction costs

 

 

 

34,279

 

 

34,279

Long-lived asset impairments

179,000

179,000

Federal and state stimulus - COVID-19 other income

(301,719)

(3,649)

(699)

(306,067)

Equity in net income of unconsolidated affiliates

 

 

 

(7,091)

 

(1,078)

 

(8,169)

Income (loss) before income tax benefit

81,111

 

85,328

 

20,408

 

(295,629)

 

1,805

 

(106,977)

Income tax benefit

 

 

 

(3,610)

 

 

(3,610)

Net income (loss)

$

81,111

$

85,328

$

20,408

$

(292,019)

$

1,805

$

(103,367)

Year ended December 31, 2019

Rehabilitation

Inpatient

Therapy

Other

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

$

3,959,157

$

738,124

$

198,676

$

244

$

(330,367)

$

4,565,834

Salaries, wages and benefits

 

1,761,273

 

601,196

 

122,541

 

 

 

2,485,010

Other operating expenses

1,599,549

 

44,088

 

62,104

 

 

(330,894)

 

1,374,847

General and administrative costs

144,471

144,471

Lease expense

382,897

 

1,297

 

1,463

 

1,406

 

 

387,063

Depreciation and amortization expense

99,529

 

12,230

 

720

 

10,775

 

(95)

 

123,159

Interest expense

83,887

 

55

 

35

 

97,831

 

(1,416)

 

180,392

Income on early extinguishment of debt

 

 

 

(122)

 

 

(122)

Investment income

 

 

 

(8,712)

 

1,416

 

(7,296)

Other (income) loss

(172,709)

 

(926)

 

112

 

18

 

 

(173,505)

Transaction costs

 

 

 

26,362

 

 

26,362

Long-lived asset impairments

16,937

16,937

Equity in net loss (income) of unconsolidated affiliates

 

 

 

4,091

 

(4,803)

 

(712)

Income (loss) before income tax benefit

187,794

 

80,184

 

11,701

 

(275,876)

 

5,425

 

9,228

Income tax expense

 

 

 

1,754

 

 

1,754

Net income (loss)

$

187,794

$

80,184

$

11,701

$

(277,630)

$

5,425

$

7,474

Net Revenues

Net revenues for the year ended December 31, 2020 as compared with the year ended December 31, 2019 decreased by $659.6 million, or 14.4%.

Inpatient Services – Revenue decreased $617.2 million, or 15.6%, for the year ended December 31, 2020 as compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, inpatient services revenue decreased $106.1 million, or 3.4%, excluding 107 divested facilities that were underperforming or subject to portfolio management strategies and the acquisition or development of two additional facilities. The same-store revenue decrease is net of $30.0 million related to a new provider tax program in the state of New Mexico, which was only enacted for the fourth quarter in 2019, $8.4 million due to the removal of the impact of sequestration on Medicare rates during the pandemic, and an additional $24.0 million of the decrease in the year ended December 31, 2020 is attributed to the transition from the resource utilization group based reimbursement to the Patient-Driven Payment Model (PDPM) reimbursement methodology in the fourth quarter of fiscal 2019. Giving effect to these factors, we estimate the remaining same-store inpatient revenue decrease of $168.5 million in the year ended December 31, 2020 compared with the same period in 2019 is due to the impact of COVID-19, partially offset by increasing payor rates, primarily in our Medicaid population, reflecting a trend that was observed before COVID-19 impacted our operations. While census was adversely

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impacted by admission holds and declining in-house census as the pandemic progressed, average payor rates increased as acuity of the in-house census increased with treatment of the population testing positive for the virus. COVID-19 has disrupted, and will likely continue to disrupt, this favorable overall census trend and may have an unpredictable impact on the skilled mix of our inpatient facilities as a result of the temporary change to patient coverage criteria.

For an expanded discussion regarding the factors influencing our census trends, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in this Form 10-K, as well as the Key Performance and Valuation Measures in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for quantification of the census trends and revenue per patient day.

Rehabilitation Therapy Services – Revenue decreased $61.3 million, or 13.3% for the year ended December 31, 2020 as compared with the same period in 2019. Of that decrease, $48.1 million is due to lost contract business, offset by $21.7 million attributed to new contracts. COVID-19 began to impact the skilled nursing customers of our rehabilitation services at an accelerating rate by March 2020 and continued through December 31, 2020, resulting in a decrease of revenue of $14.9 million in the year ended December 31, 2020 as compared with the same period in 2019. The remaining decrease of $20.0 million is principally due to reduced volume of services provided to existing customers and amended customer pricing terms in connection with the implementation of PDPM.

Other Services – Revenue increased $18.9 million, or 12.8% for the year ended December 31, 2020 as compared with the same period in 2019. Our other services revenue is comprised mainly of our physician services and staffing services businesses, in addition to our ACO. In the year ended December 31, 2020 and 2019, the ACO recognized revenue of $10.3 million and $6.6 million, respectively under the MSSP. The MSSP recognition in the year ended December 31, 2020 included $10.3 million related to the 2019 MSSP program, however, due to the unpredictable impact COVID-19 is having on our operating results and metrics applied in the MSSP, we cannot recognize any gain share relative to 2020 at this time. Revenue in our physician services business decreased $6.7 million in the year ended December 31, 2020 as compared with the same period in 2019, all of which is attributed to reduced census volumes from the impact of COVID-19 on the inpatient business. Revenue of our staffing services business increased $11.8 million in the year ended December 31, 2020 as compared with the same period in 2019. The staffing services business has shifted its focus to developing its services to our affiliated nursing facilities and therapy gyms. While the staffing business gross revenue has increased nearly 50% in the year ended December 31, 2020 as compared with the same period in 2019, its revenue from external customers has only increased 14.7% over that same period. Further penetration of the internal staffing needs is a strategic goal for our staffing business, which we believe will enable our organization to meet the evolving demands of post-acute care in light of the COVID-19 impact on our various lines of business. The remaining increase in revenue of $10.1 million principally pertains to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental revenue in year ended December 31, 2019.

EBITDA

EBITDA for the year ended December 31, 2020 decreased by $176.5 million, or 56.4% as compared with the same period in 2019. Excluding the impact of loss (gain) on early extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairments, and Federal and state stimulus – COVID-19 other income, EBITDA decreased $332.2 million, or 182.1% when compared with the same period in 2019. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.

Inpatient Services – EBITDA decreased $141.4 million, or 38.1% in the year ended December 31, 2020 as compared with the same period in 2019. Excluding the impact of other (income) loss, long-lived asset impairments and Federal and state stimulus – COVID-19 other income, EBITDA as adjusted decreased $311.4 million, or 144.6% when compared with the same period in 2019. Divestiture activity and COVID-19 are the primary drivers of this variance. On a same-store basis, the inpatient EBITDA as adjusted decreased $276.4 million. Same-store staffing costs, net of nursing agency and other purchased services and adjusted for the impact of COVID-19, increased $127.1 million. Wages and purchased services include supplemental premium pay rates and bonuses to insure we could attract adequate staff to address our clinical needs during the pandemic. Nursing wage inflation increased 13.8% while non-nursing wage inflation increased 7.4% in the year ended December 31, 2020 as compared with the same period in 2019. Same-store lease expense decreased $13.5 million, primarily due to lease amendments in 2019 resulting in certain financing leases being reclassified as operating leases in addition to our real estate joint venture transactions which resulted in previously leased centers being financed with joint-venture debt. Our self-insurance programs, including general and professional liability, workers’ compensation and health insurance benefits, resulted in a decrease of $18.1 million of EBITDA as adjusted in the year ended December 31, 2020 as compared

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with the same period in 2019, which is net of an incremental $29.8 million provision for workers compensation loss specific to COVID-19 related claims in the 2020 period. Prior to the COVID-19 pandemic our self-insurance programs were performing as anticipated and within normal claims reporting patterns of our same-store operations recently. The provisions for general and professional liability recorded in both the year ended December 31, 2020 and the comparable period in 2019 reflect continued favorable claims development. We have not changed our reserving methodology or assumptions for any COVID-19 specific professional liability exposures. Our self-insured health benefit plans have seen reduced expenses principally due to other medical care settings limiting non-emergency services during the COVID-19 pandemic. The introduction of the new provider tax program in New Mexico resulted in an increase of EBITDA of $21.5 million compared to the same period in 2019 before the program was enacted. EBITDA increased $8.4 million due to the removal of the impact of federal sequestration on Medicare rates during the pandemic, which is set to expire at the end of March 2021 absent further extension by the federal government. The remaining $174.6 million decrease in EBITDA, as adjusted, of the segment is principally due to the negative effects COVID-19 has had on our business, partially offset with reduced therapy services cost due to the implementation of PDPM. See “Significant Transactions and Events – COVID-19.”

Rehabilitation Therapy Services – EBITDA decreased by $0.4 million or 0.4% for the year ended December 31, 2020 as compared with the same period in 2019. Excluding the impact of Federal and state stimulus – COVID-19 other income, EBITDA as adjusted decreased $2.5 million when compared with the same period in 2019. Lost therapy contracts exceeded new contracts by $7.7 million in the year ended December 31, 2020 as compared with the same period in 2019. COVID-19 resulted in a decrease of EBITDA of $4.8 million in the year ended December 31, 2020. The remaining increase of $10.0 million is principally attributed to a reduction in overhead costs to right size our operating model under PDPM. Therapist efficiency declined to 60.5% in the year ended December 31, 2020 compared with 68.0% in the comparable period in the prior year. This decline in therapist efficiency is expected to be temporary as we have adjusted staffing and service models to address the clinical needs of our skilled nursing customers impacted by COVID-19.

Other Services – EBITDA increased $8.8 million or 70.8% for the year ended December 31, 2020 as compared with the same period in 2019. Excluding the impact of Federal and state stimulus – COVID-19 other income, EBITDA as adjusted increased $8.2 million when compared with the same period in 2019. The EBITDA of our ACO increased $2.3 million in the year ended December 31, 2020 as compared with the same period in 2019. In the 2020 period, our ACO recognized $10.3 million for the 2019 program performance based on actual results achieved. The EBITDA of our staffing services business increased $2.7 million in the year ended December 31, 2020 as compared with the same period in 2019, principally due to growth in its services with affiliated customers, partially offset with pricing reductions to those affiliated customers. The EBITDA of our physician services business decreased $4.1 million. The physician services business has been negatively impacted by COVID-19 reducing patient encounters due to reduced skilled nursing census across the industry and increased costs to support practitioners. The remaining increase in EBITDA of $7.3 million principally relates to fee income for administrative services support to third party post-acute care providers as well as sub-rental income for skilled nursing and behavioral health facilities sub-leased to these third party providers. There was no corresponding service or sub-rental income in the year ended December 31, 2019.

Corporate and Eliminations – EBITDA decreased $43.5 million or 26.7% in the year ended December 31, 2020 as compared with the same period in 2019. EBITDA of our corporate function includes loss on early extinguishment of debt and losses associated with transactions that are outside of the scope of our reportable segments. These and other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $17.0 million of the net decrease in EBITDA. Corporate overhead costs, net of fee income, increased $30.3 million, or 21.0%, in the year ended December 31, 2020 as compared with the same period in 2019. This increase is principally due to investments in information technology and related upgrades, as well as unallocated corporate cost associated with our COVID-19 response. The remaining increase in EBITDA of $3.8 million is primarily the result of an increase in investment earnings from our unconsolidated affiliates accounted for on the equity method and other investments.

Other income – Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other income for the year ended December 31, 2020 principally represents gains on sales of real estate and leasehold rights in the period. See also Note 18 – “Other Income.”

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the years ended December 31, 2020 and 2019 were $34.3 million and $26.4 million, respectively.

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Long-lived asset impairments — In the years ended December 31, 2020 and 2019, we recognized impairments of property and equipment and right-of-use (ROU) assets of $179.0 million and $16.9 million, respectively. The current year’s impairment charges were primarily driven by the impact of COVID-19 on the facilities’ operations. For more information about the conditions of the business which contributed to these impairments, see Note 19 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

Federal and state stimulus – COVID 19 – other income – During the year ended December 31, 2020 we recognized $267.0 million of relief grants from CARES Act funds administered by HHS. The grants are primarily related to the skilled nursing care provided through our Inpatient Services segment. Grants received are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for health care related expenses, including costs of infection control, or lost revenues that are attributable to COVID-19. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. Additionally, we recognized $39.1 million of provider relief in the year ended December 31, 2020 as supplied by the various states in which we operate. These programs, like those administered directly by HHS, are intended to address the financial hardships of the pandemic. The qualifications of each program vary state by state, but most are focused on the cost of the COVID-19 response, with few state programs addressing lost revenue.

Other Expense

The following discussion applies to the expense categories between EBITDA and income (loss) of all reportable segments and corporate and eliminations in our consolidating statement of operations for the year ended December 31, 2020 as compared with the same period in 2019.

Depreciation and amortization — Each of our reportable segments and corporate overhead have depreciating property, plant and equipment, including amortization of finance leased ROU assets. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $15.3 million in the year ended December 31, 2020 as compared with the same period in 2019. On a same-store basis, depreciation and amortization decreased $16.4 million in the year ended December 31, 2020 as compared with the same period in 2019. In the inpatient services segment, $10.1 million of the decrease is principally due to reduction in the amortization of right to use assets in our continuing lease portfolio, with the remaining $6.3 million reduction principally due to completion of amortization of certain contract rights in our rehabilitation therapy services in the 2019 period.

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our debt instruments, as well as the expense associated with leases accounted for as finance leases or financing obligations. Interest expense decreased $45.0 million in the year ended December 31, 2020 as compared with the same period in 2019. On a same-store basis, interest expense is down $31.8 million in the year ended December 31, 2020 as compared with the same period in 2019. An increase of $22.4 million of interest expense is attributed to consolidating debt and the associated interest expense of three real-estate partnerships over the course of 2019 and 2020, which were determined to be variable interest entities (VIEs) of which we are the primary beneficiary. See Note 1 – “General Information – Basis of Presentation” and Note 12 – “Long-Term Debt.” Cash interest decreased $14.3 million in the year ended December 31, 2020 as compared with the same period in 2019 as a result of a reduction in outstanding borrowings under our revolving credit facility, primarily due to the timing of the Medicare Advance payments received in addition to other phases of CARES Act relief funding. Borrowing levels are expected to increase over the period the Medicare Advance is required to be recouped in 2021. The remaining decrease in interest expense of $39.9 million is principally due to lease amendments entered in 2019 and early 2020 that resulted in modifications to the accounting for certain leases, converting them from financing leases with interest expense to operating leases presented as lease expense.

Income tax expense (benefit) — For the year ended December 31, 2020, we recorded income tax benefit of $3.6 million from continuing operations representing an effective tax rate of 3.4% compared to an income tax expense of $1.8 million from continuing operations, representing an effective tax rate of 19.0% for the same period 2019. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. In assessing the requirement for, and amount of, a valuation allowance, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.

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Net Loss Attributable to Genesis Healthcare, Inc.

The following discussion applies to categories between net income (loss) and net income (loss) attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the year ended December 31, 2020 as compared with the same period in 2019.

Net loss attributable to noncontrolling interests — Following the combination of Skilled and FC-GEN Operations Investment, LLC (FC-GEN), noncontrolling economic interest was recorded as noncontrolling interest in the financial statements of the combined entity. The noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the combination, there have been conversions of 9.2 million Class C common stock reducing the initial, approximately 42% noncontrolling economic interest to 33.1% at December 31, 2020. For the years ended December 31, 2020 and 2019, (loss) income of ($39.8) million and $2.8 million, respectively, has been attributed to the Class C common stock.

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the years ended December 31, 2020 and 2019, loss of ($4.6) million and ($9.9) million, respectively, has been attributed to these unaffiliated third parties.

Liquidity and Capital Resources

The following table presents selected data from our consolidated statements of cash flows (in thousands):

Year ended December 31, 

 

    

2020

    

2019

 

Net cash provided by (used in) operating activities

$

315,731

$

(7,166)

Net cash used in investing activities

 

(33,532)

 

(387,003)

Net cash (used in) provided by financing activities

 

(94,785)

 

377,699

Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents

 

187,414

 

(16,470)

Beginning of period

 

125,806

 

142,276

End of period

$

313,220

$

125,806

Net cash provided by operating activities in the year ended December 31, 2020 of $315.7 million increased by $322.9 million compared with the same period in 2019. The year ended December 31, 2020 include receipt of Medicare advances of $155.8 million and $92.2 million from the deferral of payroll taxes under the CARES Act. The remaining increase in cash provided by operating activities is attributed to a combination of state and federal COVID-19 grants, offset by the cost and lost revenue caused by COVID-19 and the timing of payments.

Net cash used in investing activities in the year ended December 31, 2020 was $33.5 million, compared to cash used in investing activities of $387.0 million in the year ended December 31, 2019. Cash used for routine capital expenditures for the year ended December 31, 2020 decreased from the same period in the prior year by $7.1 million. Net purchases of marketable securities of $15.4 million in 2020 exceeded net proceeds on maturity or sale of marketable securities of $0.9 million in 2019, resulting in a net increase in cash used of $16.3 million. In the year ended December 31, 2020, there were asset purchases of $207.3 million primarily as a result of the acquisition of eight skilled nursing facilities by the consolidated Cascade Partnership and one skilled nursing facility by the consolidated Vantage Point Partnership compared to asset sales of $259.5 million comprised primarily of the real property of 19 owned facilities and leasehold rights of 13 leased facilities. In the year ended December 31, 2019, there were asset purchases of $252.5 million as a result of the consolidation of the Next Partnership and its acquisition of 22 skilled nursing facilities and asset sale proceeds of $79.0 million resulting from the simultaneous sale of seven skilled nursing facilities. In the year ended December 31, 2019, there were asset purchases of $339.2 million as a result of the consolidation of the Vantage Point Partnership and its acquisition of 18 skilled nursing facilities. See Significant Transaction and Events for a summary of asset purchases and sales. The year ended December 31, 2019 also included $66.9 million in proceeds from the sale of seven facilities in California, $91.7 million in proceeds from the sale of eight facilities in Georgia, New Jersey, Virginia and Maryland and $20.2 million from the sale of seven facilities in Texas. The year ended December 31, 2019 also included the receipt of a $12.0 million payment of a note receivable. The year ended December 31, 2020 provided cash of $12.8 million on the receipt of restricted deposits compared to payments of restricted deposits of $3.8 million in the same period in the prior year. The year ended December 31, 2020 included cash used of $17.5 million for an investment in a new joint

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venture and cash used of $9.0 million extending the new joint venture a loan as described in “Significant Transaction and Events.” The remaining incremental use of cash from investing activities of $13.5 million in the year ended December 31, 2020 as compared with the same period in 2019 is principally due to a payoff of a note receivable in 2019 of $12.0 million.

Net cash used in financing activities in the year ended December 31, 2020 was $94.8 million compared to net cash provided by financing activities of $377.7 million in the year ended December 31, 2019. The net increase in cash used by financing activities of $472.5 million is principally attributed to debt repayments exceeding debt borrowings in the year ended December 31, 2020 as compared to the same period in 2019. In the year ended December 31, 2020, we had proceeds from the issuance of debt of $228.7 million, consisting primarily of $193.5 million by the consolidated Cascade Partnership, $7.3 million by the consolidated Vantage Point Partnership and $26.1 million in HUD refinancings by our consolidated Next Partnership. In the year ended December 31, 2019, we received proceeds from the issuance of debt of $538.5 million, consisting primarily of $479.4 from the consolidation of the Next Partnership and Vantage Point Partnership, $41.7 million due to the refinancing of three facilities within the Next Partnership with HUD financing and $15.0 million due to a short-term loan from Omega. Repayment of long-term debt in the year ended December 31, 2020 was $191.8 million compared to $199.6 million in the same period of the prior year. In the year ended December 31, 2020, we repaid $93.2 million in HUD-insured loans, $41.3 million in MidCap Real Estate Loans, $9.1 million in Welltower Real Estate Loans, $15.0 million in a short-term note payable and $24.5 million in term loan paydowns associated with the consolidated Next Partnership. In the year ended December 31, 2019, we repaid $39.8 million in MidCap Real Estate Loans and $65.6 million in HUD-insured loans using proceeds from the sale of 19 facilities; reduced the term loan facility of the ABL Credit Facilities by $40.0 million while increasing the revolving credit facilities by the same amount; and the Next Partnership reduced its term loan by $38.8 million refinancing three facilities through HUD. The remaining decrease in cash used to repay long-term debt of $6.7 million relates to a decrease in routine debt payments. In the year ended December 31, 2020, we had net repayments under the revolving credit facilities of $136.0 million as compared with net borrowings under the revolving credit facilities of $30.3 million under the revolving credit facilities in the same period in 2019. In the year ended December 31, 2020, we received contributions from a noncontrolling interest for $21.7 million primarily resulting from the consolidation of the Cascade Partnership. In the year ended December 31, 2019, we received contributions from a noncontrolling interest for $18.5 million and $8.5 million resulting from the consolidation of the aforementioned Next Partnership and Vantage Point Partnership, respectively. The remaining net decrease in cash used in financing activities of $1.1 million in the year ended December 31, 2020 compared to the same period in 2019 is primarily due to a reduction in debt issuance and settlement costs partially offset by an increase in repayments of finance lease obligations.

Our primary sources of liquidity are cash on hand, cash flows from operations, borrowings under our asset based lending facilities (ABL Credit Facilities) and the receipt of government-sponsored financial support in response to the COVID-19 pandemic.

The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our results of operations, restricted and unrestricted cash and cash equivalents and our available borrowing capacity.

At December 31, 2020, we had total liquidity of $284.5 million consisting of cash on hand of $244.7 million and available borrowings under our ABL Credit Facilities of $39.8 million. During the year ended December 31, 2020, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.

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COVID-19 Impact on Liquidity

We have taken, and will continue to take, actions to enhance and to preserve our liquidity in response to the pandemic. During the year ended December 31, 2020, our usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the CARES Act. Specifically, in the second quarter of 2020, we applied for and received $156.8 million of advanced Medicare payments and from April through December 2020, received approximately $275.4 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, we have elected to implement the CARES Act payroll tax deferral program, which preserved, on an interest free basis, $92.2 million of cash, representing the employer portion of payroll taxes incurred between March 27, 2020 and December 31, 2020. The advance Medicare payments of $156.8 million, which are also interest free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding has been committed by a number of states in which we operate, currently estimated at $124.7 million.

We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses, continuing to evaluate our capital structure, pursuing strategic liquidity enhancing transactions and seeking further government-sponsored financial relief related to the pandemic. We cannot provide assurance that such efforts will be successful or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic.

Strategic Partnerships

Next Partnership

On January 31, 2019, Welltower sold the real estate of 15 facilities to the Next Partnership, of which we acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next, a related party. See Note 16 – “Related Party Transactions.” In conjunction with the facility sales, we received aggregate annual rent credits of $17.2 million. We continue to operate these facilities pursuant to a new master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the original purchase price.

Vantage Point Partnership

On September 12, 2019, Welltower and Second Spring sold the real estate of four and 14 facilities, respectively, to the Vantage Point Partnership, in which we invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million. In conjunction with the facility sales, we received aggregate annual rent credits of $30.3 million. We continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available. We will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. We also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require us to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if we opt not to purchase the facilities or upon the occurrence of certain events of default.

NewGen Partnership

On February 1, 2020, we transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to a partnership with NewGen. We sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for $78.7 million. Net transaction proceeds were used by us to repay indebtedness, including prepayment penalties, of $33.7 million, fund our initial 50% equity contribution and working capital requirement of $14.9 million, and provide financing to the partnership of $9.0 million. We recorded a gain on sale of assets and transition of leased facilities of $58.8 million and loss on early extinguishment of debt of $1.0 million. Concurrently, the facilities have

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entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. We will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements.

On May 15, 2020, we transitioned operational responsibility for four additional leased facilities in California to the NewGen Partnership. The four facilities generated annual revenues of $55.0 million and pre-tax loss of $0.5 million. On October 1, 2020, we transitioned operational responsibility for one additional leased facility in the state of Washington to the NewGen Partnership. The facility generated annual revenues of $12.3 million and pre-tax income of $0.2 million.

We do not hold a controlling financial interest in the NewGen Partnership. As such, we have applied the equity method of accounting for our 50% interest in the NewGen Partnership. Our investment in the NewGen Partnership, $25.1 million, is included within other long-term assets in the consolidated balance sheet as of December 31, 2020.

Cascade Partnership

On July 2, 2020, we sold one facility to an affiliate of Cascade for $26.1 million, using proceeds from the sale to retire HUD financed debt of $10.5 million, pay aggregate prepayment penalties and other closing costs of $1.0 million, and partially fund our investment in the Cascade Partnership. Cascade also acquired eight facilities that we operated under a master lease agreement with Second Spring. We continue to operate all nine of these facilities subject to a new master lease agreement with affiliates of Cascade. The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of $20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. We also obtained a fixed price option to purchase the nine facilities for $251.6 million that is exercisable from July 2023 through June 2025. We executed a promissory note with Cascade for $20.3 million, which was subsequently converted into a 49% membership interest in the Cascade Partnership. We also hold a subordinated equity interest in the Cascade Partnership of $10.0 million.

Other Financing Activities

Mortgages and other secured debt (non-recourse) refinancings

During the years ended December 31, 2020 and 2019, a portion of the Next Partnership’s term loan facility was refinanced via five new HUD insured loans with an aggregate initial principal balance of $67.8 million. The loans mature on dates ranging from January 1, 2055 through June 1, 2055 and bear interest at fixed rates ranging from 2.79% to 3.15%. Proceeds were principally used to repay a portion of the term loan associated with the Next Partnership and fees. The loans had an aggregate outstanding principal balance of $67.0 million and $41.7 million at December 31, 2020 and 2019, respectively.

Divestiture of Non-Strategic Facilities

Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 98 skilled nursing facilities, five assisted/senior living facilities and six behavioral outpatient clinics in 18 states since January 1, 2019, including:

The sale and lease termination of nine skilled nursing facilities located in New Jersey and Ohio between January 31, 2019 and February 7, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $3.6 million.
The closure of one skilled nursing facility located in Ohio on February 26, 2019. The facility remains subject to a master lease agreement. A loss was recognized totaling $0.2 million.
The lease expiration of one behavioral health center located in California on April 1, 2019. A loss was recognized totaling $0.1 million.
The sale and lease termination of two skilled nursing facilities located in Connecticut on May 1, 2019 that were subject to a master lease agreement with Welltower. A loss was recognized totaling $0.8 million.
The sale of five owned skilled nursing facilities located in California on May 1, 2019. A gain was recognized totaling $25.0 million.
The sale and lease termination of one skilled nursing facility located in Ohio on June 30, 2019. A loss was recognized totaling $0.3 million.
The closure of one skilled nursing facility located in Massachusetts on July 1, 2019. The facility remained subject to a master lease agreement with Omega until its sale on January 31, 2020. A loss was recognized totaling $0.2 million.

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The sale and lease termination of three skilled nursing facilities located in Ohio on July 1, 2019 that were subject to a master lease with Omega. A loss was recognized totaling $0.9 million.
The sale and lease termination of six skilled nursing facilities located in Ohio on August 1, 2019, marking an exit from the inpatient business in this state. A loss was recognized totaling $1.6 million.
The sale of one owned assisted/senior living facility located in California on August 1, 2019. A gain was recognized totaling $0.3 million.
The sale and lease termination of one skilled nursing facility located in Utah on August 1, 2019. A loss was recognized totaling $0.3 million.
The sale of one owned skilled nursing facility located in Virginia on August 15, 2019. A gain was recognized totaling $16.5 million.
The sale of one owned skilled nursing facility located in Maryland on August 15, 2019 and transfer of operations on September 1, 2019. A gain was recognized totaling $3.9 million.
The sale of two owned skilled nursing facilities, one assisted/senior living facility and the lease termination of one skilled nursing facility located in Georgia on August 19, 2019. A gain was recognized totaling $7.5 million.
The sale and lease termination of one skilled nursing facility located in Idaho on September 1, 2019. A loss was recognized totaling $0.2 million.
The sale of one owned skilled nursing facility located in New Jersey on September 1, 2019. A gain was recognized totaling $11.0 million.
The sale of one owned skilled nursing facility located in California on September 17, 2019. A gain was recognized totaling $0.4 million.
The sale of one owned skilled nursing facility located in New Jersey on September 27, 2019. A gain was recognized totaling $11.2 million.
The sale of one owned skilled nursing facility located in New Jersey on August 27, 2019 and transfer of operations on October 1, 2019. A gain was recognized totaling $7.8 million.
The sale and lease termination of one skilled nursing facility located in California on October 1, 2019. A loss was recognized totaling $0.4 million.
The sale and lease termination of one skilled nursing facility located in New Jersey on December 1, 2019. A loss was recognized totaling $0.9 million.
The sale of three owned skilled nursing facilities located in North Carolina and Maryland on February 1, 2020. A gain was recognized totaling $24.9 million.
The transition of operational responsibility for 19 facilities in the states of California, Washington and Nevada to NewGen on February 1, 2020. The transaction included the sale of the real estate and operations of six skilled nursing facilities and transfer of the leasehold rights to seven skilled nursing, five behavioral health centers and one assisted living facility. A gain was recognized totaling $58.8 million.
The sale of one owned skilled nursing facility located in California on February 26, 2020. A gain was recognized totaling $3.0 million.
The lease termination of one assisted/senior living facility located in Montana on March 4, 2020. A de minimis loss was recognized.
The sale of three owned skilled nursing facilities located in New Jersey and Maryland on April 1, 2020. A gain was recognized totaling $21.7 million.
The lease termination of two skilled nursing facilities located in Montana on April 1, 2020. A loss was recognized totaling $0.8 million.
The lease termination of six skilled nursing facilities located in Florida and Maryland on April 20, 2020. A gain was recognized totaling $11.2 million.
The transition of operational responsibility for four additional leased facilities in California to NewGen on May 15, 2020. A gain was recognized totaling $5.1 million.
The lease termination of six skilled nursing facilities located in Idaho on June 1, 2020. A gain was recognized totaling $5.3 million.
The sale of one owned skilled nursing facility located in Rhode Island on July 6, 2020. A gain was recognized totaling $5.7 million.
The transition of operational responsibility for one additional leased facility in Washington to NewGen on October 1, 2020.
The lease termination of two skilled nursing facilities located in Connecticut on October 15, 2020.

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The sale of the real property and divestiture of the operations of five skilled nursing facilities in Vermont on October 30, 2020.
The lease termination of one skilled nursing facility located in Rhode Island on November 1, 2020.
The sale of one skilled nursing facility in Nevada and one assisted/senior living facility in California to NewGen on February 1, 2021.

Financial Covenants

Should we fail to comply with our debt and lease covenants at a future measurement date, we could, absent necessary and timely waivers and/or amendments, be in default under certain of our existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have a significant adverse impact on our financial position.

At December 31, 2020, we were not in compliance with or had not received waivers with respect to the financial covenants contained in certain of our leases because certain of our other material lease agreements and material debt agreements contain cross-default provisions that are triggered if we are in default of such leases. The lease and debt obligations associated with these agreements have been classified as current liabilities. As of the date of this Form 10-K filing, all rent and debt service payments have been made timely and no material creditors have pursued remedies with respect to breaches of financial covenants.

The ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on our ability to remain in compliance with or return to compliance with our financial covenants through March 16, 2022. Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to timely meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

Our ability to maintain compliance with financial covenants required by our debt and lease agreements depends in part on management’s ability to increase revenues and control costs and receive adequate government-sponsored financial support in response to the COVID-19 pandemic as well as possible waivers, deferrals and/or adjustments of debt and lease terms. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with our quarterly debt and lease covenant requirements.

There can be no assurance that the confluence of these and other factors will not impede our ability to meet covenants required by our debt and lease agreements in the future.

Concentration of Credit Risk

We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations, as we, resulting in a concentration of risk. These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions.

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in our rehabilitation therapy services business where it has approximately 150 distinct customers, many being chain operators with more than one location. One of our customers, a related party, comprises $30.5 million, or approximately 44%, of the outstanding contract receivables in the rehabilitation services business at December 31, 2020. See Note 16 – “Related Party Transactions.” A future adverse event impacting this customer or other large customers, resulting in their insolvency or other economic distress would have a material impact on us.

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Liquidity and Going Concern Considerations

We performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of our plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In completing our going concern assessment, we considered the uncertainties around the impact of COVID-19 on our future results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within 12 months following the date our financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about our ability to continue as a going concern, we have taken the following measures:

We applied for and received government-sponsored financial relief related to the pandemic;
We are utilizing the CARES Act payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;
While we vigorously advocate, for ourselves and the skilled nursing industry, regarding the need for additional government-sponsored funding, we continue to explore and to take advantage of existing government-sponsored funding programs implemented to support businesses impacted by COVID-19;
We continue to seek and implement measures to adapt our operational model to function for the long-term in a COVID-19 environment;
We have pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity; and
We are exploring and evaluating a number of strategic and other alternatives to manage and to improve our liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.

These measures and other plans and initiatives of ours are designed to provide us with adequate liquidity to meet our obligations for at least the twelve-month period following the date our financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond our control or may not be available on terms acceptable to us, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if we receive additional funding support from government sources and/or are able to execute successfully all of our plans and initiatives, given the unpredictable nature of, and the operating challenges presented by, the COVID-19 virus, our operating plans and resulting cash flows together with our cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events and circumstances could force us to seek reorganization under the U.S. Bankruptcy Code.

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. At December 31, 2020, we were not in compliance with or had not received waivers with respect to the financial covenants contained in certain of our leases containing cross-default provisions with other material lease agreements and material debt agreements. The lease and debt obligations associated with these agreements have been classified as current liabilities. Otherwise, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.

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Risk and Uncertainties

The ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on our ability to remain in compliance with our financial covenants through March 16, 2022. Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about our ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

There can be no assurance that the confluence of these and other factors will not impede our ability to meet our debt and lease covenants in the future.

Off-Balance Sheet Arrangements

As of December 31, 2020, we are subject to lease guaranty agreements on six of the facilities leased by the NewGen Partnership, under which it guarantees all payments and performance obligations of the tenants. As of December 31, 2020, the six leases have undiscounted cash rent obligations remaining of $84.7 million. As of December 31, 2019, we are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable to smaller reporting companies.

Item 8. Financial Statements and Supplementary Data

The information required by this item is incorporated herein by reference to the financial statements set forth in Item 15. “Exhibits and Financial Statement Schedules—Consolidated Financial Statements and Supplementary Data.”

Item 9. Changes in and Disagreement With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have

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concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective as of December 31, 2020. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed the evaluation.

Management’s Report on Internal Control Over Financial Reporting

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

Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

A system of internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 using the framework set forth in the report entitled, "Internal Control — Integrated Framework (2013 COSO Framework)," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation and the criteria set forth in the 2013 COSO Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2020. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report, which appears herein.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors
Genesis Healthcare, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Genesis Healthcare, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated March 16, 2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Philadelphia, Pennsylvania

March 16, 2021

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Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Director Biographical Information

Directors Continuing in Office Until the 2021 Annual Meeting of Stockholders (Class I)

Robert H. Fish, age 70, has served as our Chief Executive Officer since January 2021 and a member of our board of directors since 2013, when he joined Skilled Healthcare as Chief Executive Officer. He served as Skilled Healthcare Group, Inc.’s (Skilled Healthcare) Chief Executive Officer until it combined with Genesis Healthcare in 2015. Mr. Fish served as President, Chief Executive Officer and Director of Quorum Health Corporation, a publicly-held operator of general acute care hospitals and outpatient services, from 2018 to 2020. During his career, Mr. Fish has served as Chairman, President or CEO of a number of healthcare companies. From 2012 until he joined Skilled Healthcare in 2013, Mr. Fish served as Managing Partner of Sonoma-Seacrest, LLC, a California health care firm specializing in strategic planning, performance improvement and merger and acquisition issues. From 2008 to 2012 he served as Chairman of REACH Medical Holdings, a regional air medical transport company, from 2005 to 2006 he served as Executive Chairman of Coram, Inc., a large home infusion provider, from 2003 to 2007 he served as Lead Director of Genesis HealthCare Corporation and from 2002 to 2003 he served as Chairman and Chief Executive Officer of Genesis Ventures, a long-term care and institutional pharmacy company and predecessor in interest to Genesis Healthcare Corporation. From 2017 to January 2021, Mr. Fish has served as a director and member of the audit committee of American Renal Associates Holdings, Inc., a publicly-held provider of outpatient dialysis services. From 2013 to 2018, Mr. Fish has served as a member of the board of directors of the non-profit St. Helena Hospital Foundation in Northern California. Mr. Fish served as President and Chief Executive Officer of St. Joseph Health System—Sonoma County and Valleycare Health System, both of which are regional hospital systems in Northern California. Mr. Fish was selected to serve as a director due to his extensive experience as a healthcare company executive, including in the long-term care industry.

Arnold Whitman, age 69, has served as a member of our board of directors since 2015. Mr. Whitman is Co-Founder and Chairman of Formation Capital, LLC (Formation Capital). He has over 25 years’ experience in the seniors housing and healthcare industry. In 1999, Mr. Whitman created Formation Capital as an advisory and equity investment firm for seniors housing and healthcare. Since founding the company, Mr. Whitman has overseen the investment of over $5 billion in seniors housing assets managed by Formation Capital. Prior to co-founding Formation Capital, Mr. Whitman founded Health Care Capital Finance (HCCF), a private debt provider, where he developed a successful securitization program for seniors housing assets. Following the merger of HCCF into PRN Mortgage Capital, Mr. Whitman continued to oversee over $2 billion of debt investments into seniors housing and care. Mr. Whitman began his career in healthcare in 1985 as a Director of Acquisitions for MediPlex and then as a Vice President of Meditrust in 1986. Mr. Whitman is a current board member and Chairman Emeritus of the National Investment Center for Seniors Housing and Care Industries and also serves on the executive board of the American Seniors Housing Association. He is also a partner in Generator Ventures, LLC and Aging 2.0, a principal in Prime Care Properties, LLC and a board member of Care Institute Group, Inc. He served on the board of FC-GEN until the consummation of the Combination in 2015. Mr. Whitman was selected to serve as a director due to his extensive experience in the healthcare industry, and particularly with companies who serve seniors.

Directors Continuing in Office Until the 2022 Annual Meeting of Stockholders (Class II)

Robert Hartman, age 64, has served as a member of our board of directors since 2015. Mr. Hartman has been the Chairman of NuCare Services Corp., which provides business and financial consulting services to the long term care industry, since 1984, and a Senior Advisor to Next Healthcare Capital LLC, a healthcare real estate investment firm, since 2013. Mr. Hartman has over 35 years of development and operational experience in providing senior services ranging from assisted living to post-acute care. He has been involved with the start-up and creation of over 30 businesses primarily related to the healthcare and real estate fields. He sits on the board of Formation Development Group. Additionally, Mr. Hartman is Principal and Founder of Midway Capital Partners, a private equity fund that invests in real estate, hospitality and healthcare development opportunities. He served on the board of FC-GEN until the consummation of the Combination in 2015. Mr. Hartman has served as co-President of the Illinois Council on Long Term Care, a

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statewide trade association. He served for six years as a Trustee of Northeastern Illinois University and for 18 years as the Chairman of the Board of Trustees of Keshet, an educational, camping and social service organization for individuals with special needs. He is also a Trustee of the Simon Wiesenthal Center. Mr. Hartman was selected to serve as a director due to his great breadth and depth of operational and financial experience that he has in the senior services industry.

James V. McKeon, age 56, has served as a member of our board of directors since 2015. Mr. McKeon is currently the President of Valentine Associates LLC (Valentine Associates), a position he has held since 2009. Valentine Associates is a Pennsylvania-based consulting firm specializing in finance, strategic planning, performance improvement and merger and acquisition issues. From 2003 to 2007, Mr. McKeon served as Executive Vice President and Chief Financial Officer for Genesis Healthcare Corporation, and then he served in that same role with Genesis Healthcare LLC in 2008. From 1994 to 2003, he held various positions at Genesis Health Ventures, LLC (Genesis Health Ventures): he was Senior Vice President and Corporate Controller from 2000 to 2003, Vice President and Corporate Controller from 1997 to 2000 and Director, Finance and Investor Relations from 1994 to 1995. Mr. McKeon started his career at KPMG Peat Marwick (KPMG), a professional services company, where he worked from 1986 until 1994. He held a variety of positions at KPMG during his tenure and was a senior manager upon departure. Mr. McKeon also serves as Chairman for Educational Credit Management Corporation (ECMC), a not-for-profit focused on ensuring adequate liquidity to finance secondary education, a position he has held since 2020. Mr. McKeon also serves as Chairman of both the Audit Committee and the Governance and Compensation Committee for ECMC. Mr. McKeon joined the board of ECMC in 2009. Mr. McKeon also serves on the board of directors for several privately-held companies and on the Board of Trustees of Sanford School, a private school located in Hockessin, Delaware. Mr. McKeon was selected to serve as a director due to his extensive experience in the healthcare industry, as well as his familiarity with the Company and its predecessor companies.

Directors Continuing in Office Until the 2023 Annual Meeting of Stockholders (Class III)

James H. Bloem, age 70, has served as a member of our board of directors since 2015. Mr. Bloem has served as a director and business consultant to various public and private companies, mainly in the health-care industry, since his retirement in 2013 after 13 years as Senior Vice President, Chief Financial Officer, and Treasurer of Humana, Inc. (Humana), one of the nation’s largest health-benefit companies. At Humana, he had responsibility for all of Humana’s accounting, actuarial, analytical, financial, tax, risk management, treasury, and investor relations activities. Mr. Bloem currently serves as a director of Rotech Healthcare, Inc. (publicly-held until 2012), a leading provider of home medical equipment and related services, where he serves as chairman of the audit committee. He also previously served as a director of Genesis Health Ventures, Inc. from 2001-2003 and NeighborCare from 2003-2005. Mr. Bloem’s financial background and experience qualify him as an “audit committee financial expert” under SEC rules. Mr. Bloem was selected to serve as a director due to his extensive experience in the healthcare industry, including as an executive officer of Humana, as well as his leadership skills and financial knowledge.

David Harrington, age 76, has served as a member of our board of directors since March 2, 2021. Early in his career, Mr. Harrington developed child and family health centers in low-income communities in the USA and Mexico. With the growth of HMOs, in 1982, Mr. Harrington shifted to for profit health services initiatives, specifically, on risk contracting opportunities for providers and physicians. In 1986, he joined Aetna Health Plans as a vice-president, first, in the managed behavioral health arena and, then, as Business Sponsor of new technology initiatives in healthcare before leaving in 1994. The next year, Mr. Harrington founded and led DASH Business Group, a health services advisory and business development firm. One early prominent role (1994-1996) was as adviser and then interim CEO of Physicians Quality Care, then the largest independent physician risk contracting company in Illinois. While DASH continued advising many health care clients, Mr. Harrington took a leave of absence in 2001 to become Chief Executive and Chairman of American Imaging Management, improved the company's performance dramatically, managed it through an MBO and then sold AIM to Anthem in 2007 where it still operates as a successful free-standing entity with many health plans as clients. When returning to DASH in 2008, Mr. Harrington accepted a role as Operating Advisor to Nautic Partners, a mid-level private equity firm where he participated in the evaluation and selection of numerous investments in healthcare services. Also at Nautic, Mr. Harrington co-invested and served as a board member at Reliant Health (2010), All Metro Home Care (Chairman)(2011) and Healthcare Payments Services (Executive Chairman)(2016), all highly successful Nautic ventures. In 2012, MR. Harrington joined Mr. Joel Landau in forming Pinta Partners where they have worked to transform health services to the chronically ill; today, Pinta is involved in every manner of creative health solutions for the chronically ill. Concurrently, Mr. Harrington extended his interest in technology platforms in health care by investing in and serving as a board member at Intelligent Medical Objects (IMO), the "white label," clinical backbone of today's EMR which was sold to Warburg Pincus in 2016. Today, Mr. Harrington focuses the bulk of his time on seniors care services while still available to advise young entrepreneurs who bring the next new solutions in healthcare service delivery. Mr. Harrington was selected to serve as a director because of his extensive industry experience in critical areas of healthcare delivery management.

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John Randazzo, age 66, has served as a member of our board of directors since March 2, 2021. Mr. Randazzo has served as Executive Chairman of Waters Edge Dermatology, one of the largest dermatology practices in the United States, since 2018. He has also served as Executive Chairman of Sentry Data Systems, a provider of pharmacy technology solutions to hospitals, since 2015.  Mr. Randazzo has served as a board member of several other companies, including Experity, the largest electronic medical record and revenue cycle management company for urgent care, and IMC, a large Medicare focused medical group, since 2016. He was a co-founder and Chief Executive Officer of FastMed, the second largest independent urgent care company, before becoming its Executive Chairman.  From 2005 to 2007, Mr. Randazzo was CEO of Touchstone Health Care, a managed Medicare company with more than $100 million in revenue. From 2000 to 2003, he served as CEO of BenefitPoint, an employee benefits technology firm now part of Vertifore.  From 1997 to 2000, he was President and CEO of Women's Health Connecticut Inc., a services-based physician practice management and infertility organization. From 1995 to 1997, he was President and CEO of Value Oncology Science, a specialty health care provider.  Mr. Randazzo has served as a senior advisor to global private equity firm, Warburg Pincus, for over 20 years. Mr. Randazzo was selected to serve as a director because of his extensive experience in the healthcare and technology fields, corporate finance and entrepreneurship.

Arrangements Pursuant to Which Directors Were Selected

The Purchase and Contribution Agreement, dated as of August 18, 2014 and amended as of January 5, 2015 (as so amended, the Purchase Agreement) and entered into between Skilled Healthcare and FC-GEN Operations Investment, LLC, a subsidiary of the Company (FC-GEN), pursuant to which the combination of Skilled Healthcare with FC-GEN was effected, provided that each of the parties would take all actions necessary to provide that, at the closing of the combination (which occurred on February 2, 2015), two (2) individuals designated by Skilled Healthcare, four (4) individuals designated by FC-GEN and five (5) individuals designated jointly by Skilled Healthcare and FC-GEN would be appointed to our board of directors. Each of Messrs. Bloem, Fish, Hartman, McKeon and Whitman were appointed in 2015 pursuant to the Purchase Agreement.

The Investment Agreement dated as of March 2, 2021 (the Investment Agreement) and entered into between FC-GEN and ReGen Healthcare LLC (ReGen), pursuant to which, among other things, ReGen  purchased for $50,000,000 a convertible promissory note of FC-GEN which is convertible into 69,500,755 baskets of securities, each comprised of one Class A common unit of FC-GEN (Class A Unit) and one Class C common stock of Genesis, subject to adjustment, which represent 25% of the fully diluted share capital of the Company, provided that ReGen could designate two members to our board of directors. Each of Messrs. Harrington and Randazzo were appointed in March 2021 pursuant to the Investment Agreement.

Executive Officer Biographical Information

The following sets forth biographical information regarding our executive officers (as defined in applicable SEC rules) as of March 12, 2021, other than our Chief Executive Officer, Mr. Fish, whose biographical information is set forth above under “Director Biographical Information.”

Thomas DiVittorio, age 52, has served as our Executive Vice President and Chief Financial Officer since September 2018 and as our Senior Vice President and Chief Financial Officer from the Combination to September 2018 and he served in the same capacity for Genesis Healthcare LLC from 2008 to 2015. He served in various corporate finance positions with Genesis Healthcare Corporation from 1996 to 2007, including Vice President, Corporate Controller and Chief Accounting Officer. Prior to joining Genesis Healthcare Corporation, Mr. DiVittorio was employed by KPMG LLP. Mr. DiVittorio is a certified public accountant.

Paul D. Bach, age 62, has served as our Chief Operating Officer since January 1, 2017.  He previously served the Company as the Executive Vice President of the Mid-Atlantic/Southeast Division from 2006 through 2016.  From 1997 to 2006, Mr. Bach served the Company as the Senior Vice President of the Capital Region.  From 1984 to 1997, Mr. Bach served the Company in various roles, including Regional Vice President, Regional Director and Nursing Home Administrator.

JoAnne Reifsnyder, PhD., RN, FAAN, age 62, has served as our Executive Vice President, Clinical Operations, and Chief Nursing Officer since the Combination and she served as Senior Vice President, Clinical Operations of Genesis Healthcare LLC from 2012 to 2015. Prior to joining Genesis Healthcare LLC, Dr. Reifsnyder was Senior Vice President of Care Transitions for CareKinesis and Program Director, Health Policy, at Jefferson School of Population Health, and has held numerous other administrative, clinical and academic positions spanning a 35-year career. She was formerly the President of the Board of Directors for the Hospice and Palliative

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Nurses Association, and currently serves on the Board of the Hospice Foundation of America and the Board of the Hospice Nurses Foundation. She is a member of the American Nurses Association, the American Organization of Nurse Executives, the National Gerontological Nurses Association and Sigma Theta Tau International, the Honor Society of Nursing. Dr. Reifsnyder completed a postdoctoral fellowship in psychosocial oncology at the University of Pennsylvania School of Nursing, and holds a PhD in nursing from the University of Maryland, a Master’s Degree in nursing from Thomas Jefferson University, a BSN from Holy Family College and an MBA from George Washington University. She holds an appointment as Adjunct Assistant professor in the School of Nursing at the University of Pennsylvania and Affiliate Associate Professor at the University of Maryland School of Pharmacy. Dr. Reifsnyder was inducted as a Fellow in the American Academy of Nursing in 2015.

Richard A. Feifer, MD, MPH, FACP, age 54, has served as our Executive Vice President since 2020, the President of Genesis Physician Services, a wholly-owned subsidiary (GPS), since 2019, and Chief Medical Officer since 2016.  Prior to joining Genesis, Dr. Feifer was Chief Medical Officer of National Accounts and Vice President of Clinical Consulting, Strategy & Analysis with Aetna, one of the nation’s largest health plans and managed care organizations, from 2010 to 2016. He held various leadership roles at Medco Health Solutions, at the time the nation’s largest pharmacy benefit management company, from 2000 to 2010, most recently serving as Vice President of Clinical Program Innovation & Evaluation.  Dr. Feifer has served on the Board of Directors/Commissioners of the Accreditation Commission for Health Care (ACHC) since 2018 and he has served as the Chair of the Ethics Committee of such Board since 2020. A graduate of Brown University and the University of Pennsylvania School of Medicine, Dr. Feifer is a board-certified internist with experience in population health, primary care, geriatrics, and urgent care medicine.  Dr. Feifer received his MPH in Health Services Management from Columbia University, and has been an Assistant Clinical Professor at the University of Connecticut since 2012.

Michael S. Sherman, age 52, has served as our Senior Vice President, General Counsel, Secretary and Assistant Treasurer since the Combination and he served in the same capacity for Genesis Healthcare LLC from 2009 to 2015. Mr. Sherman previously served as Genesis Healthcare Corporation’s Assistant General Counsel from 1997 to 1999, as Vice President and Deputy General Counsel, Strategic Development, from 1999 to 2004, and as Senior Vice President, Mergers and Acquisitions, from 2006 until 2009.

Code of Conduct

We maintain a code of business conduct and ethics entitled “The Genesis Healthcare Code of Conduct,” which is applicable to our directors, officers and employees and any independent contractors performing functions similar to those of employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. The Code of Conduct addresses ethical conduct, commitment to quality care, full, fair and accurate disclosure in documents that we file with the SEC and other regulatory agencies, compliance with laws, regulations and professional standards, and the process for reporting suspected violations of the code. You can access our Code of Conduct, free of charge, on the corporate governance page in the investor relations section of our website at www.genesishcc.com. Information contained on, or accessible through, any website referenced herein does not constitute a part of this Annual Report on Form 10-K. In the event of any future amendments to certain provisions of our Code of Conduct, or waivers of such provisions, applicable to our directors and executive officers, we intend to disclose such amendments or waivers at the same location on our website identified above.

Audit Committee

We have a standing Audit Committee. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm and for reviewing and discussing with our management and our independent registered public accounting firm our audited and unaudited consolidated financial statements included in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and earnings press releases. The Audit Committee carries out its responsibilities in accordance with the terms of its charter. The Audit Committee has authority to retain any independent counsel, experts or advisors (accounting, financial or otherwise) that the committee believes to be necessary or appropriate. A copy of the Audit Committee charter is available under the “Corporate Governance” section of the Company’s website, www.genesishcc.com.

During fiscal year 2020, the Audit Committee consisted of Messrs. Bloem (Chair) and DePodesta and Ms. Rappuhn and held 14 meetings. Since March 2, 2021, the Audit Committee has consisted of Mr. Bloem. Our board of directors has determined that the members of our Audit Committee are financially literate under the current listing standards of the NYSE and are independent under the NYSE standards and the requirements of SEC Rule 10A-3. Our board of directors has determined that Mr. Bloem qualifies, and that Ms. Rappuhn had also qualified, as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K of the

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Exchange Act of 1934, as amended (the Exchange Act).

Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth the compensation awarded to, earned by or paid to our Named Executive Officers by us or our subsidiaries during the fiscal years ended December 31, 2020, 2019 and 2018.

v

Name and Principal Position

    

Year

    

Salary
($)

   

Bonus
($)(1)

   

Stock
Awards
(2)($)

    

Non-Equity
Incentive Plan
Compensation
($)

    

All Other
Compensation
($)

  

Total
($)

George V. Hager, Jr

2020

900,000

5,194,297

--

--

41,605

(3)

6,135,902

Chief Executive Officer

2019

900,000

--

1,080,626

973,000

41,605

2,953,626

2018

900,016

393,757

892,500

540,010

41,605

2,767,888

Thomas DiVittorio

2020

525,000

40,000

213,750

--

--

778,750

Chief Financial Officer

2019

525,000

--

271,986

185,000

--

981,986

2018

525,000

92,000

442,442

126,000

--

1,185,442

Paul Bach

2020

525,000

105,000

194,750

--

--

824,750

Executive Vice President and Chief

2019

525,000

--

271,986

175,000

--

971,986

Operating Officer

2018

525,000

92,000

442,442

126,000

--

1,185,442

_____________

(1)

For 2020, consists of (i) a retention payment in the amount of $5,194,297 to Mr. Hager and (ii) a special recognition bonus in the amounts of $40,000 and $105,000 to Messrs. DiVittorio and Bach, respectively. Mr. Hager subsequently returned to the Company $615,000 of his retention payment, which represented a pre-tax portion of the retention payment equal to $1,014,000. Additional information is set forth under “Employment Agreements” below.

(2)

The amounts shown represent the aggregate grant date fair value of the respective equity awards granted in the year indicated (for 2020, the maximum number of shares multiplied by the closing price of our common stock on the NYSE on the date of grant), as computed in accordance with FASB ASC Topic 718. The applicable assumptions are described in greater detail in Note 14 – “Stock-Based Compensation,” in the notes to our consolidated financial statements included elsewhere in this report. Awards granted in 2020 consisted of service-vesting restricted stock units. These awards vest over a four-year period from the date of grant, with one-fourth vesting on each anniversary of the grant date, subject to the grantee’s continued service to the Company. Additional details are set forth under “Outstanding Equity Awards at Fiscal Year-End” below.

(3)

Consists of premiums paid by the Company on behalf of Mr. Hager on a $3.0 million whole life insurance policy.

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth summary information regarding the outstanding equity awards held by our Named Executive Officers at December 31, 2020.

Name

Grant Date

Number of

Shares or

Units of

Stock That

Have Not

Vested (#)(1)

Market

Value of

Shares or

Units of

Stock That

Have Not

Vested ($)(2)

Equity Incentive

Plan Awards;

Number of

Unearned Shares,

Units or Other

Rights That Have

Not Vested(#)(3)

Equity Incentive

Plan Awards;

Market or Payout

Value of

Unearned Shares,

Units or Other

Rights That Have

Not Vested ($)(2)

Time Based

Performance Based

Restricted Stock Units

Restricted Stock Units

Mr. Hager

5-14-2019

137,500

66,000

206,250

99,000

5-14-2019

133,333

64,000

200,000

96,000

6-6-2018

250,000

120,000

--

--

Mr. DiVittorio

6-2-2020

225,000

108,000

--

--

5-14-2019

68,166

32,720

102,250

49,080

6-6-2018

123,932

59,487

--

--

Mr. Bach

6-2-2020

205,000

98,400

--

--

5-14-2019

68,166

32,720

102,250

49,080

6-6-2018

123,932

59,487

--

--

___________________________________

(1)

The number of shares reflects the maximum number of shares that could vest after December 31, 2020 if the applicable vesting criteria are met. The number consists of time-based restricted stock units that vest ratably over a three-year period from the date of grant (a four-year period for the 2020 awards), with one-third vesting on each anniversary of the grant date (one-fourth for the 2020 awards), subject to the grantee’s continued service to the company, provided, however, that for the awards granted in 2018, as a result of the achievement of a performance target, the number also includes the performance based restricted stock units originally granted in 2018 and those shares will vest on the third anniversary of the grant date.

(2)

The value shown was calculated by multiplying the number of shares shown in the table by $0.48, the closing price of our Class A common stock on the NYSE on December 31, 2020 (the last business day of the year).

(3)

The number of shares reflects the maximum number of shares that could vest after December 31, 2020 if the applicable vesting criteria are met. Consists of performance-based restricted stock units that vest three years after the award date if prior to such date the company achieves specified performance targets, with the 33% of such units becoming eligible to vest per target achieved.

Employment Agreements with the Named Executive Officers

George V. Hager, Jr. On April 1, 2019, the company entered into an amended and restated employment agreement with Mr. Hager which sets forth the terms and conditions of his service with the company as its Chief Executive Officer. Mr. Hager’s agreement will continue in effect for an initial term until December 31, 2022. Mr. Hager’s employment agreement provides that his base salary, which is currently $900,000, will be reviewed periodically and may be increased, but not decreased, in an effort to maintain Mr. Hager’s compensation level at market as compared to other CEOs in companies of a similar size and in the same industry. Mr. Hager is eligible for a target annual bonus of 115% of his base salary and for certain equity incentive grants. Mr. Hager will also be entitled to participate in any welfare benefit plans and pension, retirement, profit sharing, deferred compensation or savings plans sponsored by the company and will be entitled to receive perquisites generally provided to other executive officers of the company, as well as $3 million of “whole life” life insurance coverage.

Mr. Hager’s employment agreement provides that the company shall pay severance benefits in certain situations upon his termination of employment. Mr. Hager’s employment agreement includes a non-competition provision that states that Mr. Hager will not, subject to certain listed exceptions, compete with the company or solicit the company’s customers or employees during employment and for the two-year period following the termination of employment. The employment agreement also contains covenants relating to the treatment of confidential information and 2-year post-termination cooperation provisions.

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On November 5, 2020, upon the approval of the Board of Directors, the Company entered into a letter agreement with Mr. Hager under which Mr. Hager received a retention payment of $5,194,297 (CEO Retention Payment).

If Mr. Hager resigns other than for “Good Reason” or if his employment is terminated for “Cause” (each as defined in the letter agreement) prior to December 31, 2021, Mr. Hager will repay to the Company an amount equal to the portion of the CEO Retention Payment actually received (i.e., the net amount of the amount after reduction by all amounts withheld for taxes therefrom) prorated as follows:

Date of Termination or Resignation

Proration

10/1/21 - 12/30/21

retain 75%, repay 25%

7/1/21 - 9/30/21

retain 50%, repay 50%

4/1/21 - 6/30/21

retain 25%, repay 75%

through 3/31/21

retain 0%, repay 100%

As a condition of receiving the CEO Retention Payment, Mr. Hager agreed that any cash severance or termination pay otherwise payable in the event of termination or resignation prior to December 31, 2022 for Mr. Hager under any other agreement between him and the Company will be reduced on a dollar-for-dollar basis by the amount of any retained CEO Retention Payment, but not to an amount less than zero.

On January 5, 2021, Mr. Hager became eligible for severance benefits under his employment agreement upon his departure, subject to his execution and nonrevocation of a release of claims. His severance is offset by the retention benefit provided to him in November 2020, provided that, to mitigate certain adverse tax consequences, Mr. Hager repaid to the Company an amount of the retention benefit equal to the value of the severance benefits that are subject to Internal Revenue Code (IRC) Section 409A, and such amounts will be paid by the Company (commencing at various times during 2022) when due under the employment agreement severance provisions; moreover the value of continued health coverage that is not subject to IRC Section 409A (approximately $9,000) is being provided to Mr. Hager in a cash lump sum. The Company also awarded Mr. Hager a special cash bonus of $650,000 in recognition of his exemplary leadership during the COVID-19 pandemic during 2020. Mr. Hager has agreed to provide consulting services to the Company following his departure. In exchange for an up-front cash fee of $300,000, Mr. Hager has agreed to provide such services for at least three months, though the Company and Mr. Hager may mutually agree to extend the arrangement. This consulting arrangement secures Mr. Hager’s services to the Company during an extraordinary time and while federal and state authorities are considering material and critical financial support for the Company and industry and thereby facilitates his continued participation in industry-led efforts in which he has taken a leadership role. Mr. Hager also is being paid his full 2020 annual incentive payment, and Mr. Hager has agreed not to assert entitlement to any additional 2020 annual incentive.

Thomas DiVittorio and Paul Bach. On February 2, 2015, we entered into an employment agreement with Mr. DiVittorio. On March 2, 2015, we entered into an employment agreement with Mr. Bach. Each of the employment agreements provides for an initial term of two years and will automatically renew for successive one-year periods unless either party provides at least 90 days’ advance notice of non-renewal. The annual base salaries for the executives are currently $525,000 for each of Messrs. DiVittorio and Bach. Their base salaries will be reviewed periodically and may be increased, but not decreased, by the company. In addition, they are eligible to participate in company sponsored long-term incentive plans, including equity incentive plans, on terms and conditions similar to other senior executive officers generally and at a level generally consistent with their positions.

Director Compensation

The company’s non-employee director compensation policy provides that members of our board of directors who are not employed by us or any of our subsidiaries shall be compensated as follows:

Each member shall receive an annual cash retainer of $75,000 ($235,000 for the period of June 1, 2020 to May 31, 2021), payable in equal quarterly installments, for their service on the board of directors.
The chairpersons of our Audit Committee, Compensation Committee and Corporate Governance Committee shall receive an additional annual fee of $36,000, $20,000 and $20,000, respectively, for their service in that capacity, and the

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other members of those respective committees shall receive an annual fee of $18,000, $8,000 and $8,000, respectively, for their service on such committees, in each case payable in equal quarterly installments.
Each member shall receive a fee of $2,000 for each Board meeting that he or she attends during the period of June 1, 2020 through May 31, 2021.
The Chair of the Special Committee shall receive a fee of $50,000 per month in lieu of meeting fees commencing as of January 1, 2021.
Our Chairman of the board of directors shall receive an additional $125,000 annual fee ($150,000 for the period of June 1, 2020 to May 31, 2021) for his or her service in that capacity, of which $25,000 is paid in the form of restricted stock units. This additional cash fee to our Chairman of the board of directors is payable in equal quarterly installments, and can be made, at the Chairman’s election, either in cash or in shares of our Class A common stock.
The Lead Independent Director shall receive an additional $40,000 annual fee payable in equal quarterly payments.

In addition to the foregoing compensation that our applicable directors receive, our non-employee director compensation policy provides that each non-employee director will annually receive $160,000 of restricted stock units on or as of the date of our annual meeting of shareholders determined using either (i) the average sale price of company common stock for the 40 trading days before the trading day before the annual meeting, or (ii) such other price as the Corporate Governance Committee shall determine. The units granted to the non-employee directors will vest in full one year from the date of grant (subject to continued service), and the vesting of the units will accelerate in full upon the death or disability of the grantee, or upon a change in control of our company (as defined in the equity incentive plan). On June 3, 2020 the company granted 124,079 restricted stock units to each non-employee director, which was the same number of restricted stock units granted to the directors in 2019 and which was approximately 38% fewer awards than the directors were otherwise entitled to receive under the non-employee director policy. Each of the non-employee directors subsequently voluntarily forfeited their 2020 restricted stock units.

Lastly, each of our non-employee directors will be reimbursed for out-of-pocket expenses incurred for attendance at board and committee meetings. We do not offer our non-employee directors any perquisites or other forms of compensation for service on our board of directors.

The following table summarizes the compensation received by our non-employee directors for their services during fiscal year 2020. As noted above, Mr. Hager, who was an employee director, did not receive additional compensation for his service on our board of directors in 2020.

Director

    

Fees Earned or Paid In Cash($)(1)

    

Stock

Awards ($)(2)

   

Total ($)

James H. Bloem

312,750

N/A

312,750

John F. DePodesta

305,250

N/A

305,250

Robert H. Fish

411,500

N/A

411,500

Robert Hartman

255,750

N/A

255,750

James V. McKeon

290,750

N/A

290,750

Terry Rappuhn

290,250

N/A

290,250

Arnold Whitman

257,750

N/A

257,750

__________________________

(1)

Represents fees paid to directors for their service on our board of directors and its committees as described above.

(2)

Each director received an award of 124,079 restricted stock units with a grant date fair value, as computed in accordance with FASB ASC Topic 718, of $117,875. Mr. Fish, as Chairman, received an additional award of 19,387 restricted stock units with a grant date fair value, as computed in accordance with FASB ASC Topic 718, of $18,418. Each restricted stock unit represented the contingent right to receive one share of our Class A common stock. The restricted stock units were to vest in full on June 3, 2021 (generally subject to continued service). Each of the directors subsequently voluntarily forfeited their restricted stock units.

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

The following table shows ownership of our common stock as of March 12, 2021 by: (i) each person known to us to own beneficially more than five percent (5%) of any class of our capital stock; (ii) each director; (iii) our Chief Executive Officer, our Chief Financial Officer and our Chief Operating Officer, who were our three most highly compensated executive officers for the year ended December 31, 2020 (collectively, the Named Executive Officers); and (iv) all of our current directors and executive officers as a group.

Shares Beneficially Owned(1)

Shares of
Class A
Common
Stock

Rights to
Acquire
Class A
Common
Stock
(2)

Class A
Percentage (3)

Shares of
Class C
Common
Stock

Class C
Percentage


Percentage of Outstanding Vote

Stockholders holding 5% or more:

ReGen Healthcare, LLC(4)

--

--

--

69,500,755

55.9%

29.3%

Arnold Whitman(5)

8,759,108

19,382,477

21.5%

19,163,061

34.9%

16.8%

Isaac Neuberger(6)

10,044,233

6,448,510

14.0%

6,447,387

11.7%

9.9%

Steven Fishman(7)

8,030,840

8,340,942

13.6%

8,339,490

15.2%

9.8%

Welltower Inc. (8)

9,564,576

--

8.6%

--

--

5.7%

David Reis(9)

1,008,775

8,305,866

7.8%

8,304,420

15.1%

5.6%

Robert Hartman(10)

2,519,156

3,743,303

5.4%

3,566,603

6.5%

3.7%

Steven D. Lebowitz(11)

5,962,863

--

5.3%

--

--

3.6%

Directors:

James H. Bloem

59,802

244,729

*

--

--

*

David Harrington

--

--

*

--

--

--

Robert H. Fish

218,639

323,918

*

--

--

*

Robert Hartman(10)

2,519,156

3,743,303

5.4%

3,566,603

6.5%

3.7%

James V. McKeon

10,000

304,531

*

--

--

*

John Randazzo

--

--

*

--

--

*

Arnold Whitman(5)

8,759,108

19,382,477

21.5%

19,163,061

34.9%

16.8%

Named Executive Officers:

George V. Hager, Jr. (12)

1,551,082

1,819,641

3.1%

892,403

1.6%

2.1%

Paul Bach

271,189

276,387

*

186,497

*

*

Thomas DiVittorio

465,228

462,919

*

372,996

*

*

All current executive officers and
directors as a group (12 persons)

12,907,104

25,102,098

27.8%

23,832,612

43.4%

22.5%

____________________

* Less than 1%

(1)

Unless otherwise noted, percentage ownership is based on 111,728,783 shares of our Class A common stock, 744,396 shares of our Class B common stock and 54,877,924 shares of our Class C common stock outstanding on March 12, 2021. Restricted stock units vesting within sixty days of March 12, 2021 are deemed outstanding for purposes of computing the share amount and percentage ownership of the person holding such units, but we do not deem them outstanding for computing the percentage ownership of any other person. The person or entity listed has sole voting and dispositive power with respect to the shares that are deemed beneficially owned by such person or entity, subject to community property laws, unless otherwise noted below.

(2)

Except as otherwise noted, consists of shares of Class A common stock which the person has a right to acquire upon exchange of Class A Common Units of FC-GEN Operations Investment, LLC (OP Units) for one share of Class A common stock and/or conversion of shares of our Class B common stock or Class C common stock at a ratio of 0.00017411 to one. In addition, it includes the following number of shares of Class A common stock that the person has a right to acquire upon settlement of restricted stock units that are vested as of March 12, 2021 but for which settlement has been deferred: Mr. Bloem, 244,729; Mr. Fish, 323,918; Mr. McKeon, 304,531; Mr. Hartman, 176,079; and Mr. Whitman, 216,079.

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(3)

Giving effect to conversion of all shares of our Class B and Class C common stock and exchange of all OP Units held by the named individual or group. Also includes shares of our Class A common stock to be issued upon the vesting of restricted stock units within 60 days of March 12, 2021, as detailed above.

(4)

Consists of Class C Common Stock that ReGen Healthcare, LLC has a right to acquire upon conversion of a convertible promissory note.

(5)

Based upon the Schedule 13D/A filed with the SEC on November 5, 2018 by, among others, Mr. Whitman, and a Form 4 filed by Mr. Whitman on June 3, 2020. Includes sole voting and dispositive power over 99,952 shares of our Class A common stock and shared dispositive power over 27,825,554 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis. Mr. Whitman’s address is c/o Genesis Healthcare, Inc., 101 East State St., Kennett Square, PA, 19348.

(6)

According to the Schedule 13D/A filed with the SEC on November 5, 2018 by, among others, Mr. Neuberger. Includes shared voting and dispositive power over 16,491,620 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis. Mr. Neuberger’s address is One South Street, 27th Floor, Baltimore, Maryland 21202.

(7)

Based upon the Schedule 13D/A filed with the SEC on November 5, 2018 by, among others, Mr. Fishman, and a Form 4 filed by Mr. Fishman on March 8, 2019. Includes sole voting and dispositive power over 3,344,608 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis, and shared dispositive power over 13,027,175 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis. Mr. Fishman’s address is 1617 JFK Boulevard, Suite 545, Philadelphia, PA 19103.

(8)

According to the Schedule 13G/A filed with the SEC on February 14, 2018 by Welltower Inc., a Delaware corporation. The address of Welltower Inc. is 4500 Dorr Street, Toledo, Ohio 43615.

(9)

Based upon the Schedule 13D filed by Mr. Reis with the SEC on February 28, 2019. Includes sole voting and dispositive power over 436,848 shares of our Class A common stock and shared voting and dispositive power over 8,877,793 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis. Mr. Reis’ address is 500 Mamaroneck Ave., Suite 406, Harrison, NY 10528.

(10)

Based upon the Schedule 13D/A filed with the SEC on November 5, 2018 by, among others, Mr. Hartman and a Form 4 filed by Mr. Hartman on June 3, 2020. Includes sole voting and dispositive power over 284,729 shares of our Class A common stock and shared dispositive power over 5,977,730 shares of our Class A common stock, including Class C common stock and OP Units on an as-converted, as-exchanged basis. Mr. Hartman’s address is c/o Genesis Healthcare, Inc., 101 East State St., Kennett Square, PA, 19348.

(11)

According to the Schedule 13G/A filed by Mr. Lebowitz with the SEC on January 29, 2021. Includes sole voting and dispositive power over 200,000 shares, shared voting over 5,472,863 shares and shared dispositive power over 5,762,863 shares of our Class A common stock. Mr. Lebowitz’s address is 1333 Second Street, Suite 650, Santa Monica, CA 90401.

(12)

Includes 927,083 shares of Class A common stock that will be issued to Mr. Hager in 2021 and 2022 pursuant to restricted stock units.

Equity Compensation Plan Information

The following table provides information, as of December 31, 2020, about compensation plans under which shares of our common stock may be issued to employees, consultants or non-employee directors of our board of directors upon exercise of options, warrants or rights.

Plan Category

Number of Securities

to be Issued Upon

Exercise of Outstanding

Options, Warrants and

Rights

Weighted-Average

Exercise Price of

Outstanding Options,

Warrants and

Rights

Number of Securities

Remaining

Available for

Future Issuance Under

Equity Compensation

Plans (Excluding

Securities Reflected in

Column (a))

(a)

(b)

(c)

Plans approved by stockholders

8,369,182

$

N/A

7,438,737

Plans not approved by stockholders

N/A

N/A

N/A

Total

8,369,182

$

N/A

7,438,737

___________________________

(a)

Represents restricted stock units covering 8,369,182 shares of common stock outstanding as of December 31, 2020 under the 2020 Omnibus Incentive Plan of Genesis Healthcare, Inc., or the 2020 Plan.

(b)

No exercise price is payable in connection with the issuance of shares covered by the restricted stock units outstanding as of December 31, 2020.

(c)

Represents the number of shares that remained available for issuance under the 2020 Plan as of December 31, 2020. As of March 16, 2021, 7,490,393 shares remained available for issuance under the 2020 Plan.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

We believe that all of the related party transactions listed below were on terms at least as favorable to us as could have been obtained through arm’s-length negotiations with unaffiliated third parties or, if the transactions were negotiated in connection with acquisitions, the overall terms of such acquisitions were as favorable to us as could have been obtained through arm’s-length negotiations with unaffiliated third parties.

Tax Receivable Agreement

In connection with the closing of the Combination, on February 2, 2015, we entered into a tax receivable agreement (the TRA) with certain members of FC-GEN, which is now a subsidiary of Genesis Healthcare, Inc. that provides for the payment by us to such members of FC-GEN of 90% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (a) any increase in tax basis attributable to the exchange of FC-GEN Class A Units for shares of Class A Common Stock by such members of FC-GEN and (b) the tax benefits related to imputed interest we are deemed to pay under the Code or any provision of state, local or non-U.S. tax law as a result of our payment obligations to such members under the TRA.

The holders of FC-GEN Class A Units (other than Sun Healthcare Group, Inc. and certain of its subsidiaries) have the right (subject to certain limitations) to exchange their FC-GEN Class A Units for shares of our Class A Common Stock or, at the option of Sun Healthcare Group, Inc. (of which we own 100% of the shares), cash. As a result of such exchanges, our indirect share of the tax basis in the assets owned by FC-GEN and certain of its subsidiaries may increase. Any such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax that we otherwise would be required to pay in the future. These increases in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those capital assets. The Internal Revenue Service, however, may challenge all or part of the existing tax basis, tax basis increase and increased deductions, and a court could sustain such a challenge.

Under the TRA, the benefits we are deemed to realize as a result of the increase in tax basis attributable to the members of FC-GEN generally will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no such increase in tax basis.

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A Common Stock at the time of an exchange, and the amount and timing of our income.

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, our obligations under the TRA would be based on certain assumptions. As a result of such assumptions, we could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits we realize that are subject to the TRA. In addition, if we elect to terminate the TRA early, we would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

Payments under the TRA generally will be based on the tax reporting positions that we determine. Although we do not expect the Internal Revenue Service to challenge our tax reporting positions, we will not be reimbursed for any payments previously made under the TRA, but any overpayments will reduce future payments. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that we actually realize in respect of the tax attributes subject to the TRA.

The full text of the TRA was filed as Exhibit 10.2 to our first Form 8-K filed on February 6, 2015. While our Audit Committee did not review or approve the TRA, our full board of directors unanimously reviewed and approved the form of TRA in conjunction with the approval of the Combination in August 2014 by our board of directors.

Board Observer Rights Agreements

The company entered into a board observer rights agreement, dated February 2, 2015, with Isaac Neuberger, the managing member of stockholders that collectively held approximately 9.9% of the voting securities of the company on a fully as-converted and

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as-exchanged basis as of March 12, 2021, pursuant to which Mr. Neuberger has been granted observer rights on the board of directors. The agreement provides that the company will invite Mr. Neuberger to attend, in a nonvoting observer capacity, meetings of the board of directors and Mr. Neuberger will have the right to be heard at any such meeting. The company may exclude Mr. Neuberger from access to materials or meetings under certain circumstances. The agreement provides that the company will reimburse Mr. Neuberger for reasonable and documented out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors. The rights under the agreement will terminate if certain entities of which Mr. Neuberger is the managing member cease to beneficially own more than five (5) percent of our class A common stock. While our Audit Committee did not review or approve the board observer rights agreement, our full board of directors unanimously approved entering into the board observer arrangement with Mr. Neuberger.

The company entered into a board observer rights agreement, dated October 10, 2017, with Steve Fishman, a stockholder that beneficially held approximately 9.8% of the voting securities of the company on a fully as-converted and as-exchanged basis as of March 12, 2021, pursuant to which Mr. Fishman was granted observer rights on the board of directors. The agreement provided that the company would invite Mr. Fishman to attend, in a nonvoting observer capacity, meetings of the board of directors and Mr. Fishman would have the right to be heard at any such meeting. The company could exclude Mr. Fishman from access to materials or meetings under certain circumstances. The agreement provided that the company would reimburse Mr. Fishman for reasonable and documented out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors. The rights under the agreement were terminable by the company upon written notice to Mr. Fishman. Our Corporate Governance Committee and full board reviewed and approved the board observer rights agreement with Mr. Fishman. On March 5, 2020, our board of directors accepted the resignation of Mr. Fishman as Board Observer.

Consulting Agreement

The company entered into a consulting agreement dated September 15, 2019 with Steve Fishman pursuant to which Mr. Fishman would provide consulting services to the company as reviewed by the Chairman of the Audit Committee and assigned by the Chief Executive Officer of the company. The company paid Mr. Fishman $325,000 and $225,000 for such consulting services during 2019 and 2020, respectively. The Consulting Agreement terminated on March 5, 2020.

FC Compassus – Service Agreements for Hospice and Home Care

On May 1, 2016, the Company entered into agreements with FC Compassus LLC (FC Compassus) designating FC Compassus as a preferred provider for hospice and home care services. Certain of the Company’s healthcare centers have entered into agreements, in the ordinary course of business and on arms-length terms, with FC Compassus for hospice and home care services. Pursuant to those agreements, FC Compassus provides hospice services to approximately 200 of the Company's centers and home care services to a small number of the Company’s centers. We are unable to estimate the approximate dollar amount of these transactions because, depending upon the circumstances of each transaction, payments may be made by the center to the provider, by the provider to the center or by a third party payor to the provider or the center. In December, 2019, the Company provided notice to FC Compassus of non-renewal of the preferred provider designation for home care services, effective April 1, 2020.

Prior to December 31, 2019, Steve Fishman, Robert Hartman, Isaac Neuberger, David Reis and Arnold Whitman indirectly beneficially held ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. On December 31, 2019, Messrs. Fishman, Hartman, Neuberger, Reis and Whitman no longer hold any beneficial ownership interests in FC Compassus.

FC Compassus - Hospice and Home Health Sale

On May 1, 2016, in the ordinary course of business and on arms-length terms, the Company sold the hospice and home health businesses that were operated by subsidiaries of the company to FC Compassus for a purchase price of $84.0 million.  The purchase price was paid $72.0 million in cash and $12.0 million by the delivery to the Company of a promissory note.  FC Compassus paid the outstanding balance of $23.2 million on December 31, 2019.

Trident USA - Mobile Radiology and Laboratory / Diagnostic Services Agreements

Certain of the Company’s healthcare centers have entered into agreements, in the ordinary course of business and on arms-length terms, with Trident USA and its affiliated companies. Pursuant to those agreements, as of December 31, 2019, such companies provided mobile radiology and laboratory/diagnostic services to approximately 326 and 184 of the Company’s centers, respectively.

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Depending upon the circumstances of each transaction, payments may be made by the center to the provider, by the provider to the center or by a third party payor to the provider or the center. The amount of fees that the centers paid for these services were $8.4 million in 2019.

Mr. Reis, along with Robert Hartman, Arnold Whitman, Steve Fishman and Isaac Neuberger, indirectly beneficially held ownership interests in Trident USA totaling less than 10% in the aggregate until September 20, 2019, on which date Trident USA reorganized under Chapter 11. Messrs. Reis, Hartman, Whitman, Fishman and Neuberger no longer hold any ownership in Trident USA after such restructuring.

Consulate Healthcare - Therapy Agreements; Promissory Notes

Robert Hartman, Steve Fishman, David Reis, Isaac Neuberger and Arnold Whitman, indirectly hold, in the aggregate, material ownership interests in Consulate Health Care (Consulate). Messrs. Hartman and Neuberger serve on the Board of Consulate.

Between 2015 and 2018, Genesis Rehabilitation Services (GRS), a subsidiary of the Company, entered into agreements, in the ordinary course of business and on arms-length terms, with healthcare centers operated under Consulate, which is an affiliate of Lavie Care Centers, LLC, pursuant to which GRS provides therapy and respiratory services to such centers. The estimated aggregate dollar amount of billings by GRS to Consulate centers for therapy during 2019 and 2020 was approximately $111.4 million and $99.6 million, respectively. GRS currently serves approximately 130 Consulate centers.

On October 10, 2018, effective as of July 1, 2018, Consulate and various Consulate affiliates executed a Promissory Note (the Consulate GRS Note) in favor of GRS in the face amount of $58.8 million which, among other things, converted certain amounts owed by Consulate into the principal amount of the Consulate GRS Note. As of December 31, 2020, the outstanding balance on the Consulate GRS Note was $56.3 million. The Company has reserved $55.0 million on the note receivable balance.

Between 2015 and 2018, Respiratory Health Services (RHS), a subsidiary of the Company, entered into agreements, in the ordinary course of business and on arms-length terms, with healthcare centers operated by Consulate pursuant to which RHS provides respiratory services to such centers. The estimated aggregate dollar amount of billings by RHS to Consulate centers for respiratory services during 2019 and 2020 was approximately $2.9 million and $2.4 million, respectively. RHS currently serves approximately 130 Consulate centers.

On October 24, 2018, effective as of July 1, 2018, Consulate and various Consulate affiliates executed a Promissory Note (the Consulate RHS Note) in favor of RHS in the face amount of $0.3 million which, among other things, converted certain amounts owed by Consulate into the principal amount of the Consulate RHS Note. As of December 31, 2020, the Consulate RHS Note has been fully retired.

Welltower Inc. - Master Lease

As of March 12, 2021, Welltower Inc. (Welltower) held approximately 8.8% of the shares of the Company's Class A Common Stock, representing approximately 5.7% of the voting power of the Company's voting securities.

On January 31, 2017, the Company entered into the Twentieth Amended and Restated Master Lease Agreement (the Master Lease), in the ordinary course of business and on arms-length terms, with FC-GEN Real Estate, LLC (FC-GEN Real Estate), which is a subsidiary of Welltower, for the lease of healthcare facilities from FC-GEN Real Estate.

During 2019 and 2020, the Company and FC-GEN Real Estate amended the Master Lease to amend and restate financial covenants, to remove certain facilities from the Master Lease that FC-GEN Real Estate had sold and to revise the rent schedule accordingly. The initial term of the Master Lease, as amended, expires on January 31, 2037 and the Company has an option to renew through December 31, 2048. As of December 31, 2020, the Company leased 44 facilities from FC-GEN Real Estate. For the years ended December 31, 2019 and 2020, the Company paid rent of approximately $73.7 million and $70.6 million, respectively, to FC-GEN Real Estate.

The Company's board of directors reviewed and approved each agreement with FC-GEN Real Estate and Welltower that was material to the Company or which was not entered into in the ordinary course of business. The board of directors and the Audit

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Committee did not review the agreements with FC-GEN Real Estate and Welltower that were not material to the Company and which were entered into in the ordinary course of business.

NSpire Healthcare – Service Agreements

Robert Hartman, Steve Fishman, David Reis, Isaac Neuberger and Arnold Whitman, in the aggregate, indirectly hold material ownership interests in NSpire Centers, LLC (NSpire). On October 1, 2019, GRS entered into an amended and restated master therapy services agreement with five health care centers operated by affiliates of NSpire. On September 4, 2018, RHS entered into a master respiratory therapy services agreement with five health care centers operated by affiliates of NSpire. The estimated aggregate dollar amount of billings by GRS to NSpire centers during 2019 and 2020 was approximately $2.0 million and $1.2 million, respectively. The estimated aggregate dollar amount of billings by RHS to NSpire centers during 2019 and 2020 was approximately $50,000 and $40,000, respectively.

Next Healthcare – Alabama Facility Lease

A subsidiary of the Company entered into a lease, in the ordinary course of business and on arms-length terms, pursuant to which it leases two centers in Alabama from Glenwood Realty. Messrs. Hartman, Fishman and Whitman directly or indirectly hold ownership interests in Glenwood Realty totaling approximately 29% in the aggregate. The aggregate rent paid to the landlord during 2019 and 2020 was approximately $1.5 million and $1.6 million, respectively. Glenwood Realty is managed by an affiliate of Next Healthcare.

Mr. Hartman directly or indirectly holds ownership interests in Glenwood Realty totaling approximately 13%. In addition, Next Asset Management II, LLC (Next Management) earned acquisition fees, and may earn asset management fees and other fees with respect to Glenwood Realty. Mr. Hartman is a senior adviser to Next Management. As compensation for being a senior advisor to Next Management, Mr. Hartman is entitled to receive up to 23% of Next Management’s distributed cash.

Next Healthcare – 12-Center Facility Lease and Purchase Option

Subsidiaries of the Company have entered into a lease and a purchase option, in the ordinary course of business and on arms-length terms, pursuant to which they lease twelve centers in New Hampshire and Florida from twelve separate limited liability companies affiliated with Next Healthcare (the Next 12 Landlord Entities). The aggregate rent paid to the Next 12 Landlord Entities during 2019 and 2020 was approximately $13.0 million and $12.0 million, respectively. Next Healthcare sold eight of the Next 12 Landlord Entities on November 19, 2020. The other four Next 12 Landlord Entities will be sold pending HUD approval. The Company divested the eight operations, which were terminated from the master lease. The Company plans to continue operating the four facilities pending HUD approval.

Each of Mr. Whitman and Mr. Hartman directly or indirectly holds ownership interests in the Next 12 Landlord Entities of approximately 2%. In addition, Next Management earned acquisition fees, and may earn asset management fees and other fees, with respect to the Next 12 Landlord Entities. As compensation for being a senior advisor to Next Management, Mr. Hartman is entitled to receive up to 23% of Next Management’s distributed cash.

Next Healthcare – 15-Center Facility Lease and Purchase Option

Subsidiaries of the Company have entered into a lease and a purchase option, in the ordinary course of business and on arms-length terms, pursuant to which they will lease fifteen centers from fifteen separate limited liability companies affiliated with Next Healthcare (the Next 15 Landlord Entities). The real property of the 15 facilities is owned by a partnership (Next Partnership) between the Company and Next Healthcare. The Company owns a 46% membership interest in the Next Partnership and consolidates the Next Partnership in its consolidated financial statements. The aggregate rent paid to the Next 15 Landlord Entities during 2019 and 2020 was approximately $19.5 million and $19.5 million, respectively.

Mr. Whitman and Mr. Hartman directly or indirectly holds ownership interests in the Next 15 Landlord Entities of approximately 2% and 1.3%, respectively. In addition, Next Management will earn acquisition fees, and may earn asset management fees and other fees, with respect to the Next Landlord Entities. As compensation for being a senior advisor to Next Management, Mr. Hartman is entitled to receive up to 23% of Next Management’s distributed cash.

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ProStep Acquisition

On July 1, 2015, in the ordinary course of business and on arms-length terms, a subsidiary of the Company acquired 21 out-patient therapy clinics from FC Domino Acquisition, LLC (FC Domino) in exchange for a $1.0 million promissory note that bore interest at 5%. The promissory note and interest were paid in full in 2020.  Messrs. Fishman, Hartman, Neuberger, Reis and Whitman indirectly beneficially hold ownership interests in FC Domino totaling less than 10% in the aggregate. 

Third Eye Health, Inc.

An affiliate of the Company entered into a Professional Services and Software License Agreement with Third Eye Health, Inc. on May 1, 2018, with respect to the provision of telehealth and telemedicine services. The aggregate dollar amount of billings by Third Eye to the Company during 2019 and 2020 was approximately $1.0 million and $0.8 million, respectively. Senior Care 3rd Eye, LLC, an entity controlled and 100% owned by Mr. Reis, invested $750,000 in Series A Preferred Stock, $0.001 par value, in Third Eye Health, Inc. Senior Care 3rd Eye, LLC owns 384,381 shares of the Series A Preferred Stock. In addition, a trust of which Mr. Reis’ children are the beneficiaries invested $250,000 in 2018 for shares of the Series A Preferred Stock. Mr. Reis is on the Board of Third Eye Health, Inc. In 2018, Generator Ventures invested $2 million in Third Eye Health, Inc., as part of an $8 million capital raise at an approximate $16 million pre-money valuation.  Mr. Whitman is one of three managing members of Generator Ventures. All three managing members must vote unanimously to invest.

Concerto Dialysis

Robert Hartman indirectly hold approximately 16% of Concerto Dialysis (Concerto). Certain of the Company’s healthcare centers have entered into agreements, in the ordinary course of business and on arms-length terms, with Concerto for the provision of dialysis services. The amount of fees that the centers paid for these services in 2019 and 2020 were $0.3 million and $0.4 million, respectively.

Indemnification Agreements

We have entered into indemnification agreements with our directors containing provisions that may require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors.

Item 14. Principal Accounting Fees and Services

KPMG LLP, which served as our independent registered public accounting firm for the fiscal years ended December 31, 2020 and 2019, provided audit, audit-related and tax services to us during those fiscal years. The following table presents fees paid for professional services rendered by our independent registered public accounting firm:

Type of Fees

Fiscal 2020 ($)

Fiscal 2019 ($)

Audit Fees

4,360,000

4,345,000

Tax Fees

292,500

264,617

Total

4,652,500

4,609,617

Audit Fees

This category includes fees associated with our annual audit and the review of our quarterly reports on Form 10-Q. This category also includes audit and accounting matters that arose during, or as a result of, the audit or the review of our interim financial statements. In 2020 and 2019, this category also includes fees associated with the review of our SEC registration statements.

Tax Fees

In 2020, this category included $200,000 in fees associated with tax return review and $92,500 in fees associated with tax consulting services. In 2019, this category included $195,000 in fees associated with tax return review and $69,617 in fees associated with tax consulting services.

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Pre-Approval Policies and Procedures

Pursuant to its charter, the Audit Committee is required to pre-approve audit or non-audit services before the independent registered public accounting firm is engaged by the company or its subsidiaries. The Chairman of the Audit Committee is also authorized to grant pre-approvals, provided such approvals are presented to the Audit Committee at a subsequent meeting. In fiscal years 2020 and 2019 all audit and tax fees were pre-approved in accordance with the Audit Committee’s charter.

The Audit Committee specifically approved all of the audit and non-audit services performed by KPMG LLP and determined the rendering of such non-audit services was compatible with maintaining the independence of KPMG LLP.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)

1. Consolidated Financial Statements and Supplementary Data:

The following consolidated financial statements, and notes thereto, and the related Report of our Independent Registered Public Accounting Firm, are filed as part of this Form 10-K:

    

Page

Number

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets at December 31, 2020 and 2019

F-3

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

F-4

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019

F-5

Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2020 and 2019

F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

F-7

Notes to Consolidated Financial Statements

F-8

(b)

Exhibits:

Number

Description

2.1

Purchase and Contribution Agreement, dated as of August 18, 2014, by and between FC-GEN Operations Investment, LLC and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed on August 18, 2014, and incorporated herein by reference).

2.2

Amendment No. 1 to Purchase and Contribution Agreement, dated as of January 5, 2015, by and between FC-GEN Operations Investment, LLC and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed on January 9, 2015, and incorporated herein by reference).

3.1

Fourth Amended and Restated Certificate of Incorporation of Genesis Healthcare, Inc. (filed as Exhibit 3.1 to our Current Report on Form 8-K filed on June 9, 2020, and incorporated herein by reference).

3.2

Fourth Amended and Restated By-Laws of Genesis Healthcare, Inc. (filed as Exhibit 3.1 to our Current Report on Form 8-K filed on March 3, 2021, and incorporated herein by reference).

4.1

Amended and Restated Registration Rights Agreement, dated as of August 18, 2014, among Onex Holders (as defined therein), Greystone Holders (as defined therein) and Skilled Healthcare Group, Inc. (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 3, 2014, and incorporated herein by reference).

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4.2

Description of Capital Stock (filed as Exhibit 4.2 to our Annual Report on Form 10-K filed on March 16, 2020, and incorporated herein by reference).

10.1

Sixth Amended and Restated Limited Liability Company Operating Agreement of FC-GEN Operations Investment, LLC, dated as of February 2, 2015 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

10.2

Amendment No. 1 to Sixth Amended and Restated Limited Liability Company Operating Agreement of FC-GEN Operations Investment, LLC, dated as of April 1, 2015 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).

10.3

Tax Receivable Agreement, dated as of February 2, 2015, by and among Genesis Healthcare, Inc. (formerly Skilled Healthcare Group, Inc.), FC-GEN Operations Investment, LLC and each of the Members (as defined therein) (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on February 6, 2015, and incorporated herein by reference).

10.4*

Form of Indemnification Agreement with Genesis Healthcare, Inc.’s directors (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).

10.5*

Amended and Restated Employment Agreement, dated as of April 1, 2019, between George V. Hager, Jr. and Genesis Administrative Services, LLC (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

10.6*

Employment Agreement, dated February 2, 2015, between Thomas DiVittorio and Genesis Administrative Services, LLC (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on May 8, 2015, and incorporated herein by reference).

10.7*

Employment Agreement dated as of March 2, 2015 by and between Genesis Administrative Services, LLC and Paul Bach (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.8*

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and JoAnne Reifsnyder (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2016, and incorporated herein by reference).

10.9*

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Michael Sherman (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

10.10*

Amended and Restated Genesis Healthcare, Inc. 2015 Omnibus Equity Incentive Plan (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 8, 2017, and incorporated herein by reference).

10.11*

Genesis Healthcare, Inc. 2020 Omnibus Incentive Plan (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 9, 2020, and incorporated herein by reference).

10.12*

Form of Restricted Stock Unit Agreement to be entered into between Genesis Healthcare, Inc. and its executive officers (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on August 10, 2015, and incorporated herein by reference).

10.13*

Form of Restricted Stock Unit Agreement to be entered into between Genesis Healthcare, Inc. and its non-employee directors (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on August 10, 2015, and incorporated herein by reference).

10.14

Fourth Amended and Restated Credit Agreement, dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent and collateral agent thereto (filed as Exhibit 10.15 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.15

First Amendment, dated March 13, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

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10.16

Second Amendment, dated April 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

10.17

Third Amendment, dated June 5, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

10.18

Fourth Amendment, dated September 12, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 8, 2019, and incorporated herein by reference).

10.19

Fifth Amendment, dated December 3, 2019, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent (filed as Exhibit 10.18 to our Annual Report on Form 10-K filed on March 16, 2020, and incorporated herein by reference).

10.20

Sixth Amendment, dated July 2, 2020, to the Fourth Amended and Restated Credit Agreement dated as of March 6, 2018, by and among Genesis Healthcare, Inc. and certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and MidCap Funding IV Trust LLC, as administrative agent.

10.21

Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on May 10, 2016, and incorporated herein by reference).

10.22

Amendment No. 1 dated as of December 21, 2017 to that certain Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.22 to our Annual Report on Form 10-K filed on March 16, 2018, and incorporated herein by reference).

10.23

Amendment No. 2 dated as of March 6, 2018 to that certain Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities affiliated with Genesis Healthcare LLC set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and MidCap Funding IV Trust LLC, as administrative agent and collateral agent, regarding HUD centers (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.24

Form of Healthcare Facility Note with respect to HUD-insured loans (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on September 24, 2013, and incorporated herein by reference).

10.25

Term Loan Agreement dated as of July 29, 2016, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.6 to our Quarterly Report filed on Form 10-Q filed on August 5, 2016, and incorporated herein by reference).

10.26

Amendment No. 1 to Term Loan Agreement, dated as of December 22, 2016, by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.25 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

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10.27

Amendment No. 2, dated as of May 5, 2017, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on August 9, 2017, and incorporated herein by reference).

10.28

Amendment No. 3, dated as of August 8, 2017, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 8, 2017, and incorporated herein by reference).

10.29

Amendment No. 4, dated as of March 6, 2018, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.30

Amendment No. 5, dated as of March 13, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on May 10, 2019, and incorporated herein by reference).

10.31

Amendment No. 6, dated as of May 9, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on August 9, 2019, and incorporated herein by reference).

10.32

Amendment No. 7, dated as of September 12, 2019, to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as lenders and Welltower, Inc. as the administrative agent and collateral agent (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 8, 2019, and incorporated herein by reference).

10.33

Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.26 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

10.34

First Amendment, dated December 22, 2017, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.35

Second Amendment, dated February 21, 2018, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.11 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.36

Third Amendment, dated March 30, 2018, to the Consolidated Amended and Restated Loan Agreement, dated as of October 1, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

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10.37

Amended and Restated Loan Agreement (A-2), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.28 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

10.38

First Amendment, dated February 21, 2018, to the Amended and Restated Loan Agreement (A-2), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.39

Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.29 to our Annual Report on Form 10-K filed on March 6, 2017, and incorporated herein by reference).

10.40

First Amendment, dated June 30, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.41

Second Amendment, dated September 27, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.42

Third Amendment, dated October 20, 2017, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.43

Fourth Amendment, dated February 21, 2018, to the Amended and Restated Loan Agreement (B-1), dated as of December 22, 2016, between Welltower Inc. and each of the borrowers set forth on Schedule 1 thereto (filed as Exhibit 10.9 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.44

Omnibus Agreement dated as of February 21, 2018 by and between Welltower Inc., Welltower TRS Holdco LLC, OHI Mezz Lender LLC and Genesis Healthcare, Inc. (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 10, 2018, and incorporated herein by reference).

10.45

2020 Omnibus Incentive Plan of Genesis Healthcare, Inc. (filed as Exhibit 10.1 to our current report on Form 8-K filed on June 9, 2020 and incorporated herein by reference).

21

Subsidiaries of the Registrant.

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

    

110

Table of Contents

*

Management contract or compensatory plan or arrangement.

**

Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Item 16. Form 10-K Summary

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GENESIS HEALTHCARE, INC.

Date:

March 16, 2021

By

/S/   ROBERT FISH

Robert Fish

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date:

March 16, 2021

By

/S/    ROBERT FISH

Robert Fish

Chief Executive Officer

Date:

March 16, 2021

By

/S/    TOM DIVITTORIO

Tom DiVittorio

Chief Financial Officer

(Principal Financial Officer and Authorized Signatory)

Date:

March 16, 2021

By

/S/    STEPHEN S. YOUNG

Stephen S. Young

Chief Accounting Officer and Treasurer

(Principal Accounting Officer and Authorized Signatory)

Date:

March 16, 2021

By

/S/    JAMES H. BLOEM

James H. Bloem

Director

Date:

March 16, 2021

By

/S/    DAVID HARRINGTON

David Harrington

Chairman of the Board

Date:

March 16, 2021

By

/S/    ROBERT HARTMAN

Robert Hartman

Director

Date:

March 16, 2021

By

/S/    JAMES V. MCKEON

James V. McKeon

Director

Date:

March 16, 2021

By

/S/    JOHN RANDAZZO

John Randazzo

Director

Date:

March 16, 2021

By

/S/    ARNOLD WHITMAN

Arnold Whitman

Director

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Genesis Healthcare, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Genesis Healthcare, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent and debt obligations, and maintain compliance with financial covenants, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Variable consideration for inpatient revenues

As discussed in Notes 2, 3 and 5 to the consolidated financial statements, the Company provides inpatient services to customers and receives payments for those services from Medicare, Medicaid, private insurance, self-pay residents and other third-party payors. Net

F-1

Table of Contents

revenues are recorded at the transaction price, which the Company determines based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company’s net revenue was $3,906 million for the year ended December 31, 2020. The Company utilizes the expected value method to determine the amount of variable consideration that should be included in net revenues as an implicit price concession. This estimate is based upon contractual agreements, historical reimbursement experience within each payor type and current economic factors.

We identified the evaluation of the estimate of variable consideration for revenue contracts in the Company’s inpatient segment as a critical audit matter. Complex and subjective auditor judgment was required to assess certain assumptions used to determine the estimate of variable consideration. These assumptions include the application of historical collection rates, by payor, and consideration of other changes in the current business operations and external environment, to the current period revenues. A high degree of auditor judgment was required to evaluate the relevance of historical collection rates by payor, and the length of the historical observation period for those collection rates, which are utilized to estimate variable consideration.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for estimating variable consideration, including controls related to the assumptions, noted above, which were used to determine the estimate of variable consideration. We tested a selection of cash receipts to assess the relevance and reliability of sources of data and key assumptions, including the historical collection rates by payor and the length of observation periods of the historical collection rates. Additionally, we: (1) assessed the collection rates used by management in estimating its variable consideration by comparing revenue recognized in prior periods to actual consideration received; and (2) evaluated whether historical collection rates were representative of the characteristics of the current payor portfolio. Specifically, we inquired of the Company’s senior management, including the Company’s divisional reporting leaders and revenue cycle management teams; inspected minutes of the Company’s Board of Directors and certain other committees; and read relevant industry publications and news articles to remain apprised of developments in the current business operations and external environment that may have impacted variable consideration. Further, we evaluated the payor type portfolio approach applied by the Company, by assessing that the accounts within a payor type category had similar characteristics.

Self-insurance reserves

As discussed in Notes 2 and 21 to the consolidated financial statements, the Company self-insures for certain risks, including general and professional liabilities and workers’ compensation claims. Estimated losses from asserted and incurred but not reported claims are accrued based on the Company’s estimates of the ultimate costs of the claims, which include costs associated with litigating and settling claims, and the relationship of past reported incidents to eventual claim payments. The Company has recorded $538.8 million of self-insurance reserves as of December 31, 2020. The Company engages actuarial experts to assist in estimating its self-insurance reserves.

We identified the evaluation of the Company’s self-insurance reserves as a critical audit matter. Specialized skills were necessary to assess the Company’s actuarial models. Additionally, complex and subjective auditor judgment was required to assess the projection of claims incurred but not reported and the application of loss development factors to historical claims experience used to determine the estimates.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s self-insurance reserve process, including controls relating to estimating incurred but not reported claims and the application of loss development factors to historical claims experience. We involved actuarial professionals with specialized skills and knowledge who assisted in: (1) assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards; (2) evaluating the Company’s ability to estimate its self-insurance reserves, by comparing the prior year estimated amounts with actual claim payments; and (3) evaluating the above listed assumptions by developing an independent actuarial estimate of self-insurance reserves and comparing the independent estimate to the self-insurance reserves recorded by the Company.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Philadelphia, Pennsylvania

March 16, 2021

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

December 31, 2020

December 31, 2019

 

Assets:

Current assets:

Cash and cash equivalents

$

212,071

$

12,097

Restricted cash and equivalents

49,998

63,101

Restricted investments in marketable securities

39,526

31,855

Accounts receivable

 

426,927

567,636

Prepaid expenses

 

93,476

108,908

Other current assets

 

47,132

44,079

Assets held for sale

 

1,171

Total current assets

 

869,130

 

828,847

Property and equipment, net of accumulated depreciation of $429,705 and $431,361 at December 31, 2020 and December 31, 2019, respectively

 

984,712

962,105

Finance lease right-of-use assets, net of accumulated amortization of $16,328 and $23,401 at December 31, 2020 and December 31, 2019, respectively

27,848

37,097

Operating lease right-of-use assets

1,715,532

2,399,505

Restricted cash and equivalents

51,151

50,608

Restricted investments in marketable securities

 

114,326

105,087

Other long-term assets

116,371

85,725

Deferred income taxes

 

2,278

3,772

Identifiable intangible assets, net of accumulated amortization of $81,387 and $76,243 at December 31, 2020 and December 31, 2019, respectively

 

82,270

87,446

Goodwill

 

85,642

85,642

Assets held for sale

12,986

16,306

Total assets

$

4,062,246

$

4,662,140

Liabilities and Stockholders' Deficit:

Current liabilities:

Current portion of long-term debt

$

905,788

$

162,426

Current portion of finance lease obligations

2,949

2,839

Current portion of operating lease obligations

2,071,841

140,887

Accounts payable

211,357

238,384

Accrued expenses

335,837

226,092

Accrued compensation

 

162,870

153,698

Self-insurance reserves

153,669

146,476

Current portion of liabilities held for sale

403

368

Total current liabilities

 

3,844,714

 

1,071,170

Long-term debt

634,934

1,450,994

Finance lease obligations

34,943

39,335

Operating lease obligations

159,711

2,681,403

Deferred income taxes

 

5,071

5,245

Self-insurance reserves

385,084

406,864

Liabilities held for sale

18,271

19,789

Other long-term liabilities

 

141,765

69,905

Commitments and contingencies

Stockholders’ deficit:

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 110,801,462 and 107,888,854 at December 31, 2020 and December 31, 2019, respectively)

 

111

108

Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at December 31, 2020 and December 31, 2019, respectively)

 

1

1

Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 55,250,921 and 56,172,193 at December 31, 2020 and December 31, 2019, respectively)

55

56

Additional paid-in-capital

 

247,472

248,594

Accumulated deficit

 

(1,069,259)

(1,010,296)

Accumulated other comprehensive income

 

1,396

602

Total stockholders’ deficit before noncontrolling interests

 

(820,224)

 

(760,935)

Noncontrolling interests

(342,023)

(321,630)

Total stockholders' deficit

(1,162,247)

(1,082,565)

Total liabilities and stockholders’ deficit

$

4,062,246

$

4,662,140

See accompanying notes to consolidated financial statements.

F-3

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

Year ended December 31, 

    

2020

    

2019

Net revenues

$

3,906,223

$

4,565,834

Salaries, wages and benefits

2,256,200

 

2,485,010

Other operating expenses

1,270,571

 

1,374,847

General and administrative costs

175,057

144,471

Lease expense

366,339

 

387,063

Depreciation and amortization expense

 

107,833

 

123,159

Interest expense

 

135,439

 

180,392

Loss (gain) on early extinguishment of debt

 

8,979

 

(122)

Investment income

 

(3,989)

 

(7,296)

Other income

 

(202,272)

 

(173,505)

Transaction costs

 

34,279

 

26,362

Long-lived asset impairments

179,000

16,937

Federal and state stimulus - COVID-19 other income

(306,067)

Equity in net income of unconsolidated affiliates

 

(8,169)

 

(712)

(Loss) income before income tax (benefit) expense

 

(106,977)

 

9,228

Income tax (benefit) expense

 

(3,610)

 

1,754

Net (loss) income

 

(103,367)

 

7,474

Less net loss attributable to noncontrolling interests

 

44,404

 

7,145

Net (loss) income attributable to Genesis Healthcare, Inc.

$

(58,963)

$

14,619

(Loss) earnings per common share:

Basic:

Weighted-average shares outstanding for basic net (loss) income per share

 

111,851

 

107,286

Basic net (loss) income per common share attributable to Genesis Healthcare, Inc.

$

(0.53)

$

0.14

Diluted:

Weighted-average shares outstanding for diluted net (loss) income per share

 

111,851

 

165,314

Diluted net (loss) income per common share attributable to Genesis Healthcare, Inc.

$

(0.53)

$

0.10

See accompanying notes to consolidated financial statements.

F-4

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

Year ended December 31, 

    

2020

    

2019

Net (loss) income

$

(103,367)

$

7,474

Net unrealized gain on marketable securities, net of tax

 

1,188

 

1,198

Comprehensive (loss) income

 

(102,179)

 

8,672

Less: comprehensive loss attributable to noncontrolling interests

 

44,010

 

6,811

Comprehensive (loss) income attributable to Genesis Healthcare, Inc.

$

(58,169)

$

15,483

See accompanying notes to consolidated financial statements.

F-5

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(IN THOUSANDS)

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

other

Total

Class A Common Stock

Class B Common Stock

Class C Common Stock

Additional

Accumulated

comprehensive

Stockholders'

Noncontrolling

stockholders'

    

Shares

Amount

Shares

Amount

Shares

Amount

paid-in capital

deficit

income

deficit

interests

deficit

Balance at December 31, 2018

 

101,236

$

101

 

744

$

1

 

59,701

$

60

$

270,408

$

(1,609,828)

$

(262)

$

(1,339,520)

$

(705,346)

$

(2,044,866)

Net income (loss)

 

 

14,619

 

14,619

(7,145)

7,474

Net unrealized gain on marketable securities, net of tax

 

 

 

864

864

334

1,198

Share based compensation

 

7,309

 

 

7,309

 

7,309

Issuance of common stock

3,124

3

(3)

 

 

Conversion of common stock among classes

3,529

4

(3,529)

(4)

(29,184)

 

 

(29,184)

29,184

Distributions to noncontrolling interests

 

64

 

 

64

(5,817)

 

(5,753)

Contributions from noncontrolling interests

27,031

27,031

Cumulative effect of accounting change

 

 

584,913

 

584,913

340,129

 

925,042

Balance at December 31, 2019

 

107,889

$

108

 

744

$

1

 

56,172

$

56

$

248,594

$

(1,010,296)

$

602

$

(760,935)

$

(321,630)

$

(1,082,565)

Net loss

 

(58,963)

 

(58,963)

(44,404)

(103,367)

Net unrealized loss on marketable securities, net of tax

 

 

794

794

394

1,188

Share based compensation

6,480

 

 

6,480

 

6,480

Issuance of common stock

1,991

2

(2)

 

 

Conversion of common stock among classes

921

1

(921)

(1)

(7,600)

 

 

(7,600)

7,600

Distributions to noncontrolling interests

 

 

(5,707)

 

(5,707)

Contributions from noncontrolling interests

 

 

21,724

 

21,724

Balance at December 31, 2020

110,801

$

111

 

744

$

1

 

55,251

$

55

$

247,472

$

(1,069,259)

$

1,396

$

(820,224)

$

(342,023)

$

(1,162,247)

See accompanying notes to consolidated financial statements.

F-6

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Year ended December 31, 

 

2020

    

2019

Cash flows from operating activities

Net (loss) income

$

(103,367)

$

7,474

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Non-cash interest and leasing arrangements, net

 

25,043

 

27,311

Other non-cash gain, net

 

(202,273)

 

(173,505)

Share based compensation

6,480

7,309

Depreciation and amortization expense

 

107,833

 

123,159

Reduction in the carrying amount of operating lease right-of-use assets

113,325

117,127

Recovery for losses on accounts receivable

 

(604)

 

(4,469)

Equity in net income of unconsolidated affiliates

 

(8,169)

 

(712)

Benefit for deferred taxes

 

1,005

 

(179)

Loss (income) on early extinguishment of debt

3,754

(2,822)

Long-lived asset impairments

179,000

16,937

Changes in assets and liabilities:

Accounts receivable

 

125,511

 

45,745

Accounts payable and other accrued expenses and other

 

18,548

 

(76,911)

Medicare advance payments

155,824

Operating lease obligations

 

(106,179)

 

(93,630)

Net cash provided by (used in) operating activities

 

315,731

 

(7,166)

Cash flows from investing activities:

Capital expenditures

 

(55,616)

 

(62,727)

Purchases of marketable securities

 

(79,285)

 

(70,316)

Proceeds on maturity or sale of marketable securities

63,880

 

71,174

Purchases of assets

(207,313)

 

(591,660)

Sales of assets

 

259,514

 

257,806

Restricted deposits

12,772

(3,820)

Investments in joint venture

(17,520)

Loan provided to joint venture

 

(9,000)

 

Notes receivable and other investment additions

 

 

12,590

Other, net

 

(964)

 

(50)

Net cash used in investing activities

 

(33,532)

 

(387,003)

Cash flows from financing activities:

Borrowings under revolving credit facilities

 

4,546,161

 

4,661,000

Repayments under revolving credit facilities

 

(4,682,122)

 

(4,630,664)

Proceeds from issuance of long-term debt

 

228,714

 

538,538

Repayment of long-term debt

 

(191,781)

 

(199,626)

Repayment of finance lease obligations

(2,905)

(2,645)

Debt issuance and settlement costs

 

(8,869)

 

(10,182)

Contributions from noncontrolling interests

 

21,724

 

27,031

Distributions to noncontrolling interests and stockholders

 

(5,707)

 

(5,753)

Net cash (used in) provided by financing activities

 

(94,785)

 

377,699

Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents

 

187,414

 

(16,470)

Cash, cash equivalents and restricted cash and equivalents:

Beginning of period

 

125,806

 

142,276

End of period

$

313,220

$

125,806

Supplemental cash flow information:

Interest paid

$

109,242

$

153,589

Net taxes paid

2,910

1,496

Federal and state stimulus - COVID-19 other income

306,067

Non-cash investing and financing activities:

Finance lease obligations, net write-down due to lease activity

$

(1,378)

$

(930,110)

Assets subject to finance lease obligations, net write-down due to lease activity

 

(572)

 

(53,588)

Operating lease obligations, net (write-down) gross-up due to lease activity

(484,558)

2,916,017

Assets subject to operating leases, net write-down (gross-up) due to lease activity

 

407,799

 

(2,523,708)

Financing obligations, net write-down due to lease activity

(2,734,940)

Assets subject to financing obligations, net write-down due to lease activity

 

 

1,718,507

See accompanying notes to consolidated financial statements.

F-7

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)

General Information

Description of Business

Genesis Healthcare, Inc. is a healthcare services holding company that through its subsidiaries (collectively, the Company or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At December 31, 2020, the Company provided inpatient services through 341 skilled nursing, assisted/senior living and behavioral health centers located in 24 states. Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of its revenues.

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contracts with healthcare facilities operated by third parties. The Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 10% of the Company’s revenues.

The Company provides an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of the Company’s revenues.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net (loss) income attributable to Genesis Healthcare, Inc. and net (loss) income attributable to noncontrolling interests in its consolidated statements of operations.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of control and economics that considers whether the Company has the power to direct the activities that most significantly impact the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to the VIE. During the years ended December 31, 2020 and 2019, the Company entered into three partnerships that acquired the real property of 43 skilled nursing facilities that are leased to the Company. Management has concluded that these entities are VIEs, of which the Company is the primary beneficiary. As a result, it has included the assets, liabilities, and operating results of these entities in its consolidated financial statements. See Note 4 – “Significant Transactions and Events – Strategic Partnerships.”

Going Concern Considerations

On March 11, 2020, the World Health Organization declared the coronavirus outbreak (COVID-19) a pandemic. COVID-19 is a complex and previously unknown virus which disproportionately impacts older adults, particularly those having other underlying health conditions.

The Company’s primary focus as the effects of COVID-19 began to impact the United States was the health and safety of its patients, residents, employees and their respective families. The Company implemented various measures to provide the safest possible environment within its sites of service during this pandemic and will continue to do so.

F-8

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the healthcare industry and the Company’s businesses. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocols within the healthcare system across the United States. A significant number of the Company’s facilities and operations are geographically located and highly concentrated in markets with close proximity to areas of the United States that have experienced widespread and severe COVID-19 outbreaks. COVID-19 has materially and adversely affected the Company’s operations and supply chains, resulting in a reduction in its operating occupancy and related revenues, and an increase in its expenditures.

The Company performed an assessment to determine whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this assessment does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management assesses the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In completing its going concern assessment, the Company considered the uncertainties around the impact of COVID-19 on its future results of operations as well as its current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s indebtedness and other conditional and unconditional obligations due within 12 months following the date its financial statements were issued. Without giving effect to the prospect, timing and adequacy of future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its rent and debt obligations, and maintain compliance with financial covenants. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

In response to COVID-19, and other conditions that raise substantial doubt about the Company’s ability to continue as a going concern, the Company has taken the following measures:

The Company applied for and received government-sponsored financial relief related to the pandemic;
The Company is utilizing the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) payroll tax deferral program to delay payment of a portion of payroll taxes incurred through December 2020, with 50% to be repaid in December 2021 and the remaining 50% to be repaid in December 2022;
While it vigorously advocates, for itself and the skilled nursing industry, regarding the need for additional government-sponsored funding, the Company continues to explore and to take advantage of existing government-sponsored funding programs implemented to support businesses impacted by COVID-19;
The Company continues to seek and implement measures to adapt its operational model to function for the long-term in a COVID-19 environment;
The Company has pursued, and will continue to pursue, creative and accretive opportunities to sell assets and enter into joint venture structures in order to provide liquidity;
The Company executed a series of transactions, as described at Note 23 – “Subsequent Events – Restructuring Transactions,” that are expected to improve its liquidity position; and
The Company is exploring and evaluating a number of strategic and other alternatives to manage and to improve its liquidity position, in order to address the maturity of material indebtedness and other obligations over the twelve-month period following the date the financial statements are issued.

These measures and other plans and initiatives are needed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. However, such plans and initiatives are dependent on factors that are beyond the Company’s control or may not be available on terms acceptable to the Company, or at all. Accordingly, management determined it could not be certain that the plans and initiatives would be effectively implemented within one year after the date the financial statements are issued. Further, even if the Company receives additional funding support from government sources and/or is able to execute successfully all of these plans and initiatives, given the unpredictable nature of, and the

F-9

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operating challenges presented by, the COVID-19 virus, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued. Such events or circumstances could force the Company to seek reorganization under the U.S. Bankruptcy Code.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. At December 31, 2020, the Company was not in compliance with or had not received waivers with respect to the financial covenants contained in certain of its leases containing cross-default provisions with other lease agreements and debt agreements. The lease and debt obligations associated with these agreements have been classified as current liabilities. Otherwise, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

(2)

Summary of Significant Accounting Policies

Estimates and Assumptions

The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to consolidate company financial information and make informed estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to valuation of revenues and accounts receivable, self-insured liabilities, income taxes, long-lived assets and goodwill, lease obligations and other contingencies. Actual results could differ from those estimates.

Revenue Recognition

The Company generates revenues, primarily by providing healthcare services to its customers. The Company applies Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) in determining the amount and timing of revenue recognition. Under Topic 606, revenues are recognized when control of the promised good or service is transferred to the Company’s customers, in an amount that reflects the consideration to which the Company expects to be entitled from patients, third-party payors (including government programs and insurers) and others, in exchange for those goods and services. Amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues.

Performance obligations are determined based on the nature of the services provided. The majority of the Company's healthcare services are highly interrelated and represent multiple inputs to deliver the combined output for which a customer has entered into a contract with the Company. As such, the bundle of services is treated as a single performance obligation satisfied over time as services are rendered. The Company also provides certain ancillary services, such as activities, meals, security, housekeeping, and assistance in the activities of daily living, including barber and beauty services. Separate and distinct performance obligations exist relative to the performance of the non-medical ancillary services. As such, revenues from ancillary services are recognized at a point in time, if and when those services are rendered.

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company constrains the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known. The Company does not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.

F-10

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is entitled to compensation for the value of the services provided, as they are performed, so it recognizes the related revenue in the statements of operations as the services are performed. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded and, therefore, classifies those billed and unbilled rights as accounts receivable. Payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. See Note 5 – “Net Revenues and Accounts Receivable.”

Accounts Receivable

The Company’s accounts receivable are primarily comprised of amounts due from patients who either do not have insurance or who have insurance with Medicare, Medicaid, private and commercial insurance entities, other third-party payors and long-term care providers that utilize its rehabilitation therapy and other services. The Company evaluates the valuation of accounts receivable based on analysis of historical collection trends, as well as its understanding of the nature and collectibility of accounts based on their age and other factors.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less when purchased and therefore, approximate fair value. The Company’s available cash is held in accounts at commercial banking institutions. The Company currently has bank deposits with commercial banking institutions that exceed Federal Deposit Insurance Corporation insurance limits.

Restricted Cash and Equivalents

Restricted cash and equivalents includes cash and money market funds held by the Company’s wholly-owned captive insurance subsidiary, which are substantially restricted to securing outstanding claims losses. Further, restricted cash and equivalents includes cash proceeds received under the ABL Credit Facilities that are pledged to cash collateralize letters of credit previously issued under the retired revolving credit facilities, as well as cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities resulting in the majority of the Company’s cash accounts being classified as restricted. See Note 12 – “Long-Term Debt Asset Based Lending Facilities.” The restricted cash and equivalents balances at December 31, 2020 and 2019 were $101.1 million and $113.7 million, respectively.

Restricted Investments in Marketable Securities

Restricted investments in marketable securities primarily consist of fixed interest rate securities that are considered to be available-for-sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income (loss), a separate component of stockholders’ deficit. Fair values for fixed interest rate securities are based on quoted market prices.

A decline in the market value of any security below cost that is deemed other-than-temporary is charged to income, resulting in the establishment of a new cost basis for the security. Realized gains and losses for securities classified as available-for-sale are derived using the specific identification method for determining the cost of securities sold.

The restricted investments in marketable securities balances at December 31, 2020 and 2019 were $153.9 million and $136.9 million, respectively.

F-11

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the depreciable assets, which generally range from 20-35 years for buildings, building improvements and land improvements, and 3-15 years for equipment, furniture and fixtures. Depreciation expense on leasehold improvements is calculated using the straight-line method over the lesser of the lease term or the estimated useful life of the asset. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are expensed as incurred. Costs of additions and improvements are capitalized.

Total depreciation expense for the years ended December 31, 2020 and 2019 was $98.5 million and $96.1 million, respectively.

Impairment of Long-Lived Assets

The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less costs to sell. See Note 19 – “Asset Impairment Charges.”

Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. The Company tests goodwill on an annual basis and between annual tests if events occur or circumstances exist that would reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual goodwill impairment assessment for its reporting units as of September 30 of each year. The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any.

Definite-lived intangible assets consist of customer relationships. These assets are amortized in accordance with the authoritative guidance for intangible assets using the straight-line method over their estimated useful lives. These assets are tested for impairment consistent with the Company’s long-lived assets. Indefinite-lived intangible assets consist of trade names. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events occur or circumstances exist that would indicate that the carrying amount of the intangible asset may not be recoverable. See Note 11 – “Goodwill and Identifiable Intangible Assets” and Note 19 – “Asset Impairment Charges.”

Self-Insurance Reserves

The Company provides for self-insurance reserves for both general and professional liabilities and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported. Estimated losses from asserted and incurred but not reported claims are accrued based on the Company’s estimates of the ultimate costs of the claims, which include costs associated with litigating and settling claims, and the relationship of past reported incidents to eventual claim payments. All relevant information, including the Company’s own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims. The reserves for loss for workers’ compensation claims are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability claims are recorded on an undiscounted basis. Estimated insurance recoveries related to recorded liabilities are reflected as assets in the Company’s consolidated balance sheets when the receipt of such amounts is deemed to be probable. See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs – General and Professional Liability and Workers’ Compensation.”

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Income Taxes

The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which it operates. The Company accounts for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized.

The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.

The Company evaluates, on a quarterly basis, its ability to realize deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are its forecast of pre-tax earnings, its forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent the Company prevails in matters for which reserves have been established, or is required to pay amounts in excess of its reserves, its effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of cash and result in an increase in the effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in the Company’s effective tax rate in the year of resolution. The Company records accrued interest and penalties associated with uncertain tax positions as income tax (benefit) expense in the consolidated statement of operations.

Leases

The Company leases skilled nursing facilities and assisted/senior living facilities, as well as certain office space, land, and equipment. The Company evaluates at contract inception whether a lease exists and recognizes a lease liability and right-of-use (ROU) asset for all leases with a term greater than 12 months. Leases are classified as either finance or operating. While many of the Company’s facilities are subject to master lease agreements, leases are assessed, classified, and measured at the facility level.

All lease liabilities are measured as the present value of the future lease payments using a discount rate, which is generally the Company’s incremental borrowing rate for collateralized borrowings. The future lease payments used to measure the lease liability include both fixed and variable payments that depend on a rate or index, as well as the exercise price of any options to purchase the underlying asset that have been deemed reasonably certain of being exercised. Future lease payments for optional renewal periods that are not reasonably certain of being exercised are excluded from the measurement of the lease liability. Regarding variable payments that depend on a rate or index, the lease liability is measured using the applicable rate or index as of lease commencement and is only remeasured under certain circumstances, such as a change in the lease term. Lease incentives serve to reduce the amount of future lease payments included in the measurement of the lease liability. For all leases, the ROU asset is initially derived from the measurement of the lease liability and adjusted for certain items, such as initial direct costs and lease incentives received. ROU assets are subject to impairment testing.

Amortization of finance lease ROU assets, which is generally recognized on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset, is included within depreciation and amortization expense in the consolidated statements of operations. Interest expense associated with finance lease liabilities is included within interest expense in the consolidated statements of operations. Operating lease expense is recognized on a straight-line basis over the lease term and included within lease expense in the consolidation statements of operations. The lease term is determined based on the date the Company acquires control of the leased premises through the end of the lease term. Optional renewals periods are not initially included in the lease term unless they are deemed to be reasonably certain of being exercised at lease commencement. For further discussion, see Note 10 – “Leases.”

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(Loss) Earnings Per Share

The Company follows the FASB’s authoritative guidance for the financial reporting of (loss) earnings per share. (Loss) earnings per share excludes dilution and is based upon the weighted average number of common shares outstanding during the respective periods. Diluted (loss) earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company. See Note 6 – “(Loss) Earnings Per Share.”

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued Accounting Standard Update (ASU) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which simplifies the fair value measurement disclosure requirements. The Company adopted the new standard on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Further, the FASB issued ASU 2019-04 and ASU 2019-05 to provide additional guidance on the credit losses standard. The standard is effective for fiscal years beginning after December 15, 2022, for smaller reporting companies, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which serves to remove or amend certain requirements associated with the accounting for income taxes. The new standard became effective for the Company on January 1, 2021. The Company is evaluating the effect, if any, that the standard will have on its consolidated financial statements.

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(3)

Certain Significant Risks and Uncertainties

COVID-19

The COVID-19 pandemic has materially and adversely affected, and will continue to materially and adversely affect, the Company’s patients, staff and operations, which in turn has materially and adversely affected its revenues and expenses. The Company began to experience the negative impact of the COVID-19 pandemic beginning in late February 2020. For a more detailed discussion of the impact of COVID-19 on the Company’s operations, net revenues, operating expenses and liquidity, see Note 4 – “Significant Transactions and Events – COVID-19.”

Revenue Sources

The Company receives revenues from patients who either do not have insurance or who have insurance with Medicare, Medicaid, private and commercial insurance entities, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services segment derives approximately 80% of its revenue from patients who are insured by Medicare and various state Medicaid programs. The following table depicts the Company’s inpatient services segment revenue by source for the years ended December 31, 2020 and 2019:

Year ended December 31, 

    

2020

    

2019

Medicare

21

%  

20

%  

Medicaid

59

%  

58

%  

Insurance

11

%  

12

%  

Private

7

%  

7

%  

Other

2

%  

3

%  

Total

100

%  

100

%  

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and the historical reimbursement experience within each payor type. Changes in the case mix of the patients as well as payor mix of the patients among Medicare, Medicaid and private pay patients can significantly affect the Company’s profitability.

It is difficult to quantify fully the effect of legislative changes, public and private subsidy, and grant programs related to COVID-19, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business. The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have an adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations are and will continue to be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Laws and regulations governing the Medicare and Medicaid programs, and the Company’s businesses generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations. However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from participation in the Medicare and/or Medicaid programs. 

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Concentration of Credit Risk

The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk. These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions.

Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in the Company’s rehabilitation therapy services business where it has approximately 150 distinct customers, many being chain operators with more than one location. One of the Company’s customers, a related party, comprises $30.5 million, or approximately 44%, of the outstanding contract receivables in the rehabilitation services business at December 31, 2020. See Note 16 – “Related Party Transactions.” A future adverse event impacting this customer or other large customers, resulting in their insolvency or other economic distress would have a material impact on the Company.

Covenant Compliance

Should the Company fail to comply with its debt and lease covenants at a future measurement date, it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have a significant adverse impact on the Company’s financial position.

At December 31, 2020, the Company was not in compliance with or had not received waivers with respect to the financial covenants contained in certain of its leases because certain of its other lease agreements and debt agreements contain cross-default provisions that are triggered if the Company is in default of such leases. The lease and debt obligations associated with these agreements have been classified as current liabilities. As of the date of this Form 10-K filing, all rent and debt service payments have been made timely and no material creditors have pursued remedies with respect to breaches of financial covenants.

The ongoing uncertainty related to the impact of healthcare reform initiatives and the effect of the COVID-19 pandemic may have an adverse impact on the Company’s ability to remain in compliance with or return to compliance with its financial covenants through March 16, 2022. Without giving effect to the prospect of timely and adequate future governmental funding support and other mitigating plans, many of which are beyond the Company’s control, it is unlikely that the Company will be able to generate sufficient cash flows to timely meet its required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties. The existence of these conditions raises substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

The Company’s ability to maintain compliance with financial covenants required by its debt and lease agreements depends in part on management’s ability to increase revenues and control costs and receive adequate government-sponsored financial support in response to the COVID-19 pandemic as well as possible waivers, deferrals and/or adjustments of debt and lease terms. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt and lease covenant requirements.

There can be no assurance that the confluence of these and other factors will not impede the Company’s ability to meet covenants required by its debt and lease agreements in the future.

(4)

Significant Transactions and Events

COVID-19

As discussed in Note 1 – “General Information – Going Concern Considerations,” the Company’s operations and supply chains have been materially and adversely affected by the COVID-19 pandemic, resulting in a reduction in its operating occupancy and related revenues, and an increase in its expenditures. Although the ultimate impact of the pandemic remains uncertain, the following disclosures

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serve to outline the estimated impact of COVID-19 on its business through December 31, 2020, including the impact of emergency legislation, temporary changes to regulations and reimbursements issued in response to COVID-19.

Operations

The Company’s first report of a positive case of COVID-19 in one of its facilities occurred on March 16, 2020. Since that time, 292 of the Company’s 341 facilities have experienced one or more positive cases of COVID-19 among patients and residents. Over 71% of the patient and resident positive COVID-19 cases in its facilities have occurred in the states of Connecticut, Maryland, Massachusetts, New Jersey, New Mexico, Pennsylvania, and West Virginia, which correspond to many of the largest community outbreak areas across the country. The Company’s facilities in these seven states represent 60% of its total operating beds.

The Company’s occupancy decreased in the early months of the pandemic following the efforts by referring hospitals to cancel or reschedule elective procedures in anticipation of an increasing number of COVID-19 cases in their communities. As the pandemic progressed, occupancy was further decreased by, among other things, implementation of both self-imposed and state or local admission holds in facilities having exposure to positive cases of COVID-19 among patients, residents and employees. These self-imposed, and sometimes mandatory, restrictions on admissions were instituted to limit risks of potential spread of the virus by individuals that either tested positive for COVID-19, exhibited symptoms of COVID-19 but had not yet been tested positive due to a severe shortage of testing materials, or were asymptomatic of COVID-19 but potentially positive and contagious.

Net Revenues

The Company’s net revenues for the year ended December 31, 2020 were materially and adversely impacted by a significant decline in occupancy as a result of COVID-19. The Company’s skilled nursing facility operating occupancy decreased from 88.2% for the three months ended March 31, 2020 to 76.6% for the three months ended December 31, 2020. The revenue lost from the decline in occupancy was partially offset by incremental state sponsored funding programs, changes in payor mix, and the enactment of COVID-19 relief programs, as discussed below. See Regulatory and Reimbursement Relief. After considering a commensurate reduction in related and direct operating expenses, the Company lost revenue caused by COVID-19 during the year ended December 31, 2020.

Operating Expenses

The Company’s operating expenses for the year ended December 31, 2020 were materially and adversely impacted due to increases in costs as a result of the pandemic, with more dramatic increases occurring at facilities with positive COVID-19 cases among patients, residents and employees. During the year ended December 31, 2020, the Company incurred $257.9 million of incremental operating expenses in response to the pandemic. Increases in cost primarily stemmed from higher labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, workers compensation, testing, medical equipment, enhanced cleaning and environmental sanitation costs and the impact of utilizing less efficient modes of providing therapy in order to avoid the grouping of patients. Additionally, the future cost of securing adequate insurance coverages through annual renewals may be significantly higher than existing coverages, and the same level of coverage may no longer be available or affordable. This includes workers compensation and general and professional liability coverages, which are requirements in most states in which we operate.

The Company is not reasonably able to predict the total amount of costs it will incur related to the pandemic and to what extent such incremental costs can be reduced or will be borne by or offset by actions taken by public and private entities in response to the pandemic.

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Liquidity

The Company has taken, and will continue to take, actions to enhance and to preserve its liquidity in response to the pandemic. During the year ended December 31, 2020, the Company’s usual sources of liquidity have been supplemented by grants and advanced Medicare payments under programs expanded or created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, in the second quarter of 2020, the Company applied for and received $156.8 million of advanced Medicare payments and from April through December 2020, received $275.4 million of relief grants and other forms of federal relief, such as the temporary suspension of Medicare sequestration. In addition, the Company has elected to implement the CARES Act payroll tax deferral program, which preserved, on an interest free basis, $92.2 million of cash, representing the employer portion of payroll taxes incurred between March 27, 2020 and December 31, 2020. The advance Medicare payments of $156.8 million, which are also interest free, are expected to be recouped between April 2021 and February 2022, while one-half of the payroll tax deferral amount will become due on each of December 31, 2021 and December 31, 2022. In addition to relief funding under the CARES Act, funding of $124.7 million has been committed by a number of states in which the Company operates.

The Company continues to seek opportunities to enhance and to preserve its liquidity, including through reducing expenses, continuing to evaluate its capital structure and seeking further government-sponsored financial relief related to the pandemic. The Company cannot provide assurance that such efforts will be successful, timely or adequate to offset the lost revenue and escalating operating expenses as a result of the pandemic. See Note 1 – “General Information – Going Concern Considerations.”

Regulatory and Reimbursement Relief

On March 18, 2020, the Families First Coronavirus Response Act was enacted, which provided a temporary 6.2% increase to each qualifying state’s Medicaid Federal Medical Assistance Percentage (FMAP) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the COVID-19 public health emergency declared by the U.S. Department of Health and Human Services (HHS), including any extensions or termination, which currently expires on April 20, 2021. As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporarily increased FMAP is claimed. Further, a number of additional states in which the Company operates have implemented incremental FMAP related reimbursement provisions and other forms of support to assist providers. For the year ended December 31, 2020, the Company recognized FMAP reimbursement relief of $82.3 million as net revenues and other forms of state support grants of $39.1 million as Federal and state stimulus – COVID-19 other income in the consolidated statements of operations. At December 31, 2020, the Company deferred recognition of $3.3 million of other forms of state support grants, which have been presented within accrued expenses in the consolidated balance sheet. The Company cannot predict the extent to which further FMAP funding programs will be implemented in the states in which it operates.

In further response to the pandemic, on March 27, 2020, the former U.S. Presidential administration signed into law the bipartisan CARES Act, which authorized the cash distribution of relief funds to reimburse healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus. Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protective equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source. The secretary of HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.

The Company was impacted by certain provisions of the CARES Act, as summarized below.

Temporary suspension of certain patient coverage criteria and documentation and care requirements. The CARES Act and a series of temporary waivers and guidance issued by the Centers for Medicare and Medicaid Services (CMS) suspend various Medicare patient coverage criteria as well as certain documentation and care requirements. These accommodations are intended to ensure patients have access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

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Relief Funds. The CARES Act authorized HHS to distribute relief fund grants to healthcare providers to support healthcare-related expenses or lost revenue attributable to COVID-19. HHS has made several rounds of distributions to providers based upon a variety of factors and providers have been able to apply for additional funding. To retain the funds, providers must submit an attestation accepting certain terms and conditions. During April 2020, the Company first began receiving relief grants from CARES Act funds administered by HHS. Through December 31, 2020, the Company has received $198.7 million in these initial relief grants, the majority of which are related to skilled nursing care provided through the Company’s Inpatient Services segment.

On July 22, 2020, the former U.S. presidential administration announced an additional relief fund to be used to protect residents of long term care facilities and nursing homes from the impact of COVID-19. Through December 31, 2020, the Company received $68.3 million of relief grants under the program. The relief fund included:

oPayments to be used primarily to support increased testing and meet staffing and personal protective equipment needs.
oSubsequent distributions as part of the Quality Incentive Payments Program (QIP). In order to qualify for payments under QIP, a facility must have an active state certification as a nursing home or skilled nursing facility and receive reimbursement from CMS. HHS will administer quality checks on nursing home certification status to identify and remove facilities that have a terminated, expired, or revoked certification or enrollment. Facilities must also report to at least one of three data sources that will be used to establish eligibility and collect necessary provider data to inform payment.

The QIP Program has been divided into four performance periods (September, October, November and December 2020). All nursing homes or skilled nursing facilities meeting the previously noted qualifications were eligible for each of the performance periods.  

oDistributions to “COVID only” facilities.
oDistributions to providers that participate in approved training programs to better enable nursing home employees to administer COVID-19-related safety practices.

The Company recognizes relief funds as income once there is reasonable assurance that the applicable terms and conditions required to retain the funds have been met. During the year ended December 31, 2020, the Company recognized $306.1 million of aggregate relief funds within the “Federal and state stimulus – COVID-19 other income” caption in the consolidated statement of operations.

On June 9, 2020 as part of its ongoing efforts to provide financial relief to healthcare providers impacted by COVID-19, HHS announced the Phase 2 general distribution to Medicaid, Medicaid managed care, Children's Health Insurance Program (CHIP) and dental providers. HHS anticipates distributing approximately $15 billion to eligible providers that participate in state Medicaid and CHIP programs that did not receive a payment from the Provider Relief Fund General Allocation (Phase 1). Eligible applicants will receive 2% of Gross Revenues from Patient Care for calendar years 2017, 2018 or 2019 as selected by applicant. The Company has submitted applications for its assisted living facilities that meet the eligibility criteria.

Medicare Accelerated and Advanced Payment Program. During the second quarter of 2020, the Company applied for and received $156.8 million of interest free advanced Medicare payments. These payments will be subsequently recouped over time as revenue is recognized for claims submitted for services provided to Medicare patients. In October 2020, CMS extended the recoupment period to begin one year from the date the advanced payments were issued. The Company’s recoupment period for the advanced payments is expected to be from April 2021 to February 2022. The Company has reported advanced payments of $118.8 million and $36.7 million within accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet as of December 31, 2020.

Payroll Tax Deferral. Under the CARES Act, the Company has elected to defer payment, on an interest free basis, of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. One-half of the deferral amount is due on each of December 31, 2021 and December 31, 2022. The Company has presented $46.1 million of the deferred payroll tax balance within accrued expenses and $46.1 million within other long-term liabilities in the consolidated balance sheet as of December 31, 2020.

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Temporary Suspension of Medicare Sequestration. The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee for service claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to remain in place through at least 2023, unless Congress takes further action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020; this period was subsequently extended through March 31, 2021. During the year ended December 31, 2020, the suspension of sequestration resulted in net revenues of $8.4 million.

Strategic Partnerships

NewGen Partnership

On February 1, 2020, the Company transitioned operational responsibility for 19 facilities in the states of California, Washington and Nevada to a partnership with New Generation Health, LLC (the NewGen Partnership). The Company sold the real estate and operations of six skilled nursing facilities and transferred the operations to 13 skilled nursing, behavioral health and assisted living facilities for $78.7 million. Net transaction proceeds were used by the Company to repay indebtedness, including prepayment penalties, of $33.7 million, fund its initial 50% equity contribution and working capital requirement of $14.9 million, and provide financing to the partnership of $9.0 million. The Company recorded a gain on sale of assets and transition of leased facilities of $58.8 million and loss on early extinguishment of debt of $1.0 million. Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. The Company will continue to provide administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements.

On May 15, 2020, the Company transitioned operational responsibility for four additional leased facilities in California to the NewGen Partnership. The four facilities generated annual revenues of $55.0 million and pre-tax loss of $0.5 million. On October 1, 2020, the Company transitioned operational responsibility for one additional leased facility in the state of Washington to the NewGen Partnership. The facility generated annual revenues of $12.3 million and pre-tax income of $0.2 million.

The Company does not hold a controlling financial interest in the NewGen Partnership. As such, the Company has applied the equity method of accounting for its 50% interest in the NewGen Partnership. The Company’s investment in the NewGen Partnership, $25.1 million, is included within other long-term assets in the consolidated balance sheet as of December 31, 2020.

Cascade Partnership

On July 2, 2020, the Company sold one facility to an affiliate of Cascade Capital Group, LLC (Cascade) for $26.1 million, using proceeds from the sale to retire U.S. Department of Housing and Urban Development (HUD) financed debt of $10.5 million, pay aggregate prepayment penalties and other closing costs of $1.0 million, and partially fund its investment in a partnership with Cascade (the Cascade Partnership). The Cascade Partnership also acquired eight facilities that the Company operated under a master lease agreement with Second Spring. The Company continues to operate all nine of these facilities subject to a new master lease agreement with affiliates of Cascade. The master lease agreement contains an initial term of 10 years with one five-year renewal option and base rent of $20.7 million with no rent escalators for the first five years and annual rent escalators of 2.5% thereafter. The Company also obtained a fixed price option to purchase the nine facilities for $251.6 million that is exercisable from July 2023 through June 2025. The Company executed a promissory note with Cascade for $20.3 million, which was subsequently converted into a 49% membership interest in the Cascade Partnership.

The Company has concluded that the Cascade Partnership is a VIE and it is the primary beneficiary. Consequently, the Company has consolidated all of the accounts of the Cascade Partnership in the accompanying financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Cascade Partnership acquired all nine skilled nursing facilities for an aggregate purchase price of $223.6 million. The initial consolidation primarily resulted in property and equipment of $208.6 million, non-recourse debt of $190.3 million, net of debt issuance costs, and noncontrolling interests of $21.2 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Next Partnership

On January 31, 2019, Welltower Inc. (Welltower) sold the real estate of 15 facilities to a real estate partnership (Next Partnership), of which the Company acquired a 46% membership interest for $16.0 million.  The remaining interest is held by Next Healthcare (Next), a related party. See Note 16 – “Related Party Transactions.” In conjunction with the facility sales, the Company received aggregate annual rent credits of $17.2 million. The Company will continue to operate these facilities pursuant to a master lease with the Next Partnership.  The term of the master lease is 15 years with two five-year renewal options available. The Company will pay annual rent of $19.5 million, with no rent escalators for the first five years and an escalator of 2% beginning in the sixth lease year and thereafter. The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the net price paid by the partnership to acquire the facilities from Welltower.

The Company has concluded the Next Partnership is a VIE and it is the primary beneficiary. Consequently, the Company has consolidated all of the accounts of the Next Partnership in the accompanying financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Next Partnership acquired 22 skilled nursing facilities for a purchase price of $252.5 million but immediately sold seven of these facilities for $79.0 million. The initial consolidation of the remaining 15 facilities resulted in property and equipment of $173.5 million, non-recourse debt of $165.7 million, net of debt issuance costs, and non-controlling interest of $18.5 million.

Vantage Point Partnership

On September 12, 2019, Welltower and Second Spring Healthcare Investments (Second Spring) sold the real estate of four and 14 facilities, respectively, to a real estate partnership (Vantage Point Partnership), in which the Company invested $37.5 million for an approximate 30% membership interest.  The remaining membership interest is held by Vantage Point Capital, LLC (Vantage Point) for an investment of $85.3 million consisting of an equity investment of $8.5 million and a formation loan of $76.8 million. In conjunction with the facility sales, the Company received aggregate annual rent credits of $30.3 million. The Company will continue to operate these facilities pursuant to a new master lease with the Vantage Point Partnership.  The term of the master lease is 15 years with two five-year renewal options available. The Company will pay annual rent of approximately $33.1 million, with no rent escalators for the first four years and an escalator of 2% beginning in the fifth lease year and thereafter. The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable during certain periods in fiscal years 2024 and 2025 for a 10% premium over the original purchase price. Further, Vantage Point holds a put option that would require the Company to acquire its membership interests in the Vantage Point Partnership. The put option becomes exercisable if the Company opts not to purchase the facilities or upon the occurrence of certain events of default.

The Company has concluded the Vantage Point Partnership is a VIE and it is the primary beneficiary. Consequently, the Company has consolidated all of the accounts of the Vantage Point Partnership in the accompanying financial statements. Additionally, all leasing activity associated with the master lease has been fully eliminated in consolidation. The Vantage Point Partnership acquired all 18 skilled nursing facilities for a purchase price of $339.2 million. The initial consolidation primarily resulted in property and equipment of $339.2 million, non-recourse debt of $306.1 million, net of debt issuance costs, and non-controlling interest of $8.5 million.

During the third quarter of 2019, the Company sold the real property of seven skilled nursing facilities and one assisted/senior living facility located in Georgia, New Jersey, Virginia, and Maryland to affiliates of Vantage Point for an aggregate purchase price of $91.8 million, using the majority of the proceeds to acquire its interest in the Vantage Point Partnership and repay indebtedness. The operations of seven of these facilities were also divested. Three of the facilities were subject to real estate loans and two were subject to loans insured by the U.S. Department of Housing and Urban Development (HUD). See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company also divested the operations of an additional leased skilled nursing facility located in Georgia, marking an exit from the inpatient business in this state. The divested facilities had aggregate annual revenues of $84.1 million and annual pre-tax net income of $2.6 million. The divestitures resulted in an aggregate gain of $57.8 million.

On January 10, 2020, Welltower sold the real estate of one skilled nursing facility located in Massachusetts to the Vantage Point Partnership. The sale represents the final component of the transaction. As a result of the January 10, 2020 transaction, the Company will receive an annual rent credit of $0.7 million from Welltower and recorded a gain of $0.2 million as a result of the lease termination.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Vantage Point Partnership acquired this skilled nursing facility for a purchase price of $9.1 million. The consolidation of this additional skilled nursing facility primarily resulted in property and equipment of $9.1 million, non-recourse debt of $7.3 million with the balance of the purchase price settled primarily with proceeds held in escrow from the September 12, 2019 closing. The Company operates all 19 facilities owned by the Vantage Point Partnership.

Divestiture of Non-Strategic Facilities

2020 Divestitures

In addition to the 24 facilities transitioned into the NewGen Partnership, the Company divested the operations of 39 owned and leased facilities in 2020.

During the first quarter of 2020, the Company sold four owned skilled nursing facilities and divested the operations of one leased senior/assisted living facility. Additionally, Omega Healthcare Investors, Inc. (Omega) sold the real estate of one skilled nursing facility located in Massachusetts that the Company leased under a master lease agreement, but had closed on July 1, 2019. The facilities generated annual revenues of $55.2 million and pre-tax income of $0.5 million. The sales resulted in aggregate proceeds of $82.6 million, of which, $49.6 million was used to repay indebtedness. The Company recognized an aggregate gain on the sale of the facilities of $27.4 million and a loss on early extinguishment of debt of $3.0 million.

During the second quarter of 2020, the Company sold three owned skilled nursing facilities and divested the operations of 12 leased skilled nursing facilities. The facilities generated annual revenues of $136.1 million and pre-tax loss of $1.8 million. The sales resulted in aggregate proceeds of $45.8 million, of which, $22.7 million was used to repay indebtedness. The Company recognized an aggregate gain on the sale of the facilities of $16.1 million and a loss on early extinguishment of debt of $1.4 million.

During the third quarter of 2020, the Company sold one owned skilled nursing facility and several rehab clinics. The facility generated annual revenues of $9.9 million and pre-tax income of $0.2 million. The sale resulted in proceeds of $10.5 million, of which, $5.5 million was used to repay indebtedness. The Company recognized a gain on the sale of the facility and rehab clinics of $5.5 million.

During the fourth quarter of 2020, the Company sold five owned facilities and divested the operations of 13 leased skilled nursing facilities. The facilities generated annual revenues of $173.9 million and pre-tax loss of $8.8 million. The sales resulted in aggregate proceeds of $40.9 million, of which, $22.4 million was used to repay indebtedness. The Company recognized an aggregate gain on the sale and divestitures of $10.8 million and a loss on early extinguishment of debt of $2.4 million.

2019 Divestitures

In addition to the nine divestitures noted in the Vantage Point Partnership transaction, the Company divested the operations of 35 owned and leased facilities in 2019. The Company also sold the real property of seven previously divested facilities.

During the first quarter of 2019, the Company divested the operations of nine facilities located in New Jersey and Ohio that were subject to the master lease with Welltower (the Welltower Master Lease). The nine divested facilities had aggregate annual revenues of $90.2 million and annual pre-tax net loss of $6.0 million. The Company recognized a loss on exit reserves of $3.5 million. The Company also completed the closure of one facility located in Ohio. The facility generated annual revenues of $7.7 million and pre-tax net loss of $1.6 million. The closure resulted in a loss of $0.2 million.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the second quarter of 2019, the Company sold the real property and divested the operations of five skilled nursing facilities in California for a sale price of $56.5 million. Loan repayments of $41.8 million were paid on the facilities at closing. See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – Real Estate Loans” and “Long-Term Debt – HUD Insured Loans.” The Company incurred prepayment penalties and other closing costs of $2.4 million at settlement. The facilities generated annual revenues of $53.0 million and pre-tax net income of $1.6 million. The divestiture resulted in a gain of $25.0 million. The Company also divested the operations of one behavioral health center located in California upon the lease’s expiration in the second quarter of 2019. The center generated annual revenues of $3.1 million and pre-tax net loss of $0.3 million. The divestiture resulted in a loss of $0.1 million. In addition, the Company divested the operations of three leased skilled nursing facilities. Two of the facilities were located in Connecticut and subject to the Welltower Master Lease, while the third was located in Ohio. The facilities generated annual revenues of $24.7 million and pre-tax net loss of $2.9 million. The divestitures resulted in a loss of $1.1 million.

During the third quarter of 2019, the Company divested the operations of 11 leased skilled nursing facilities and completed the closure of a twelfth facility. Nine of the facilities were located in Ohio, marking an exit from the inpatient business in this state, while the remaining three were located in Massachusetts, Utah, and Idaho. Four of the facilities were subject to a master lease with Omega Healthcare Investors, Inc. (Omega), three of which were removed from the lease, resulting in an annual rent credit of $1.9 million, with the fourth, the closed facility, remaining subject to the lease. The twelve facilities generated annual revenues of $75.6 million and pre-tax loss of $4.6 million. The divestitures resulted in a loss of $3.5 million. In addition, the Company sold the real property and divested the operations of one additional skilled nursing facility and one assisted/senior living facility in California for an aggregate sale price of $11.5 million. Loan repayments of $9.6 million were paid on the facilities at closing. See Note 9 – “Property and Equipment” and Note 12 – “Long-Term Debt – HUD Insured Loans.” The facilities generated annual revenues of $10.4 million and pre-tax net income of less than $0.1 million. The divestiture resulted in an aggregate gain of $0.6 million.

During the fourth quarter of 2019, the Company sold the real property of seven facilities in Texas for a sales price of $20.1 million. The operations of these facilities were divested in 2018. The net proceeds were used principally to repay the indebtedness of the facilities. The Company recognized a net gain of $3.3 million associated with the sale of the facilities. The Company recognized a gain on early extinguishment of debt of $2.6 million associated with the write off of the debt premiums and issuance costs on the underlying HUD loans.

Also during the fourth quarter of 2019, the Company divested the operations of two leased skilled nursing facilities. The facility generated annual revenues of $28.1 million and pre-tax net loss of $1.7 million. The divestitures resulted in a loss of $1.3 million, which was primarily attributable to exit costs.

Lease Transactions

Gains, losses and termination charges associated with master lease terminations and amendments are recorded as non-recurring charges. These amendments and terminations resulted in net gains of $98.6 million and of $95.8 million for the years ended December 31, 2020 and 2019, respectively. These gains are included in other income on the consolidated statements of operations. Below is a summary of the more material lease transactions.

NewGen Partnership

As noted above, the Company transitioned the operations of 18 leased skilled nursing, behavioral health and assisted living facilities to the NewGen Partnership during the year ended December 31, 2020. In total, the lease transitions resulted in a net reduction to operating lease ROU assets and obligations of $17.0 million and $26.8 million, respectively, and a gain of $19.7 million, which includes proceeds from the sale of leasehold rights.

Welltower

During the year ended December 31, 2020, the Company amended the Welltower Master Lease several times to reflect the lease termination of one facility and rent credits associated with the sale of previously closed locations. The Company received annual rent credits of approximately $1.1 million. In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of $37.6 million and $57.4 million, respectively, and a gain of $19.8 million.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2019, the Company amended the Welltower Master Lease several times to reflect the lease termination of 30 facilities, including the 15 facilities sold to and now leased from the Next Partnership. As a result of the lease termination on the 30 facilities, the Company received annual rent credits of approximately $25.9 million. For those facilities remaining under the Welltower Master Lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Lease modification analyses were performed at each amendment date and as of December 31, 2019, all facilities subject to the Welltower Master Lease were classified as operating leases. In total, the amendments resulted in a net reduction to finance lease ROU assets and obligations of $11.7 million and $22.4 million, respectively, a net reduction to operating lease ROU assets and obligations of $112.8 million and $150.4 million, respectively and a gain of $48.3 million.

Omega

During the year ended December 31, 2020, the Company amended the Omega Master Lease several times to reflect the lease termination of five facilities. The Company received annual rent credits of approximately $2.6 million. In total, the amendments resulted in a net reduction to operating lease ROU assets and obligations of $16.0 million and $24.6 million, respectively, and a gain of $8.6 million.

During the year ended December 31, 2019, the Company amended its master lease with Omega to reflect the lease termination of three facilities subject to the lease and received annual rent credits of $1.9 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $10.1 million and $16.8 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were reduced by $164.6 million and $181.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $23.4 million. In addition, the Company recorded a gain of $1.9 million in the reassessment of the assumed timing of a variable rent buyout.

During the year ended December 31, 2019, the Company amended its master lease with Omega to reflect the inclusion of nine skilled nursing facilities and one assisted living facility in New Mexico and Arizona. These facilities were previously leased from Omega, following the terms of a separate lease agreement, and all facilities were classified as operating leases. There was no change in base rent for the 10 facilities upon addition to the master lease. The lease assessment and measurement resulted in operating lease classification with a $10.6 million ROU asset and lease liability gross up. In addition, the Company received $15.0 million as a short-term note payable. See Note 12 – “Long-Term Debt – Notes Payable.”

Second Spring

During the year ended December 31, 2020, the Company amended its master lease several times with Second Spring to reflect the lease termination of 22 facilities subject to the lease and received annual rent credits of $41.2 million. In conjunction with the lease termination, operating lease ROU assets and lease obligations of $304.0 million and $340.1 million, respectively, were written off. The lease termination and remeasurement resulted in a gain of $36.1 million..

During the year ended December 31, 2019, the Company amended its master lease with Second Spring to reflect the lease termination of 14 facilities subject to the lease and received annual rent credits of $28.4 million. In conjunction with the lease termination, finance lease ROU assets and lease obligations of $5.9 million and $8.8 million, respectively, were written off and operating lease ROU assets and lease obligations of $202.7 million and $205.4 million, respectively, were written off. Additionally, for those facilities remaining under the master lease, the Company reassessed the likelihood of exercising its renewal options and concluded that it no longer met the reasonably certain threshold. Consequently, the remaining facilities subject to the master lease were reclassified from finance leases to operating leases and the corresponding ROU assets and liabilities were increased by $54.4 million and $33.3 million, respectively. The lease termination and remeasurement resulted in an aggregate gain of $26.9 million.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Lease Transactions

During the year ended December 31, 2020, the Company amended three master lease agreements to reflect the lease termination of a combined 13 facilities from the master lease agreements. In conjunction with the lease terminations, operating lease ROU assets and lease obligations of $59.6 million and $64.0 million, respectively, were written off, resulting in a gain of $4.4 million.

During the year ended December 31, 2020, the Company extended the lease agreements of several facilities and offices resulting in an increase in ROU assets and lease liabilities of $28.0 million.

During the year ended December 31, 2019, the Company amended a master lease agreement for 19 skilled nursing facilities. The amendment extended the lease term by five years through October 31, 2026, removed the Company’s option to purchase certain facilities under the lease and adjusted certain financial covenants. The Company had previously determined that the renewal option period was not reasonably certain of exercise. Upon execution of the amendment, the operating lease ROU assets and obligations were remeasured, resulting in an increase of $77.2 million to both operating lease ROU assets and obligations.

During the year ended December 31, 2019, the Company amended a master lease agreement to reflect the lease termination of six facilities subject to the lease. In conjunction with the lease termination, operating lease ROU assets of $4.9 million were written off, resulting in a loss of $4.9 million.

(5)   Net Revenues and Accounts Receivable

Revenue Streams

Inpatient Services

The Company generates revenues primarily by providing services to patients within its facilities. The Company uses interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care. Many of the Company’s facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management, as well as standard services, such as room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. The Company assesses collectibility on all accounts prior to providing services.

Rehabilitation Therapy Services

The Company generates revenues by providing rehabilitation therapy services, including speech-language pathology, physical therapy, occupational therapy and respiratory therapy at its skilled nursing facilities and assisted/senior living facilities, as well as facilities of third-party skilled nursing operators and other outpatient settings. The majority of revenues generated by rehabilitation therapy services rendered are billed to contracted third party providers.

Other Services

The Company generates revenues by providing an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.

Disaggregation of Revenues

The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of 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 payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source. Payments are generally received within 30 to 60 days after billing. See Note 7 – “Segment Information.”

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The composition of net revenues by payor type and operating segment for the years ended December 31, 2020 and 2019 was as follows (in thousands):

Year ended December 31, 2020

Rehabilitation

Inpatient

Therapy

Other

Services

Services

Services

Total

 

Medicare

$

697,160

$

87,896

$

$

785,056

Medicaid

 

1,982,156

 

1,440

 

 

1,983,596

Insurance

351,293

 

22,038

 

 

373,331

Private

248,962

(1)

191

249,153

Third party providers

264,893

91,641

356,534

Other

59,284

(2)

24,746

(2)

74,523

(3)

158,553

Total net revenues

$

3,338,855

$

401,204

$

166,164

$

3,906,223

Year ended December 31, 2019

Rehabilitation

Inpatient

Therapy

Other

Services

Services

Services

Total

Medicare

$

800,253

$

90,811

$

$

891,064

Medicaid

 

2,313,479

 

2,144

 

 

2,315,623

Insurance

463,135

 

22,273

 

 

485,408

Private

310,022

(1)

296

310,318

Third party providers

336,509

78,709

415,218

Other

69,143

(2)

10,513

(2)

68,547

(3)

148,203

Total net revenues

$

3,956,032

$

462,546

$

147,256

$

4,565,834

(1)Includes Assisted/Senior living revenue of $79.3 million and $93.1 million for the years ended December 31, 2020 and 2019, respectively. Such amounts do not represent contracts with customers under Topic 606.
(2)Primarily consists of revenue from patients with Veteran Affairs insurance and administration of third party facilities.
(3)Includes net revenues from all payors generated by the other services, excluding third party providers.

(6) (Loss) Earnings Per Share

The Company has three classes of common stock. Classes A and B are identical in economic and voting interests. Class C has a 1:1 voting ratio with each of the other two classes, representing the voting interests of the legacy FC-GEN Operations Investment, LLC (FC-GEN) owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic (loss) earnings per share (EPS) calculation.

The noncontrolling owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option. There were exchanges of 0.9 million FC-GEN units and Class C shares in the year ended December 31, 2020 equating to 0.9 million Class A shares. There were exchanges of 3.5 million FC-GEN units and Class C shares in the year ended December 31, 2019 equating to 3.5 million Class A shares.

Basic EPS was computed by dividing net (loss) income attributable to Genesis Healthcare, Inc. by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net (loss) income attributable to Genesis Healthcare, Inc. plus the effect of any assumed conversions of noncontrolling interests by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common stock.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the numerator and denominator used in the calculation of basic net (loss) income per common share follows (in thousands, except per share data):

Year ended December 31, 

    

2020

    

2019

Numerator:

Net (loss) income

$

(103,367)

$

7,474

Less: Net loss attributable to noncontrolling interests

 

44,404

 

7,145

Net (loss) income attributable to Genesis Healthcare, Inc.

$

(58,963)

$

14,619

Denominator:

Weighted-average shares outstanding for basic net (loss) income per share

 

111,851

 

107,286

Basic net (loss) income per common share attributable to Genesis Healthcare, Inc.

$

(0.53)

$

0.14

A reconciliation of the numerator and denominator used in the calculation of diluted net (loss) income per common share follows (in thousands, except per share data):

Year ended December 31, 

    

2020

    

2019

Numerator:

Net (loss) income

$

(103,367)

$

7,474

Less: Net loss attributable to noncontrolling interests

 

44,404

 

7,145

Net (loss) income attributable to Genesis Healthcare, Inc.

$

(58,963)

$

14,619

Plus: Assumed conversion of noncontrolling interests

 

 

1,868

Net (loss) income available to common stockholders after assumed conversions

$

(58,963)

$

16,487

Denominator:

Weighted-average common shares outstanding

 

111,851

 

107,286

Plus: Assumed conversion of noncontrolling interests

57,074

Plus: Unvested restricted stock units and stock warrants

954

Adjusted weighted-average common shares outstanding, diluted

111,851

165,314

Diluted net (loss) income per common share attributable to Genesis Healthcare, Inc.

$

(0.53)

$

0.10

The computation of diluted net (loss) income per common share attributable to Genesis Healthcare, Inc. excludes the effects of anti-dilutive shares attributable to the assumed conversion of noncontrolling interests, unvested restricted stock units, and stock warrants, which were 55.7 million for the year ended December 31, 2020. There were 55.3 million and 56.2 million units attributable to the noncontrolling interests outstanding as of December 31, 2020 and 2019, respectively.

(7)

Segment Information

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments, see Note 1 – “General Information – Description of Business.”

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s segmented revenues follows (in thousands, except percentages):

Year ended December 31, 

2020

2019

Increase / (Decrease)

    

Revenue

    

Revenue

    

Revenue

    

Revenue

    

Dollars

Percentage

Dollars

Percentage

Dollars

Percentage

Revenues:

Inpatient services:

Skilled nursing facilities

$

3,254,715

 

83.4

%  

$

3,857,793

 

84.4

%  

$

(603,078)

(15.6)

%

Assisted/Senior living facilities

 

79,314

 

2.0

%  

 

93,054

 

2.0

%  

 

(13,740)

(14.8)

%

Administration of third party facilities

 

7,866

 

0.2

%  

 

8,310

 

0.2

%  

 

(444)

(5.3)

%

Elimination of administrative services

 

(3,040)

 

(0.1)

%  

 

(3,125)

 

(0.1)

%  

 

85

2.7

%

Inpatient services, net

 

3,338,855

 

85.5

%  

 

3,956,032

 

86.5

%  

 

(617,177)

 

(15.6)

%

Rehabilitation therapy services:

Total therapy services

 

622,601

 

15.9

%  

 

738,124

 

16.2

%  

 

(115,523)

(15.7)

%

Elimination of intersegment rehabilitation therapy services

 

(221,397)

 

(5.7)

%  

 

(275,578)

 

(6.0)

%  

 

54,181

19.7

%

Third party rehabilitation therapy services, net

 

401,204

 

10.2

%  

 

462,546

 

10.2

%  

 

(61,342)

 

(13.3)

%

Other services:

Total other services

 

263,806

 

6.8

%  

 

198,920

 

4.4

%  

 

64,886

32.6

%

Elimination of intersegment other services

 

(97,642)

 

(2.5)

%  

 

(51,664)

 

(1.1)

%  

 

(45,978)

(89.0)

%

Third party other services, net

 

166,164

 

4.3

%  

 

147,256

 

3.3

%  

 

18,908

 

12.8

%

Net revenues

$

3,906,223

 

100.0

%  

$

4,565,834

 

100.0

%  

$

(659,611)

(14.4)

%

A summary of the Company’s condensed consolidated statement of operations follows (in thousands):

Year ended December 31, 2020

Rehabilitation

Inpatient

Therapy

Other

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

$

3,341,895

$

622,601

$

263,806

$

$

(322,079)

$

3,906,223

Salaries, wages and benefits

 

1,593,013

 

501,093

 

162,094

 

 

 

2,256,200

Other operating expenses

1,482,488

 

31,431

 

79,194

 

 

(322,542)

 

1,270,571

General and administrative costs

175,057

175,057

Lease expense

362,384

 

1,019

 

1,739

 

1,197

 

 

366,339

Depreciation and amortization expense

91,084

 

6,731

 

825

 

9,457

 

(264)

 

107,833

Interest expense

57,634

 

27

 

38

 

82,460

 

(4,720)

 

135,439

Loss on early extinguishment of debt

 

 

 

8,979

 

 

8,979

Investment income

 

 

 

(8,709)

 

4,720

 

(3,989)

Other (income) loss

(203,100)

 

621

 

207

 

 

 

(202,272)

Transaction costs

 

 

 

34,279

 

 

34,279

Long-lived asset impairments

179,000

179,000

Federal and state stimulus - COVID-19 other income

(301,719)

(3,649)

(699)

(306,067)

Equity in net income of unconsolidated affiliates

 

 

 

(7,091)

 

(1,078)

 

(8,169)

Income (loss) before income tax benefit

81,111

 

85,328

 

20,408

 

(295,629)

 

1,805

 

(106,977)

Income tax benefit

 

 

 

(3,610)

 

 

(3,610)

Net income (loss)

$

81,111

$

85,328

$

20,408

$

(292,019)

$

1,805

$

(103,367)

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2019

Rehabilitation

Inpatient

Therapy

Other

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

$

3,959,157

$

738,124

$

198,676

$

244

$

(330,367)

$

4,565,834

Salaries, wages and benefits

 

1,761,273

 

601,196

 

122,541

 

 

 

2,485,010

Other operating expenses

1,599,549

 

44,088

 

62,104

 

 

(330,894)

 

1,374,847

General and administrative costs

144,471

144,471

Lease expense

382,897

 

1,297

 

1,463

 

1,406

 

 

387,063

Depreciation and amortization expense

99,529

 

12,230

 

720

 

10,775

 

(95)

 

123,159

Interest expense

83,887

 

55

 

35

 

97,831

 

(1,416)

 

180,392

Income on early extinguishment of debt

 

 

 

(122)

 

 

(122)

Investment income

 

 

 

(8,712)

 

1,416

 

(7,296)

Other (income) loss

(172,709)

 

(926)

 

112

 

18

 

 

(173,505)

Transaction costs

 

 

 

26,362

 

 

26,362

Long-lived asset impairments

16,937

16,937

Equity in net loss (income) of unconsolidated affiliates

 

 

 

4,091

 

(4,803)

 

(712)

Income (loss) before income tax benefit

187,794

 

80,184

 

11,701

 

(275,876)

 

5,425

 

9,228

Income tax expense

 

 

 

1,754

 

 

1,754

Net income (loss)

$

187,794

$

80,184

$

11,701

$

(277,630)

$

5,425

$

7,474

The following table presents the segment assets as of December 31, 2020 compared to December 31, 2019 (in thousands):  

    

December 31, 2020

    

December 31, 2019

 

Inpatient services

$

3,555,291

$

4,221,579

Rehabilitation therapy services

 

252,575

 

281,978

Other services

 

47,448

 

49,877

Corporate and eliminations

 

206,932

 

108,706

Total assets

$

4,062,246

$

4,662,140

(8)

Restricted Investments in Marketable Securities

The current portion of restricted investments in marketable securities principally represents an estimate of the level of outstanding self-insured losses the Company expects to pay in the succeeding year through its wholly-owned captive insurance company. See Note 21 – “Commitments and Contingencies – Loss Reserves For Certain Self-Insured Programs.”

Restricted investments in marketable securities at December 31, 2020 consist of the following (in thousands):

Unrealized losses

Amortized

Unrealized

Less than

Greater than

    

cost

    

gains

    

12 months

    

12 months

    

Fair value

Restricted investments in marketable securities:

Mortgage/government backed securities

$

23,727

$

166

$

$

$

23,893

Corporate bonds

59,936

867

(1)

60,802

Government bonds

67,794

1,364

(1)

69,157

$

151,457

$

2,397

$

(1)

$

(1)

153,852

Less: Current portion of restricted investments

(39,526)

Long-term restricted investments

$

114,326

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted investments in marketable securities at December 31, 2019 consist of the following (in thousands):

Unrealized losses

Amortized

Unrealized

Less than

Greater than

    

cost

    

gains

    

12 months

    

12 months

    

Fair value

Restricted investments in marketable securities:

Mortgage/government backed securities

$

20,957

$

90

$

(17)

$

(7)

$

21,023

Corporate bonds

48,362

566

(2)

48,926

Government bonds

66,734

286

(22)

(5)

66,993

$

136,053

$

942

$

(39)

$

(14)

136,942

Less: Current portion of restricted investments

(31,855)

Long-term restricted investments

$

105,087

Maturities of restricted investments yielded proceeds of $35.1 million and $69.2 million for the years ended December 31, 2020 and 2019, respectively.

Sales of investments yielded proceeds of $29.0 million and $2.0 million for the years ended December 31, 2020 and 2019, respectively. Associated gross realized gain and loss for the years ended December 31, 2020 and 2019 were de minimis.

The majority of the Company’s investments are investment grade government and corporate debt securities that have maturities of five years or less. The Company generally holds the investments until maturity.

Restricted investments in marketable securities held at December 31, 2020 mature as follows (in thousands):

Amortized

Fair

    

cost

    

value

Due in one year or less

$

36,550

$

36,834

Due after 1 year through 5 years

111,907

114,019

Due after 5 years through 10 years

Due after 10 years

3,000

2,999

$

151,457

$

153,852

Actual maturities may differ from stated maturities because borrowers may have the right to call or prepay certain obligations and may exercise that right with or without prepayment penalties.

The Company has issued letters of credit totaling $143.3 million at December 31, 2020 to its third party administrators and excess insurance carriers. Restricted cash of $2.6 million and restricted investments with an amortized cost of $151.5 million and a fair value of $153.9 million are pledged as security for these letters of credit as of December 31, 2020.

(9)

Property and Equipment

Property and equipment consisted of the following as of December 31, 2020 and 2019 (in thousands):

    

December 31, 2020

    

December 31, 2019

 

Land, buildings and improvements

$

1,052,095

$

1,004,447

Equipment, furniture and fixtures

 

358,546

 

386,248

Construction in progress

 

3,776

 

2,771

Gross property and equipment

 

1,414,417

 

1,393,466

Less: accumulated depreciation

 

(429,705)

 

(431,361)

Net property and equipment

$

984,712

$

962,105

Net property and equipment included $735.1 million and $535.9 million at December 31, 2020 and 2019, respectively, associated with the Company's consolidated VIEs.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the years ended December 31, 2020 and 2019, the Company recorded long-lived asset impairment charges to its property and equipment of $11.5 million and $10.7 million, respectively. See Note 19 – “Asset Impairment Charges – Long-Lived Assets with a Definite Useful Life.”

(10)

Leases

The Company leases the majority of the skilled nursing facilities and assisted/senior living facilities used in its operations, most of which are subject to triple-net leases, meaning that in addition to rent, the Company is responsible for paying property taxes, insurance, and maintenance and repair costs. As of December 31, 2020, the Company leased approximately 72% of its centers; 43% were leased pursuant to master lease agreements with four landlords. The Company also leases certain office space, land, and equipment.

The Company’s real estate leases generally have initial lease terms of 10 to 15 years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional five to ten years or more. Exercise of the renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term. The Company assesses renewal options using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, the majority of its leases’ terms do not include renewal periods for accounting purposes. For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the ROU asset and lease liability. The payment structure of the Company’s leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices. Leases with an initial term of 12 months or less are not recorded on the balance sheet; expense for these leases is recognized on a straight-line basis over the lease term as an other operating expense.

As of December 31, 2020, the Company held fixed-price options to purchase 58 facilities, 15 of which are subject to third-party leases and 43 of which are owned by the Company’s consolidated VIEs. The Company assesses the likelihood of exercising purchase options using a “reasonably certain” threshold, which is understood to be a high threshold and, therefore, purchase options are generally assumed to be exercised when a compelling economic reason to exercise the option exists. Certain leases include options to terminate the lease, the terms and conditions of which vary by contract. Such options allow the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The Company’s lease agreements do not contain any material residual value guarantees. The Company leases certain facilities from affiliates of related parties. See Note 16 – “Related Party Transactions.”

The Company makes certain assumptions in determining the discount rate. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate for collateralized borrowings, based on the information available at commencement date, in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach was utilized to group assets based on similar lease terms in a manner whereby the Company reasonably expects that the application does not differ materially from application to individual leases.

Subsequent to lease commencement date, the Company reassesses lease classification when there is a contract modification that is not accounted for as a separate contract, a change in lease term, or a change in the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. This reassessment is made using current facts, circumstances and conditions. As a result of a lease’s modification, the remaining consideration in the contract is reallocated to lease and non-lease components, as applicable, and the lease liability is remeasured using the applicable discount rate at the effective date of the modification. The remeasurement of the lease liability will result in adjustment to the corresponding ROU asset, unless the lease is fully or partially terminated, in which case, a gain or loss will be recognized.

Lease Transactions

During the years ended December 31, 2020 and 2019, the Company amended, extended and terminated the leases with respect to numerous facilities subject to material lease agreements, resulting in ROU asset and liability adjustments. See Note 4 – “Significant Transactions and Events – Lease Transactions.”

During the years ended December 31, 2020 and 2019, the Company recognized impairment charges resulting in the reduction of ROU assets of $167.5 million and $6.2 million, respectively. The current year’s impairment charges were primarily driven by the

F-31

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impact of COVID-19 on the facilities’ operations. See Note 19 – “Asset Impairment Charges – Long-Lived Assets with a Definite Useful Life.”

The maturity of total operating and finance lease obligations at December 31, 2020 is as follows (in thousands):

Year ending December 31, 

    

Operating Leases

    

Finance Leases (1)

2021

$

324,840

$

6,798

2022

 

328,039

 

6,597

2023

 

330,147

 

6,420

2024

 

334,231

 

6,195

2025

 

333,225

 

5,968

Thereafter

 

2,250,977

 

28,950

Total lease payments

 

3,901,459

 

60,928

Less interest

 

(1,669,907)

 

(23,036)

Total lease obligations

 

2,231,552

 

37,892

Less current portion

 

(2,071,841)

 

(2,949)

Long-term lease obligations

$

159,711

$

34,943

(1)Finance lease payments include $37.2 million related to options to renew lease terms that are reasonably certain of being exercised.

The impact of the lease covenant defaults described below and the transactions described within Note 23 – “Subsequent Events – Restructuring Transactions” are reflected in the current and long term lease obligation balances shown above, but are not reflected in the maturity of the Company’s lease obligations presented as of December 31, 2020.

The following table provides lease costs and income by line item on the consolidated statements of operations for the years ended December 31, 2020 and 2019 (in thousands):

    

Year ended December 31, 

Classification

    

2020

    

2019

Operating lease cost

Lease expense

$

366,339

$

387,063

Finance lease cost:

 

 

Amortization of finance lease ROU assets

Depreciation and amortization expense

 

3,818

 

16,224

Interest on finance lease obligations

Interest expense

4,402

50,162

Total finance lease expense

8,220

66,386

Variable lease cost

Other operating expenses

 

34,601

 

37,841

Short-term leases

Other operating expenses

18,516

24,297

Sublease income

Net revenues

(6,058)

-

Total

$

421,618

$

515,587

The following table provides remaining lease term and discount rates by lease classification as of December 31, 2020 and 2019:

Lease Term and Discount Rate

    

December 31, 2020

December 31, 2019

Weighted-average remaining lease term (years)

Operating leases

 

11.4

 

12.6

Finance leases

 

9.5

 

10.2

Weighted-average discount rate

Operating leases

 

10.1%

 

9.6%

Finance leases

 

10.6%

 

12.2%

The following table includes supplemental lease information for the years ended December 31, 2020 and 2019 (in thousands):

Year ended December 31, 

Other information

    

2020

    

2019

Cash paid for amounts included in the measurement of lease obligations

Operating cash flows from operating leases

$

348,034

$

364,334

Operating cash flows from finance leases

 

7,305

 

47,188

Financing cash flows from finance leases

 

2,905

 

2,645

Right-of-use assets obtained in exchange for new lease obligations

 

 

Operating leases

 

27,229

 

96,718

Finance leases

 

1,033

 

1,160

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Lease Covenants

The Company’s lease agreements generally contain covenant requirements that, among other things, and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries. These leases also require the Company to meet defined financial covenants, such as a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage. Certain of the Company’s leases include cross-default provisions with each other and certain material debt instruments.

At December 31, 2020, the Company was not in compliance with or had not received waivers with respect to the financial covenants contained in certain of its leases because certain of its other lease agreements and debt agreements contain cross-default provisions that are triggered if the Company is in default of such leases. The lease and debt obligations associated with these agreements have been classified as current liabilities. As of the date of this Form 10-K filing, all rent and debt service payments have been made timely and no material creditors have pursued remedies with respect to breaches of financial covenants.

The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue, control costs and receive timely and adequate government-sponsored financial support in response to the COVID-19 pandemic. See Note 1 – “General Information – Going Concern Considerations” and Note 4 – “Significant Transactions and Events – COVID-19” for discussions that could impact future covenant compliance. Should the Company fail to comply with its lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing lease agreements. To the extent any cross-default provisions may apply, the default would have a significant adverse impact on the Company’s financial position.

(11)

Goodwill and Identifiable Intangible Assets

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The changes in the carrying value of goodwill are as follows (in thousands):

    

Rehabilitation Therapy Services

    

Other Services

    

Consolidated

Balance at December 31, 2019

Goodwill

$

73,814

$

11,828

$

85,642

Accumulated impairment losses

$

73,814

$

11,828

$

85,642

Balance at December 31, 2020

Goodwill

$

73,814

$

11,828

$

85,642

Accumulated impairment losses

$

73,814

$

11,828

$

85,642

During the year ended December 31, 2017, as a result of changes in the regulatory and reimbursement environment, the Company performed a quantitative impairment test for all reporting units, the results of which indicated that the carrying value of the inpatient reporting unit exceeded its fair value. Consequently, the Company recorded an impairment of $351.5 million, representing the entire balance of goodwill associated with the inpatient reporting unit.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Identifiable intangible assets consist of the following at December 31, 2020 and 2019 (in thousands):

    

December 31, 2020

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $81,387

$

31,715

7

Trade names

50,555

Indefinite

Identifiable intangible assets

$

82,270

    

December 31, 2019

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $76,243

$

36,891

8

Trade names

50,555

Indefinite

Identifiable intangible assets

$

87,446

Identifiable intangible assets consist of customer relationship assets and trade names.

Customer relationship assets exist in the Company’s rehabilitation services, respiratory services, management services and medical staffing businesses. These assets are amortized on a straight-line basis over the expected period of benefit.

The Company’s trade names have value, in particular in the rehabilitation business which markets its services to other providers of skilled nursing and assisted/senior living services. The trade name asset has an indefinite life and is measured no less than annually or if indicators of potential impairment become apparent.

Amortization expense related to customer relationship assets, which is included in depreciation and amortization expense, for the years ended December 31, 2020 and 2019 was $5.1 million and $10.5 million, respectively.

Based upon amounts recorded at December 31, 2020, amortization expense related to identifiable intangible assets is estimated to be $5.0 million in 2021, $5.0 million in 2022, $4.6 million in 2023, $4.5 million in 2024, and $3.3 million in 2025 and $9.3 million, thereafter.

The Company recorded no impairment charges related to identifiable intangible assets during the years ended December 31, 2020 and 2019.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12)

Long-Term Debt

Long-term debt at December 31, 2020 and 2019 consisted of the following (in thousands):

    

    

 

December 31, 2020

December 31, 2019

 

Asset based lending facilities, net of debt issuance costs of $5,894 and $8,615 at December 31, 2020 and December 31, 2019, respectively

$

279,106

$

412,346

Term loan agreements, net of debt issuance costs of $525 and $1,084 and debt premium balance of $2,221 and $4,816 at December 31, 2020 and December 31, 2019, respectively

 

210,913

 

196,714

Real estate loans, net of debt issuance costs of $860 and $3,846 and debt premium balance of $9,664 and $19,328 at December 31, 2020 and December 31, 2019, respectively

 

215,848

 

265,700

HUD insured loans, net of debt issuance costs of $633 and $2,909 at December 31, 2020 and December 31, 2019, respectively

 

26,221

 

117,117

Notes payable

104,598

116,952

Mortgages and other secured debt (recourse)

 

6,987

 

6,369

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $10,711 and $9,349 and debt premium balance of $1,323 and $1,422 at December 31, 2020 and December 31, 2019, respectively

 

697,049

 

498,222

 

1,540,722

 

1,613,420

Less: Current portion of long-term debt

 

(905,788)

 

(162,426)

Long-term debt

$

634,934

$

1,450,994

Asset Based Lending Facilities

The Company maintains an asset based lending facility, as amended, that was previously comprised of (a) a $285.0 million first lien term loan facility, (b) a $240.0 million first lien revolving credit facility and (c) a $30.0 million delayed draw term loan facility (collectively, the ABL Credit Facilities) with affiliates of MidCap Financial Services, LLC (MidCap). The commitments under the delayed draw term loan facility were reduced to $20.0 million on December 31, 2020.

The Company originally entered into the ABL Credit Facilities in March 2018. The ABL Credit Facilities have a stated maturity of March 6, 2023 and include a springing maturity clause that would accelerate the maturity date 90 days prior to the maturity of the Term Loan Agreement or Welltower Real Estate Loans (each defined below). The Term Loan Agreements and Welltower Real Estate Loans were set to mature on January 1, 2022. However, on March 2, 2021, the Company entered into a series of transactions, as described within Note 23 – “Subsequent Events – Restructuring Transactions,” that extended the maturity dates of the Term Loan Agreement and the Welltower Real Estate Loans to January 1, 2024, subject to acceleration. Consequently, the maturity date of the ABL Credit Facilities was effectively extended to March 6, 2023. The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed. Cash proceeds of $51.2 million received under the ABL Credit Facilities remain in a restricted account. This amount is pledged to cash collateralize letters of credit. The Company has classified this deposit and all cash account balances subject to deposit account control agreements that were sprung under the ABL Credit Facilities as restricted cash and equivalents in the consolidated balance sheets at December 31, 2020 and 2019.

Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%. Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11.0%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.

In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate equals 0.5% per annum on the revolving credit facility and 2% on the delayed draw term loan facility.

The term loan facility and revolving credit facility include a termination fee equal to 1.5%. The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loan’s retirement or on the maturity date.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings. Financial covenants include a minimum consolidated fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity.

Borrowings and interest rates under the ABL Credit Facilities were as follows at December 31, 2020 (dollars in thousands):

    

    

    

    

Weighted

 

    

    

    

Average

 

ABL Credit Facilities

Commitment

Borrowings

Interest

 

Term loan facility

$

285,000

$

285,000

6.50

%

Revolving credit facility (Non-HUD)

168,000

6.50

%

Revolving credit facility (HUD)

72,000

 

 

6.50

%

Delayed draw term loan facility

20,000

12.00

%

$

545,000

 

$

285,000

 

6.50

%

As of December 31, 2020, the Company had a total borrowing base capacity of $324.8 million with outstanding borrowings under the ABL Credit Facilities of $285.0 million, leaving the Company with approximately $39.8 million of available borrowing capacity under the ABL Credit Facilities.

Term Loan Agreements

The Company and certain of its affiliates, including FC-GEN (the Borrower) are party to a term loan agreement, as amended (the Term Loan Agreement), with an affiliate of Welltower and an affiliate of Omega. The Term Loan Agreement originally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million and later expanded to $160.0 million. The Term Loans provide that 60% and 40% of the outstanding balance and interest accrued thereon is due to affiliates of Welltower and Omega, respectively. The Term Loan Agreement was set to mature on November 30, 2021, but the agreement was amended on November 8, 2020, extending the maturity date to January 1, 2022. On March 2, 2021, the Company entered into a series of transactions, as described within Note 23 – “Subsequent Events – Restructuring Transactions,” that among other things, further extended the maturity date of the Term Loan Agreement to January 1, 2024, subject to acceleration, and provided that the Welltower affiliate’s portion of the interest payable under the Term Loans may be paid in-kind at the option of the Company, subject to the satisfaction of certain conditions. As of December 31, 2020, the original Term Loan for $120.0 million bore interest at a rate equal to 14.0% per annum, with up to 9.0% per annum to be paid in kind, while the additional Term Loan for $40.0 million bore interest at a rate equal to 10.0% per annum, with up to 5.0% per annum to be paid in kind. The Omega affiliate’s portion of the interest payable was not affected by the transactions referenced above. The Term Loans had an outstanding accreted principal balance of $209.2 million and $193.0 million at December 31, 2020 and 2019, respectively.

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions. The Term Loan Agreement is also secured by a junior lien on the assets that secure the ABL Credit Facilities on a first priority basis. Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants.

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type. Financial covenants include a maximum leverage ratio, a minimum interest coverage ratio and a minimum fixed charge coverage ratio, the most restrictive of which is the minimum interest coverage ratio which requires the Company to maintain a coverage ratio, as defined therein, of no less than 1.7 to 1.0 through December 31, 2020, and increasing to 1.8 to 1.0 thereafter.

Real Estate Loans

MidCap Real Estate Loans

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company originally entered into two real estate loans, as amended, with MidCap (MidCap Real Estate Loans) with combined available proceeds of $85.0 million during 2018. The MidCap Real Estate Loans were secured by skilled nursing facilities and a corporate office building. The loans had a stated maturity of March 30, 2023, subject to acceleration upon repayment of the ABL Credit Facilities. The loans were subject to principal amortization payments and bore an annual interest rate equal to 30-day LIBOR (subject to a floor ranging from 1.5% to 2.0%) plus an applicable margin ranging from 5.85% to 6.25%, with a balloon payment due at maturity.

During the years ending December 31, 2020 and 2019, the Company divested the real property and operations of eight and six facilities, respectively, that were subject to the MidCap Real Estate Loans, using the sale proceeds to repay $41.3 million and $39.8 million on the loans, respectively. The MidCap Real Estate Loans were repaid in full during the fourth quarter of 2020 and had an outstanding principal balance of $42.2 million at December 31, 2019.

Welltower Real Estate Loans

The Company is subject to two real estate loan agreements with Welltower (Welltower Real Estate Loans). The Welltower Real Estate Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Real Estate Loans. The Welltower Real Estate Loans had a maturity date of January 1, 2022. However, on March 2, 2021, the Company entered into a series of transactions, as described within Note 23 – “Subsequent Events – Restructuring Transactions,” that among other things, extended the maturity date of the Welltower Real Estate Loans to January 1, 2024, subject to acceleration, and provided for the forgiveness of approximately $169.8 million under the Welltower Real Estate Loans plus interest accrued thereon, upon the future satisfaction of certain conditions, and provided an increase in the portion of interest payable under the loans that may be paid in kind. As of December 31, 2020, the Welltower Real Estate Loans bore an annual interest rate of 12.0%, of which 7.0% was paid in cash and 5.0% was paid in kind; the annual cash component of the interest payments was increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest payable. At December 31, 2020, the Welltower Real Estate Loans are unsecured.

During the first quarter of 2020, the Company divested the real property and operations of the remaining facility that was subject to the Welltower Real Estate Loans, using the sale proceeds to repay $9.0 million on the loans. The Welltower Real Estate Loans had an outstanding accreted principal balance of $207.0 million and $208.0 million at December 31, 2020 and 2019, respectively.

HUD Insured Loans

As of December 31, 2020, the Company had five owned skilled nursing facility loans insured by HUD. The HUD insured loans have an original amortization term ranging from 30 to 35 years and an average remaining term of 28.5 with fixed interest rates ranging from 3.0% to 3.4% and a weighted average interest rate of 3.3%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required thereafter. Any further HUD insured loans will require additional HUD approval. All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of December 31, 2020, the Company has total escrow reserve funds of $3.4 million with the loan servicer that are reported within prepaid expenses in the consolidated balance sheets.

During December 31, 2019, the Company sold the real property and operations of eight skilled nursing facilities and one assisted/senior living facility that were subject to HUD financing, using the sale proceeds to retire HUD insured loans totaling $65.6 million. During the year ended December 31, 2020, the Company sold the real property and operations of eleven skilled nursing facilities that were subject to HUD financing, one of which was classified as held for sale at December 31, 2019. The sale proceeds were used to retire HUD insured loans totaling $93.2 million. The HUD insured loans for owned facilities had an aggregate principal balance of $46.0 million and $140.6 million at December 31, 2020 and 2019, respectively.

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Additionally, the HUD insured loans of two facilities with an aggregate principal balance of $19.2 million were classified as held for sale at December 31, 2020. See Note 20 – “Assets Held for Sale.” On February 1, 2021, the Company sold the real property and divested the operations of these two facilities, using the sale proceeds to retire the loans. See Note 23 – “Subsequent Events – NewGen Partnership.”

Notes Payable

In November 2016, the Company issued a note totaling $51.2 million to Welltower, which accrues cash interest at 3.0% and paid-in-kind interest at 7.0%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1. The note was set to mature on December 15, 2021. However, on March 2, 2021, the Company entered into a series of transactions, as described within Note 23 – “Subsequent Events – Restructuring Transactions,” that among other things, extended the maturity date of the note to January 1, 2024, subject to acceleration. The Company has agreed to support Welltower in connection with the sale to third party purchasers of Welltower’s interests in certain facilities that the Company leases from Welltower, terminate the leases on 51 of its facilities leased from Welltower and transition operations to new operators in return for an $86.3 million payment, which will be used to repay the accreted note balance and shall occur incrementally over time upon the transition of the facilities. The note had an outstanding accreted principal balance of $68.8 million and $64.2 million at December 31, 2020 and 2019, respectively.

In December 2016, the Company issued a second note totaling $11.7 million to Welltower, which accrues cash interest at 3.0% and paid-in-kind interest at 7.0%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15. The note was set to mature on December 15, 2021. However, on March 2, 2021, the Company entered into a series of transactions, as described at Note 23 – “Subsequent Events – Restructuring Transactions,” that among other things, extended the maturity date of the note to January 1, 2024, subject to acceleration. The Company has agreed to support Welltower in connection with the sale to third party purchasers of Welltower’s interests in certain facilities that the Company leases from Welltower, terminate the leases on 51 of its facilities leased from Welltower and transition operations to new operators in return for an $86.3 million payment, which will be used to repay the accreted note balance and shall occur incrementally over time upon the transition of the facilities. The note had an outstanding accreted principal balance of $15.6 million and $14.6 million at December 31, 2020 and 2019, respectively.

In October 2019, the Company converted $23.2 million of its trade payables into a note payable. The note requires monthly interest payments based on an annual interest rate of 3.5%. As of December 31, 2020 and 2019, the outstanding principal balance of the note payable was $20.2 million and $23.1 million, respectively. The balance of the note is due on September 30, 2022.

In November 2019, the Company issued a short-term note payable for $15.0 million. The note was repaid in full during the year ended December 31, 2020.

Other Debt

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets. The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest rate of 0.5% at December 31, 2020, and maturity dates ranging from 2021 to 2024.

Mortgages and other secured debt (non-recourse). The Company’s consolidated joint ventures and VIEs are subject to various loans, as set forth below. These loans are labeled “non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements.

Next Partnership Debt

The Company holds a 46% ownership interest in a partnership with Next Healthcare (Next), a related party (the Next Partnership). The Company has concluded the Next Partnership, which includes 15 facilities, qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Next Partnership in the accompanying consolidated financial statements.

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The Next Partnership is subject to a term loan agreement with an original principal balance of $142.1 million and maturity date of January 31, 2022. The term loan bears interest at LIBOR plus 3.50% and is subject to interest-only payments through January 31, 2021. Beginning in April 2021, principal payments calculated based on a 25-year amortization schedule, after giving effect to any prior refinancings or other repayments of the term loan, will be applied to the remaining term loan balance. During the second quarter of 2020, the Next Partnership term loan was partially refinanced via two new HUD insured loans. Proceeds from the new HUD insured loans were principally used to pay down $24.6 million on the Next Partnership term loan. The term loan had an outstanding principal balance of $78.8 million and $103.4 million as of December 31, 2020 and 2019, respectively. The term loan was collateralized by 10 facilities as of December 31, 2020.

The Next Partnership is subject to a mezzanine loan with an original principal balance of $27.0 million and maturity date of February 1, 2029. The mezzanine loan bears interest at 11.50% and is subject to interest-only payments through January 2022, with payments including a principal component thereafter. The mezzanine loan had an outstanding principal balance of $27.0 million as of both December 31, 2020 and 2019.

The Next Partnership includes five facilities that are subject to HUD-insured loans, two of which were entered into during the year ended December 31, 2020. The loans mature on dates ranging from January 1, 2055 through June 1, 2055. The loans bear interest at fixed rates ranging from 2.79% to 3.15% and had an aggregate outstanding principal balance of $67.0 million and $41.7 million at December 31, 2020 and 2019, respectively.

Vantage Point Partnership Debt

The Company holds an approximately 30% ownership interest in a partnership with Vantage Point Capital, LLC (the Vantage Point Partnership). The Company has concluded the Vantage Point Partnership, which includes 19 facilities, qualifies as a VIE and the Company is the primary beneficiary. As such, the Company has consolidated all of the accounts of the Vantage Point Partnership in the accompanying consolidated financial statements.

The Vantage Point Partnership is subject to a term loan agreement with an aggregate original principal balance of $240.9 million and maturity date of September 12, 2026. The term loan bears interest at LIBOR (subject to a floor of 1.75%) plus 3.75% and is subject to interest-only payments through October 1, 2021. The interest-only period can be extended through October 1, 2022 upon satisfaction of certain conditions, such as the achievement of a specified debt service coverage ratio and ratio of adjusted net operating income to the outstanding term loan balance. Following the interest-only period, principal payments calculated based on a 25-year amortization schedule, after giving effect to any prior refinancings or other repayments of the term loan, will be applied to the remaining term loan balance. The term loan had an outstanding principal balance of $240.9 million and $233.6 million at December 31, 2020 and 2019, respectively. The term loan was collateralized by 19 facilities as of December 31, 2020.

The Vantage Point Partnership is subject to a promissory note in the amount of $76.8 million, the entire balance of which was outstanding at December 31, 2020 and 2019. The promissory note bears interest at 14.0% and matures on September 12, 2028.

Cascade Partnership Debt

The Cascade Partnership is subject to a term loan agreement with an aggregate principal balance of $183.5 million and maturity date of July 2, 2023. The term loan bears interest at LIBOR (subject to a floor of 1.50%) plus 4.75% and is subject to interest-only payments through the maturity date. The term loan also has two one-year optional extension periods that become exercisable upon satisfaction of certain conditions, such as achieving a specified debt service coverage ratio. The debt service payments during the extension periods include a principal component that will be calculated based on the outstanding balance, an assumed interest rate of 6.0%, and a 25-year amortization schedule, with the balance due at maturity. The entire term loan balance of $183.5 million was outstanding as of December 31, 2020. The term loan is collateralized by 9 facilities as of December 31, 2020.

The Cascade Partnership is subject to a note payable in the amount of $10.0 million, the entire balance of which was outstanding at December 31, 2020. The note matures on June 30, 2024 and bears interest at 10.0%, of which 5.0% will be paid in cash and 5.0% will be paid in kind. Paid in kind interest compounds annually beginning July 1, 2021. Subsequent to July 1, 2022, quarterly principal payments are required based on cash flows generated by the Cascade Partnership, with the remaining balance due at maturity.

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Other Non-Recourse Debt

The Company has other non-recourse loans consisting principally of revenue bonds and secured bank loans with maturities ranging from 2023 through 2034. The loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest, with a weighted average interest rate of 4.2% at December 31, 2020. The loans had an aggregate outstanding principal balance of $22.4 million and $23.8 million at December 31, 2020 and 2019, respectively.

Debt Covenants

The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue, control costs and receive timely and adequate government-sponsored financial support in response to the COVID-19 pandemic. See Note 1 – “General Information – Going Concern Considerations” and Note 3 – “Significant Transactions and Events – COVID-19” for discussion of conditions that have impacted current covenant compliance.

At December 31, 2020, the Company was not in compliance with or had not received waivers with respect to the financial covenants contained in certain of its leases because certain of its other lease agreements and debt agreements contain cross-default provisions that are triggered if the Company is in default of such leases. The lease and debt obligations associated with these agreements have been classified as current liabilities. As of the date of this Form 10-K, all rent and debt service payments have been made timely and no material creditors have pursued remedies with respect to breaches of financial covenants.

The scheduled maturity of total debt of $1.5 billion, excluding debt issuance costs and other non-cash debt discounts and premiums, at December 31, 2020 is as follows (in thousands):

Twelve months ended December 31, 

    

2021

$

380,890

2022

522,672

2023

204,123

2024

19,528

2025

9,516

Thereafter

409,408

Total debt maturity

$

1,546,137

The impact of the debt covenant defaults described above and the transactions described within Note 23 – “Subsequent Events – Restructuring Transactions” are not reflected in the maturity of debt presented as of December 31, 2020.

(13)

Stockholders’ Deficit

The total number of shares of all classes of stock that the Company shall have authority to issue is 1,200,000,000 consisting of:

1,000,000,000 shares of Class A common stock, par value $0.001 per share, of which 110,801,462 shares and 107,888,854 shares were issued at December 31, 2020 and 2019, respectively;
20,000,000 shares of Class B common stock, par value $0.001 per share, of which 744,396 shares and 744,396 shares were issued at December 31, 2020 and 2019, respectively;
150,000,000 shares of Class C common stock, par value $0.001 per share, of which 55,250,921 shares and 56,172,193 shares were issued at December 31, 2020 and 2019, respectively; and
30,000,000 shares of Preferred Stock, par value $0.001 per share, of which no shares were issued at December 31, 2020 and 2019.

(14)

Stock-Based Compensation

Omnibus Equity Incentive Plans

The Company maintains two stock-based employee compensation plans: the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”) and the Amended and Restated 2015 Omnibus Equity Incentive Plan (the “Prior Plan”). During the second quarter of 2020, the

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Company’s shareholders approved the 2020 Plan. As of the effective date of the 2020 Plan, no further grants may be made under the Prior Plan. Any shares that were available for issuance under the Prior Plan and that were not subject to outstanding awards under the Prior Plan became available for issuance (in addition to the newly authorized shares) under the 2020 Plan. Accordingly, upon stockholder approval of the 2020 Plan at the Annual Meeting of Stockholders on June 3, 2020, a total of 6,462,605 shares became available for delivery under the 2020 Plan, including (i) 3,500,000 newly authorized shares and (ii) 2,962,605 shares previously registered on Forms S-8 filed with the SEC that were available for issuance under the Prior Plan.

The Company provides stock-based compensation to attract and retain employees while also aligning employees’ interests with the interests of its shareholders. The 2020 Plan, which is shareholder-approved, permits the grant of various cash-based and equity-based awards to selected employees, directors, independent contractors and consultants of the Company. The 2020 Plan permits the grant of up to 27.9 million shares of Class A common stock, subject to certain adjustments and limitations.

On March 2, 2021, the Company executed certain transactions that among other things, require that the Company use reasonable best efforts to (i) delist the Class A Shares from the NYSE, (ii) deregister the Class A Shares under the Exchange Act, and (iii) suspend any Exchange Act reporting obligations in respect of the Class A Shares. Refer to Note 23 – “Subsequent Events – Restructuring Transactions.”

Stock-based compensation expense is comprised of restricted stock units, which are based on estimated fair value, made to certain employees and directors. The Company accounts for forfeitures when they occur.

Restricted Stock Units

The Company has granted restricted stock units to certain employees and directors under the 2020 Plan and the Prior Plan. Each unit represents an obligation to deliver to the holder one share of the Company’s Class A common stock upon vesting. Restricted stock units are subject to some combination of service-based, performance-based, and market-based vesting conditions. Units subject to only service-based vesting conditions generally vest in equal installments over three to four years on the anniversary of the grant date with expense being recognized over the requisite service period. The fair value of such units is measured at the market price of the Company’s stock on the date of the grant. Units subject to performance-based or market-based vesting conditions are generally subject to a service-based vesting condition (i.e. cliff vest). Consequently, expense of such awards is recognized over the requisite service period. Units subject to performance-based vesting conditions generally cliff vest upon satisfaction of performance targets. The fair value of such units is measured at the market price of the Company’s stock on the date of the grant. Units subject to market-based vesting conditions generally cliff vest upon the Company’s share price meeting specified target prices. The fair value of such units is measured using the Monte-Carlo simulation model, which incorporates into the fair value determination the possibility that the target share prices may not be met. Further, expense related to these units is recognized regardless of whether the market-based vesting condition is satisfied, provided that the requisite service has been provided.

During the year ended December 31, 2020, the Company’s board of directors voluntarily forfeited an aggregate 887,940 restricted stock units having an aggregate grant date fair value of $0.8 million.

A summary of the Company’s non-vested restricted stock units as of and for the year ended December 31, 2020 is shown below (number of units in thousands):

    

Number of Restricted Stock Units

    

Weighted-Average Grant Date Fair Value

 

Non-vested balance at January 1, 2020

9,959

$

1.74

Granted

 

3,540

0.96

Vested

 

(2,880)

1.68

Forfeited

 

(2,248)

1.13

Non-vested balance at December 31, 2020

8,371

$

1.60

For the year ended December 31, 2019, the weighted-average grant date fair value of restricted stock units granted was $1.30. As of December 31, 2020, there was approximately $7.4 million of unrecognized expense related to non-vested restricted stock units, which is expected to be recognized over a weighted-average term of 1.6 years. During the years ended December 31, 2020 and 2019, the fair

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value of restricted stock units that vested was $2.2 million and $4.4 million, respectively. At December 31, 2020, 7.4 million shares of the Company’s Class A common stock are available for delivery under the 2020 Plan.

Stock-based compensation expense related to restricted stock units included in general and administrative costs was $6.5 million and $7.3 million for the years ended December 31, 2020 and 2019, respectively. The income tax benefit for stock-based compensation expense was $0.3 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively.

(15)

Income Taxes

The Company’s provision for income taxes was based upon management’s estimate of taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets, including net operating loss and credit carryforwards, and liabilities and the amounts reported in the financial statements. These temporary differences would result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled.

The Company effectively owns 66.9% of FC-GEN, which is an entity taxed as a partnership for U.S. income tax purposes and the Company’s only source of taxable income. FC-GEN is subject to income taxes in several U.S. state and local jurisdictions. The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 66.9% ownership of FC-GEN.

Income Tax Provision

The total income tax (benefit) expense for the periods presented was as follows (in thousands):

Year ended December 31,

    

2020

    

2019

Continuing operations

$

(3,610)

$

1,754

Stockholder's deficit

316

346

Total

$

(3,294)

$

2,100

The components of the provision for income taxes on (loss) income for the years ended December 31, 2020 and 2019 were as follows (in thousands):

Year ended December 31,

    

2020

    

2019

Current:

Federal

$

(4,814)

$

1,014

State

200

28

(4,614)

1,042

Deferred:

Federal

(563)

29

State

1,567

683

1,004

712

Total

$

(3,610)

$

1,754

The Company’s 2020 tax year was impacted by certain provisions contained in the CARES Act, such as increased limits on interest expense deductions, acceleration of refunds related to alternative minimum tax credits, payroll tax deferrals, and the employee retention tax credits.

At December 31, 2020 and 2019, the current income taxes were primarily generated on the taxable income of the Company’s Bermuda captive insurance company. The Company’s Bermuda captive insurance company incurred a $14.6 million taxable loss in the year ended December 31, 2020. Under the CARES Act, any loss sustained during 2020 is permitted to be carried back for five years. Management has recorded a $5.1 million current income tax refund receivable for the carry back of the Company’s Bermuda captive insurance company’s taxable loss.

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Reasonable estimates for the Company’s state and local provision were made based on the Company’s analysis of the state’s enacted response to U.S. federal tax reform. The Company’s 2020 state deferred tax expense is primarily the result of applying a full valuation allowance against the Company’s state deferred tax incurred by the FC-GEN partnership.

Under the U.S. Tax Cuts and Jobs Act, the Company's federal net operating losses that have been incurred prior to January 1, 2018 will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. For net operating losses created after December 31, 2017, the net operating losses will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. The Company has estimated the impact of the U.S. Tax Cuts and Jobs Act on state income taxes reflected in its income tax provision for the years ended December 31, 2020 and 2019.

In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, the Company gives appropriate consideration to all positive and negative evidence related to the realization of its deferred tax assets. The assessment considers the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods and the Company’s experience with operating loss and tax credit expirations. A history of cumulative losses is a significant piece of negative evidence used in the assessment.

The Company previously established a full valuation allowance against the majority of its net deferred tax assets based on its assessment that the Company will not realize such assets. The Company continues to assess the requirement for, and amount of, the valuation allowance for its deferred tax assets. At December 31, 2020 and 2019, the Company has established a full valuation allowance against the majority of its net deferred tax assets in the amount of $408.4 million and $391.3 million, respectively, based on management’s assessment that the Company will not realize its deferred tax assets. The valuation allowance does not include the discounted unpaid loss reserve deferred tax asset of the Company’s captive insurance company, which continues to project taxable income that will allow the Company to utilize its deferred tax assets. As of December 31, 2020, management determined that the current valuation allowance was still necessary and sufficient.

Total income tax (benefit) expense for the periods presented was as follows (in thousands):

Year ended December 31,

    

2020

    

2019

Computed “expected” (benefit) expense

$

(22,465)

$

1,939

Increase (reduction) in income taxes resulting from:

State and local income taxes, net of federal tax benefit

116

107

Income tax credits

(1,847)

(2,088)

Non-controlling interest

8,306

4,038

Adjustment to deferred taxes, including credits and valuation allowance

17,389

(2,977)

US federal refund carryback claim

(5,107)

FIN 48

(13)

Other, net

11

735

Total income tax (benefit) expense

$

(3,610)

$

1,754

The Company’s effective income tax rates were 3.4% and 19.0% for the years ended December 31, 2020 and 2019, respectively. The reduction in the effective tax rate was primarily attributable to the $14.6 million taxable loss generated by the Company’s Bermuda captive insurance company during the year ended December 31, 2020. This loss was carried back to tax periods during which the U.S. Federal income tax rate was 35%, compared to the current rate of 21%.

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are presented below (in thousands):

    

2020

    

2019

Deferred tax assets:

Investment in partnership

$

252,214

$

240,247

Net operating loss carryforwards

136,709

133,611

Discounted unpaid loss reserve

2,278

2,156

General business credits

29,895

30,006

Total deferred tax assets

421,096

406,020

Valuation allowance

(408,379)

(391,257)

Deferred tax assets, net of valuation allowance

$

12,717

$

14,763

Deferred tax liabilities:

Long-lived assets: intangible property

(15,509)

(16,236)

Total deferred tax liabilities

(15,509)

(16,236)

Net deferred tax liabilities

$

(2,792)

$

(1,473)

Uncertain Tax Positions

The Company follows ASC 740 guidance for recognizing and measuring tax positions taken or expected to be taken in a tax return that directly or indirectly affect amounts reported in financial statements, and accounting for the related income tax effects of individual tax positions that do not meet the recognition thresholds required in order for any part of the benefit of that tax position to be recognized in an entity’s financial statements.

The Company, excluding its corporate groups, is only subject to state and local income tax in certain jurisdictions. The Company’s corporate groups are subject to federal, state and local income taxes. The Company is also subject to income based taxes in the People’s Republic of China and Hong Kong. However, these business operations have generated current taxable losses since their inception. Judgment is required in evaluating its uncertain tax positions and determining its provision for income taxes. The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the technical merits of a tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties. While the Company believes its tax positions are appropriate, it cannot assure that the various authorities engaged in the examination of its income tax returns will not challenge the Company’s positions. The Company believes it has adequately reserved, if necessary, for its potential audit exposures of uncertain tax positions, though no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves through closely monitoring and continuously evaluating, if any, the changes of facts and circumstances and tax legislative development, such as the closing of a tax audit or the expiration of the statute of limitations. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

A reconciliation of unrecognized tax benefits follows (in thousands):

Balance, December 31, 2018

$

77

Reductions due to lapses of applicable statute of limitations

Balance, December 31, 2019

$

77

Reductions due to lapses of applicable statute of limitations

(13)

Balance, December 31, 2020

$

64

The Company’s unrecognized tax benefits reserve for uncertain tax positions primarily related to the accrual of penalty on underpayment of quarterly estimated tax. All of the gross unrecognized tax benefits would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final

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outcome differs from the amount recorded. Unrecognized tax benefits are not expected to change significantly over the next twelve months. The Company recognizes potential accrued interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would also be recognized as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was less than $0.1 million as of both December 31, 2020 and 2019. Generally, the Company has open tax years for state purposes subject to tax audit on average of between three years to six years. The Company’s U.S. income tax returns from 2014 through 2019 are open and could be subject to examination.

Exchange Rights and Tax Receivable Agreement

The noncontrolling owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option.  As a result of such exchanges, the Company increases its holding interest in FC-GEN at the cost of the fair market value of the stock that was exchanged with the noncontrolling owners for their interest in FC-GEN. The cost of the exchanges to the Company in excess of the tax basis of the Company’s increased share of the assets of FC-GEN is adjusted to the tax basis of the Company’s increased share of the assets of FC-GEN, pursuant to internal revenue code (IRC) Section 743(b), because of FC-GEN’s IRC Section 754 election. The exchanges during the years ended December 31, 2020 and 2019 resulted in IRC Section 743(b) deductible goodwill of $6.2 million and $16.9 million, respectively.

The Company is party to a tax receivable agreement (TRA) with the noncontrolling owners of FC-GEN.  The agreement provides for the payment by the Company to the noncontrolling owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA.  Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the noncontrolling owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, such as the timing of exchanges, the price of shares of the Company’s Class A common stock at the time of the exchange, the amount and timing of the Company’s income, and future tax rates of jurisdictions in which the Company has tax liability.

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA. In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises. Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine. Although FC-GEN does not expect the IRS to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future payments. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.

The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.

In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16)

Related Party Transactions

The Company provides rehabilitation services to certain facilities owned and operated by two customers in which certain members of the Company’s board of directors, board observer, and shareholders with greater than 5% of the Company’s Class A common stock beneficially own an ownership interest. In the case of one significant customer, these services resulted in net revenues of $102.0 million and $114.3 million in the years ended December 31, 2020 and 2019, respectively. The services resulted in net accounts receivable balances of $30.5 million and $28.9 million at December 31, 2020 and 2019, respectively. Further, the Company holds a note receivable from this customer, which was derived from past due accounts receivable, in the principal amount of $56.3 million. The Company has reserved $55.0 million on the note receivable balance. The reserve represents the judgment of management and does not indicate a forgiveness of any amount owed by this related party customer. The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available. In the case of the other customer, the Company recorded net revenues of $5.3 million and $6.6 million in the years ended December 31, 2020 and 2019, respectively, resulting in net accounts receivable balances of $1.2 million and $1.4 million at December 31, 2020 and 2019, respectively.

Certain subsidiaries of the Company are subject to leases of facilities from affiliates of Next (the Next Landlord Entities). Certain members of the Company’s Board of Directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling less than 5% in the aggregate. These members have earned acquisition fees, and may earn asset management fees and other fees from the Next Landlord Entities.

During the years ended December 31, 2020 and 2019, the Company was subject to a lease of seven facilities in New Hampshire and five facilities in Florida from affiliates of the Next Landlord Entities. The lease contained initial annual rent of $13.0 million and included an option to purchase the facilities. During the fourth quarter of 2020, the Next Landlord Entities sold the real estate of three of the New Hampshire facilities and all five of the Florida facilities to new owners. In conjunction with these sales, the Company no longer operates these eight facilities. Additionally, the Next Landlord Entities sold the other four New Hampshire facilities to a third party landlord, the closing of which is pending regulatory approval. Genesis will continue to operate these facilities and holds an option to purchase them in the future.

The Company is also subject to a lease of 15 facilities from affiliates of the Next Landlord Entities associated with the Next Partnership, of which Genesis holds a 46% membership interest. The Company has consolidated the Next Partnership within the accompanying financial statements and consequently, all leasing activity has been eliminated in consolidation. The lease for these 15 facilities was effective February 1, 2019 with an initial term of 15 years and two five-year renewal options. Initial annual rent under the master lease was $19.5 million with no rent escalators for the first five years and an escalator of 2.0% beginning in the sixth lease year and thereafter. The Company also obtained a fixed price purchase option to acquire all of the real property of the facilities. The purchase option is exercisable between lease years five and seven, reducing in price each successive year down to a 10% premium over the initial purchase price.

As of December 31, 2020, Welltower held greater than 5% of the Company’s Class A common stock. The Company is party to a master lease with an affiliate of Welltower. The initial term of the master lease expires on January 31, 2037 and the Company has one eleven-year renewal option. Annual rent escalators under the master lease are 2.0%. During the years ended December 31, 2020 and 2019, the Company paid rent of approximately $77.8 million and $81.9 million to Welltower. The Company holds options to purchase certain facilities subject to the master lease. At December 31, 2020, the Company leased 51 facilities from Welltower. The Company and certain of its affiliates are also party to certain debt instruments with Welltower. During the years ended December 31, 2020 and 2019, the Company recorded cash interest on debt instruments due to Welltower of $24.8 million and $24.1 million, respectively.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2020, the Company transitioned operational responsibility for 24 facilities in the states of California, Washington and Nevada to the NewGen Partnership. The Company does not hold a controlling financial interest in the NewGen Partnership. As such, the Company has applied the equity method of accounting for its 50% interest in the NewGen Partnership. The Company provided $9.0 million in financing to the NewGen Partnership. Concurrently, the facilities have entered, or will enter upon regulatory approval, into management services agreements with NewGen for the day-to-day operations of the facilities. The Company provides administrative and back office services to the facilities pursuant to administrative support agreements, as well as therapy services pursuant to therapy services agreements. The Company also subleases six facilities to the NewGen Partnership. Total income recorded related to these services and the subleases was $25.4 million for the year ended December 31, 2020.

An affiliate of the Company entered into an agreement to receive telehealth and telemedicine services from a company in which certain members of the Company’s board of directors and shareholders with greater than 5% of the Company’s Class A common stock beneficially own an ownership interest. The cost of these services for the Company were approximately $0.8 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively.

Certain skilled nursing facilities of the Company entered into agreements to receive dialysis services from a company in which a member of the Company’s board of directors beneficially owns an ownership interest. The cost of these services for the Company were approximately $0.4 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.

(17)

Defined Contribution Plan

The Company sponsors a defined contribution plan covering substantially all employees who meet certain eligibility requirements. The Company did not match employee contributions for the defined contribution plan in 2020 and 2019.

(18)

Other Income

In the years ended December 31, 2020 and 2019, the Company completed multiple transactions, including the divestitures of numerous owned assets and the termination and refinancing of certain facilities subject to lease agreements. See Note 4 – “Significant Transactions and Events.” These transactions resulted in a net gain recorded as other income in the consolidated statements of operations. The following table summarizes those net gains (in thousands):

Year ended December 31, 

    

2020

    

2019

Gain on sale of owned assets (1)

$

(120,357)

$

(90,723)

Loss recognized for exit costs associated with divestiture of operations (2)

16,671

12,997

Gain on lease termination or modification (3)

(98,586)

(95,779)

Total other income

$

(202,272)

$

(173,505)

(1)The Company sold 19 owned skilled nursing facilities during the year ended December 31, 2020. The Company sold 13 owned skilled nursing facilities and two assisted/senior living facilities during the year ended December 31, 2019. The gain represents sale proceeds in excess of the carrying value of the assets sold.
(2)The Company divested the operations of 63 facilities, including the sold facilities noted above, in the year ended December 31, 2020. The Company divested operations of 44 facilities, including the facilities described in Note 16 – “Related Party Transactions, in the year ended December 31, 2019. Upon divestiture, the Company recognizes exit costs for uncollectible accounts receivable resulting from a sale, the write-off of inventory balances assumed by the new operator, and other costs associated with the transition of operations.
(3)The Company amended numerous lease agreements in the years ended December 31, 2020 and 2019. These transactions resulted in a combination of base rent reductions, lease term extensions or reductions and facility terminations. Lease terminations may be the result of divested operations or sales of real property between landlords for retained operations. Each lease amendment triggers a lease reassessment, which includes possible lease reclassification and assumption of renewal options. Upon termination, the respective lease liability and ROU asset balances are adjusted proportionately, with offsetting adjustments recorded as other income, in certain circumstances.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(19)

Asset Impairment Charges

Long-Lived Assets with a Definite Useful Life

In each quarter, the Company’s long-lived assets with a definite useful life are tested for impairment at the lowest levels for which there are identifiable cash flows. The primary asset in each long-lived asset group is principally a building or ROU asset in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets. The cash flow period was based on the remaining useful lives of each long-lived asset group. The Company recognized impairment charges in the inpatient segment of $179.0 million and $16.9 million during the years ended December 31, 2020 and 2019, respectively.

Goodwill and Identifiable Intangible Assets with an Indefinite Useful Life

The Company performed its annual goodwill impairment test as of September 30, 2020 and 2019, which indicated that no impairment existed. The Company conducts the test at the reporting unit level that management has determined aligns with the Company’s segment reporting. See Note 7 – “Segment Information.” Indefinite-lived intangible assets consist of trade names. In conjunction with the annual goodwill impairment tests, the Company performed impairment tests with respect to its indefinite-lived intangible assets, noting no impairment existed.

(20)

Assets Held for Sale

In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets. These assets are evaluated to determine whether they qualify as assets held for sale or discontinued operations. The assets and liabilities of a disposal group classified as held for sale shall be presented separately in the asset and liability sections, respectively, of the statement of financial position in the period in which they are identified only. Assets held for sale that qualify as discontinued operations are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the consolidated statements of operations.

At December 31, 2020, two skilled nursing facilities owned and operated by the Company in California and Nevada, as well as a land parcel in Texas, were classified as held for sale. Neither the facilities nor the land parcel met the criteria as discontinued operations. The Company is party to purchase and sale agreements, as amended, to sell the facilities for an aggregate $19.2 million and the land parcel for $2.7 million. On February 1, 2021, the Company completed the sale of the two facilities. See Note 23 – “Subsequent Events.” The sale of the land parcel is expected to close during 2021.

At December 31, 2019, the Company classified one skilled nursing facility operated by the Company in California as held for sale. The facility did not meet the criteria as a discontinued operation. The sale of the facility, which was subject to a HUD insured loan, was completed on February 26, 2020.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the major classes of assets and liabilities included as part of the disposal groups as of December 31, 2020 and 2019 (in thousands):

    

December 31, 2020

    

December 31, 2019

Current assets:

    

    

Prepaid expenses

$

$

1,171

Long-term assets:

 

 

Property and equipment, net of accumulated depreciation of $3,015 and $2,201 at December 31, 2020 and December 31, 2019, respectively

 

12,986

 

16,306

Total assets

$

12,986

$

17,477

Current liabilities:

Current portion of long-term debt

$

403

$

368

Long-term liabilities:

 

 

Long-term debt

 

18,271

 

19,789

Total liabilities

$

18,674

$

20,157

(21)

Commitments and Contingencies

Loss Reserves For Certain Self-Insured Programs

General and Professional Liability and Workers’ Compensation

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly-owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. General and professional liability policies are typically written for a duration of 12 months or less and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. Excess insurance policies are typically written for a duration of 12 months or less and are measured on an “occurrence” basis. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. Estimated insurance recoveries related to recorded liabilities are reflected as assets in the Company’s consolidated balance sheets when the receipt of such amounts is deemed to be probable.

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

The Company utilizes a combination of third-party administrators (TPAs), in-house adjusters, and legal counsel, along with systems designed to maintain and process claims to provide it with the data utilized in its assessments of reserve adequacy. Where TPAs are utilized, they operate under the oversight of the Company’s in-house risk management and legal functions. These functions and systems ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

The provision for general and professional liability risks totaled $60.3 million and $70.1 million for the years ended December 31, 2020 and 2019, respectively. The reserves for general and professional liability, which are recorded on an undiscounted basis, were $365.2 million and $392.8 million as of December 31, 2020 and 2019, respectively.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for workers’ compensation risks totaled $74.0 million and $47.6 million for the years ended December 31, 2020 and 2019, respectively. The reserves for loss for workers’ compensation risks were $173.6 million and $160.5 million as of December 31, 2020 and 2019, respectively. These reserves are discounted based on actuarial estimates of claim payment patterns using a discount rate for the current policy year of 0.2%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $9.7 million and $12.0 million as of December 31, 2020 and 2019, respectively.

Health Insurance

The Company offers employees an option to participate in self-insured health plans. Health insurance claims are paid as they are submitted to the plans’ administrators. The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid. This accrual for incurred but not yet reported claims was $13.7 million and $15.1 million as of December 31, 2020 and 2019, respectively. The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets. Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

Select Subcommittee on the Coronavirus Crisis

A U.S. House of Representatives subcommittee, the Select Subcommittee on the Coronavirus Crisis (the Committee), announced an investigation into the ongoing COVID-19 crisis in nursing homes, demanding information from both the federal government and five large operators, including the Company. The Company has provided all requested information. On October 30, 2020, the Committee issued an “Interim Staff Report.”

Legal Proceedings

The Company and certain of its subsidiaries are involved in or have received notice of various investigations, litigation and potential claims related to the COVID-19 pandemic, including inquiries from state and federal agencies; professional liability claims; and employment-related lawsuits and claims. Such claims may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation. The applicability of such protection has not yet been adjudicated in any pending claim against the Company.

While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigation and investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment may evolve based upon further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Settlement Agreement

In 2017, the Company and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled Healthcare Group, Inc. (Skilled) or Sun Healthcare Group, Inc. prior to their operations becoming part of the Company’s operations (collectively, the Successor Matters). The Company agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

The settlement agreement called for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  The Company will continue to remit the Settlement Amount through January 31, 2023. The remaining outstanding Settlement Amount at December 31, 2020 was $22.6 million, of which $12.1 million is recorded in accrued expenses and $10.5 million is recorded in other long-term liabilities.

Conditional Asset Retirement Obligations

Certain of the Company’s leased and owned real estate assets contain asbestos, which is believed to be appropriately contained in accordance with environmental regulations. If these properties were demolished or subject to renovation activities that disturb the asbestos, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed.

At December 31, 2020 and 2019, the Company has a liability for the asset retirement obligation associated primarily with the cost of asbestos removal aggregating approximately $6.6 million and $6.6 million, respectively, which is included in other long-term liabilities. The liability for each facility will be accreted to its settlement value, which is estimated to approximate $16.6 million through the estimated settlement dates extending from 2021 through 2042. Due to the time over which these obligations could be settled and the judgment used to determine the liability, the ultimate obligation may differ from the estimate. Upon settlement, any difference between actual cost and the estimate is recognized as a gain or loss in that period.

Annual accretion of the liability is recorded each year for the impacted assets until the obligation year is reached, either by sale of the property, demolition or some other future event such as a government action.

Employment Agreements

The Company has employment agreements and arrangements with its executive officers and certain members of management. The agreements generally continue until terminated by the executive or management, and provide for severance payments under certain circumstances.

Lease Guarantees

The Company is subject to lease guaranty agreements on six of the facilities leased by the NewGen Partnership, under which it guarantees all payments and performance obligations of the tenants. As of December 31, 2020, the six leases have undiscounted cash rent obligations remaining of $84.7 million.

(22)

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and equivalents, restricted investments in marketable securities, accounts receivable, accounts payable and current and long-term debt.

The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recurring Fair Value Measures

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

Level 1 —

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 —

 

Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.

 

Level 3 —

 

Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

The tables below present the Company’s assets measured at fair value on a recurring basis as of December 31, 2020 and 2019, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

Fair Value Measurements at Reporting Date Using

    

    

Quoted Prices in

Significant

 

Active Markets for

Significant Other

Unobservable

December 31, 

Identical Assets

Observable Inputs

Inputs

Assets:

2020

(Level 1)

    

(Level 2)

    

(Level 3)

Cash and cash equivalents

$

212,071

$

212,071

$

$

Restricted cash and equivalents

101,149

101,149

Restricted investments in marketable securities:

Mortgage/government backed securities

23,893

23,893

Corporate bonds

60,802

60,802

Government bonds

69,157

39,480

29,677

Total

$

467,072

$

352,700

$

114,372

$

Fair Value Measurements at Reporting Date Using

    

    

Quoted Prices in

Significant

 

Active Markets for

Significant Other

Unobservable

December 31,

Identical Assets

Observable Inputs

Inputs

Assets:

2019

(Level 1)

    

(Level 2)

    

(Level 3)

Cash and cash equivalents

$

12,097

$

12,097

$

$

Restricted cash and equivalents

113,709

113,709

Restricted investments in marketable securities:

Mortgage/government backed securities

21,023

21,023

Corporate bonds

48,926

48,926

Government bonds

66,993

45,903

21,090

Total

$

262,748

$

171,709

$

91,039

$

The Company places its cash and cash equivalents, restricted cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument. The Company has not experienced any significant losses on such investments. Certain of the Company’s financial instruments have quoted prices but are traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fairly valued using other financial instruments, the parameters of which can be directly observed. These financial instruments have been reported as Level 2 measurements.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Instruments

The table below shows the carrying amounts and estimated fair values, net of debt issuance costs and other non-cash debt discounts and premiums, of the Company’s primary long-term debt instruments (in thousands):

December 31, 2020

December 31, 2019

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Asset based lending facilities

$

279,106

$

279,106

$

412,346

$

412,346

Term loan agreements

210,913

 

210,913

 

196,714

 

196,714

Real estate loans

 

215,848

 

215,848

 

265,700

 

265,700

HUD insured loans

 

26,221

 

26,221

 

117,117

 

117,117

Notes payable

104,598

104,598

116,952

116,952

Mortgages and other secured debt (recourse)

 

6,987

 

6,987

 

6,369

 

6,369

Mortgages and other secured debt (non-recourse)

 

697,049

 

697,049

 

498,222

 

498,222

$

1,540,722

$

1,540,722

$

1,613,420

$

1,613,420

The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented. The majority of the Company’s debt instruments contain variable rates that are based upon current market prices, or have been refinanced within the recent past. Consequently, management believes the carrying value of these debt instruments approximates fair value. The Company believes this approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements.

Non-Recurring Fair Value Measures

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test. The following tables present the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):

    

    

    

Impairment Charges -

Carrying Value

Year ended

    

December 31, 2020

    

December 31, 2020

Assets:

Property and equipment, net

$

984,712

$

11,500

Finance lease right-of-use assets, net

 

27,848

 

6,000

Operating lease right-of-use assets

 

1,715,532

 

161,500

Intangible assets, net

 

82,270

 

Goodwill

 

85,642

 

    

 

    

    

Impairment Charges -

Carrying Value

Year ended

December 31, 2019

December 31, 2019

Assets:

Property and equipment, net

$

962,105

$

10,696

Finance lease right-of-use assets, net

 

37,097

 

Operating lease right-of-use assets

 

2,399,505

 

6,241

Intangible assets, net

 

87,446

 

Goodwill

 

85,642

 

The fair value allocation related to the Company’s acquisitions and the fair value of tangible and intangible assets related to the Company’s impairment analysis are determined using a discounted cash flow approach, which is a significant unobservable input (Level 3). The Company estimates the fair value using the income approach (which is a discounted cash flow technique). These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates. The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and

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working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows.

The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows. The Company believes the estimates and assumptions used in the valuation methods are reasonable.

(23)

Subsequent Events

NewGen Partnership

On February 1, 2021, the Company sold the real estate and operations of two skilled nursing facilities in California and Nevada to the NewGen Partnership for a price of $19.2 million, which represented the outstanding HUD insured loans as of the closing date. The associated asset and loan balances were presented as held for sale in the consolidated balance sheet at December 31, 2020. The facilities generated annual revenues of $15.7 million and pre-tax income of $1.7 million. The Company recorded a long-lived asset impairment charge of $0.7 million associated with one of the facilities during the year ended December 31, 2020. The Company is assessing the full impact these sales will have on its consolidated financial statements.

Restructuring Transactions

Second Spring

On March 12, 2021, Second Spring sold the real estate of 16 of the 21 skilled nursing facilities, in which the Company operates and leased from Second Spring, to affiliates of Cascade. The Company continues to operate all 16 centers under an interim master lease, with a reduced monthly lease rate. As part of the transaction, the Company entered into operations transfer agreements with two prospective new operators and anticipates transferring operations of the facilities as early as May 1, 2021. Upon transfer, the Company will receive a payment of $9.3 million from Cascade, and $13.8 million of facility related liabilities will be assumed by the new operators or reimbursed to the Company. The Company has signed operations transfer agreements for four of the facilities and expects to transfer those operations upon the receipt of licensure approval. No definitive plans have been determined as to the fifth remaining facility.

The 21 facilities leased from Second Spring generated annual revenues of $276.4 million and pre-tax loss of $35.3 million during the year ended December 31, 2020. The ROU assets and lease obligations associated with the facilities were $174.0 million and $189.0 million, respectively, as of December 31, 2020. The Company is evaluating the accounting for these transactions, which is expected to be finalized later in 2021 upon the satisfaction of certain conditions and the related timing.

The Investment Agreement

On March 2, 2021, the Company entered into an investment agreement (the Investment Agreement) with FC-GEN Operations Investment, LLC (FC-GEN), a subsidiary of the Company, and ReGen Healthcare, LLC, (the Investor).

(a) The Notes

In accordance with the terms of the Investment Agreement, on March 2, 2021 (the Initial Closing Date), the Investor purchased for $50.0 million a convertible promissory note of FC-GEN (the Initial Note), which is convertible into 69,500,755 baskets of securities (Conversion Baskets), each comprised of one Class A common unit of FC-GEN (Class A Unit) and one Class C common stock of Genesis (Class C Share), subject to adjustment, which represent 25% of the fully diluted share capital of the Company (the Initial Closing). Under the Investment Agreement, the Investor has an option exercisable on or prior to March 31, 2021 to purchase for $25.0 million (the Supplemental Purchase), a second convertible promissory note (the Supplemental Note), which is convertible into 34,594,079 Conversion Baskets which, together with the Conversion Baskets issuable upon conversion of the Initial Note, represent 33.3% of the fully diluted share capital of the Company as of the Initial Closing Date, subject to certain adjustments (the Second Closing). The conversion of the Notes are subject to, among other things, receipt of

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certain regulatory approvals. The number of Conversion Baskets issuable upon conversion assumes that the Welltower Shares (as defined below) have been issued. If such Welltower Shares have not been issued in part or in full, the Investor would receive a lesser amount of Conversion Baskets upon conversion and be issued the remainder of the Conversion Baskets upon the issuance of the Welltower Shares or the remainder of the Welltower Shares, as applicable.

(b) The ReGen Warrant

Under the Investment Agreement, upon the closing of the Supplemental Purchase, the Investor will receive a warrant (the ReGen Warrant) to purchase baskets of Class A Units and Class C Shares, with each such basket consisting of one Class A Unit and one Class C Share, subject to adjustment pursuant to the terms of the ReGen Warrant (together, the Exercise Basket) at an exercise price equal to $1.00 per Exercise Basket, subject to adjustment pursuant to the terms of the ReGen Warrant. The ReGen Warrant will be exercisable for 55,600,604 Exercise Baskets (subject to certain adjustments) by the Investor during the term commencing on the date of the Second Closing and ending on the third anniversary of the Second Closing. 

(c) Governance Matters

In accordance with the terms of the Investment Agreement, the board of directors (the Board) has fixed the size of the Board at seven (7) members. In accordance with the terms of the Investment Agreement, at the Initial Closing, two directors resigned from the Board and the vacancies were filled with two directors selected by the Investor (each, an Investor Director). Any change in the size of the Board from seven (7) must be approved by (i) the Independent Committee at any time prior to the one year anniversary of the Investment Agreement and (ii) the Investor, if the change is made at a time when the Investor is entitled to elect one Investor Director to the Board. Effective March 2, 2021, Robert Fish resigned as Chairman of the Board and David Harrington, an Investor Director, was appointed as Chairman. So long as the Investor is entitled to two seats on the Board, one of the Investor Directors will be the Chairman. Mr. Fish continues to be CEO as well as a director on the Board.

In the event that the Second Closing occurs, the Company is obligated to cause an additional director who is not an Investor Director (a Non-Investor Director) to resign from the Board and for the vacancy to be filled with an Investor Director. In the event that the Second Closing occurs, the Investor will continue to be entitled to designate three Investor Directors to the Board so long as the Investor and its Affiliates beneficially own in the aggregate at least 75% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing (the 3 Director Beneficial Ownership Requirement). If at any time the 3 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate two Investor Directors to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 50% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 75% of the Class A Units and Class C Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 2 Director Beneficial Ownership Requirement) and the Investor will cause one Investor Director then on the Board to resign. If at any time the 2 Director Beneficial Ownership Requirement is not met, the Investor will be entitled to designate one Investor Director to the Board, so long as the Investor and its Affiliates beneficially own in the aggregate (i) if the Second Closing occurred, 25% of the Class A Units and Class C Shares under the Initial Note and Supplemental Note the Investor acquired beneficial ownership of at the Initial Closing and the Second Closing or (ii) if the Second Closing did not occur, 25% of the Class A Units and Class C Shares under the Initial Note the Investor acquired beneficial ownership of at the Initial Closing (the 1 Director Beneficial Ownership Requirement) and the Investor will cause any Investor Director(s) then on the Board in excess of one to resign. If at any time the 1 Director Beneficial Ownership Requirement is not met, the Investor will not be entitled to designate any Investor Directors to the Board and the Investor will cause all Investor Directors then on the Board to resign. Until the one year anniversary of the date of the Investment Agreement, the Investor will cause all Investor Directors to recuse themselves from any meetings of the Board or any committee thereof regarding any related party transaction involving the Investor.

In accordance with the terms of the Investment Agreement, so long as the 1 Director Beneficial Ownership Requirement is satisfied, the Investor has the right to designate an observer to the Board (the Observer), who (i) may attend meetings of the Board but may not vote or otherwise participate in them and (ii) is bound to confidentiality obligations as set forth in the Investment Agreement.

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In accordance with the terms of the Investment Agreement, Genesis has formed an independent committee of the Board comprised of up to three (3) directors (the Independent Committee), each of whom must be a Non-Investor Directors and qualify as an independent director under the listing standards of the New York Stock Exchange (the NYSE) except that the CEO as of the Initial Closing Date may serve on the Independent Committee if he is a director. The initial Independent Committee is comprised of James McKeon, James Bloem and Robert Fish. At any time prior to the one year anniversary of the date of the Investment Agreement: (i) the size of the Independent Committee may not be changed, (ii) none of the initial directors on the Independent Committee may be removed therefrom, except and only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be, (iii) a vacancy on the Independent Committee, arising for any reason, may be filled only by the agreement of the two (2) remaining directors on the Independent Committee or by the sole remaining director on the Independent Committee, as the case may be and (iv) in the event of the death, resignation or removal of any Non-Investor Director as a member of the Board, the Independent Committee shall fill such vacancy, except that the Investor shall fill the vacancy resulting from the resignation of a Non-Investor Director in connection with the Second Closing. The Independent Committee has the authority to enforce the Company's rights under the Investment Agreement and will make all determinations therefor regarding the performance and exercise of any rights or obligations of the Company or its subsidiaries. Further, the Independent Committee has the authority to approve certain related party transactions involving the Investor. The Independent Committee must also approve (i) any amendment to the Company Bylaws that limits or reduces the authority of the Independent Committee and (ii) any amendment to certain sections of the Investment Agreement that affects the governance of the Company or the rights of the Company or Independent Committee. The Independent Committee will be disbanded at the one year anniversary of the Investment Agreement.

The Investment Agreement further provides that the Investor may not convert Class A Units that would be issued upon conversion of the Initial Note or Supplemental Note or exercise of the ReGen Warrant into shares of Class A common stock of Genesis (the Class A Shares).

The Waiver Agreement

The Investment Agreement requires the Company to use reasonable best efforts to (i) delist the Class A Shares from the NYSE, (ii) deregister the Class A Shares under the Exchange Act, and (iii) suspend any Exchange Act reporting obligations in respect of the Class A Shares (collectively, the Delisting and Deregistration). In connection with the Delisting and Deregistration, on March 2, 2021, the Company entered into a Waiver Agreement (the Waiver Agreement) with certain stockholders of the Company (the Waiving Holders) who are parties to the Registration Rights Agreement, dated as of August 18, 2014, by and among the Company and the stockholders signatory thereto (the Registration Rights Agreement). Under the Waiver Agreement, the Waiving Holders have agreed to waive the provisions of the Registration Rights Agreement that require that the Company maintain a shelf registration statement, provide the stockholders party thereto with demand registration rights and file with the SEC reports required under the Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934, as amended (the Exchange Act). In the event that subsequent to the completion of the Delisting and Deregistration, the Class A Shares are both registered under the Exchange Act and listed on a national securities exchange, the Waiver Agreement automatically becomes null and void.

The Transaction Agreement

On March 2, 2021 (the Effective Date), the Company entered into a Transaction Agreement (together with the exhibits and schedules thereto, the Transaction Agreement) with Welltower, pursuant to which the Company has agreed to support Welltower in connection with the sale to third party purchasers of Welltower’s interests in certain facilities that the Company leases from Welltower (the Facilities), terminate the leases on 51 of its facilities leased from Welltower and transition operations to new operators (the New Operators) in return for an $86 million payment; the $86 million will be used to repay Company obligations to Welltower which shall occur incrementally over time upon the transition of the Facilities. In connection therewith, the Company has agreed to transfer management and/or operations of such Facilities to designated replacement operators (the Transitions), subject to the retention of certain liabilities related thereto by the Company, the assumption of certain liabilities by the New Operators and the delivery of certain indemnities by Welltower relating to the Transitions.

The 51 facilities leased from Welltower, as described above, generated annual revenues of $629.8 million and pre-tax loss of $82.5 million during the year ended December 31, 2020. The ROU assets and lease obligations associated with the facilities were $552.0

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million and $686.5 million, respectively, as of December 31, 2020. The Company is evaluating the accounting for these transactions, which is expected to be finalized later in 2021 upon the satisfaction of certain conditions and the related timing.

The Transaction Agreement further provides that, upon the Company satisfying certain conditions, including transition of the Facilities, in consideration for Genesis undertaking the transactions contemplated in the section below entitled “The Welltower Warrant and Shares” (a) an additional approximately $170 million of outstanding unsecured indebtedness owed to Welltower will be written off and (b) the Company’s obligations in respect of the yet outstanding secured and unsecured indebtedness will be restructured (the Debt Write-Down). Concurrently with the Debt Write-Down, the Company will issue a warrant to Welltower for its purchase of shares in the Company and Class A Shares, in each case as more particularly described below.

(a) The Welltower Warrant and Shares

Pursuant to the Transaction Agreement, concurrently with the debt restructure, the Company will (i) issue to a subsidiary of Welltower (TRS Holdco) a warrant (the Welltower Warrant) to purchase 900,000 Class A Shares at an exercise price equal to $1.00 per share, which Welltower Warrant will be exercisable by TRS Holdco during the period commencing on the date which is six months following the issuance date of the Welltower Warrant (the Issuance Date), and ending on the date which is five years following the Issuance Date; and (ii) issue to Welltower Class A Shares (the Welltower Shares) representing 20% of the indirect ownership of FC-GEN, provided that such issuance will be subject to dilution from new capital (including the Initial Note and the Supplemental Note).

(b) The Term Loan Amendments

Pursuant to the Transaction Agreement, the Company and Welltower have agreed to certain amendments (the Term Loan Amendments) to the Term Loan Agreement, dated as of July 29, 2016 (as may be amended, restated, amended and restated, extended, supplemented or otherwise modified from time to time, including as amended by the Term Loan Amendments, the Term Loan Agreement), among the Company, FC-GEN Operations Investment, LLC, as the borrower (the Term Borrower), certain other subsidiaries of the Company party thereto, Markglen, Inc. (the Welltower Lender) and OHI Mezz Lender, LLC and any other lender from time to time party thereto and Welltower, as administrative agent and collateral agent.

Among other things, the Term Loan Agreement (i) provides that all interest payable on the term loans of the Welltower Lender (the Welltower Term Loans) may be paid in-kind at the option of the Company, (ii) extends the maturity of the term loans to January 1, 2024, (iii) removes the financial covenants (except for the covenant with respect to capital expenditures), (iv) includes additional negative covenants restricting, among other things, asset sales and the issuance of capital stock by certain subsidiaries of the Company and (v) permits the Company and its subsidiaries to enter into certain other transactions, including the Transitions and the transactions contemplated by the Transaction Agreement.

The Term Loan Amendments to the Term Loan Agreement are effective as of the Effective Date. However, if the Company has not completed any Transitions by September 1, 2021, then several of the Term Loan Amendments (including the changes that permit all interest payable on the Welltower Term Loans to be paid in-kind) will no longer be effective. Moreover, if the Company does not complete Transitions with respect to 85% of the Facilities by September 1, 2021, then a portion of the interest payable with respect to the Welltower Term Loans will require interest to be paid with cash instead of in-kind until the Transitions are completed.

(c) The Asset Based Lending Facility

On the Effective Date, the Company also entered into an Amendment No. 7 (the ABL Amendment) to the Fourth Amended and Restated Credit Agreement, dated as of March 6, 2018 (as may be amended, restated, amended and restated, extended, supplemented or otherwise modified from time to time, the ABL Credit Agreement), among the Company, certain subsidiaries of the Company party thereto as borrowers and/or as guarantors, the lenders party thereto, the letter of credit issuers party thereto and MidCap Funding IV Trust, as administrative agent.

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Among other things, the ABL Amendment, permits the Company and its subsidiaries to enter into certain transactions, including, among other things, the Transitions, the Term Loan Amendments and certain other transactions contemplated by the Transaction Agreement.

Tax Benefit Preservation Plan

On March 11, 2021, the Company entered into a Tax Benefits Preservation Plan (the Plan) with Equiniti Trust Company as rights agent (the Rights Agent), and the Board of Directors of the Company declared a dividend distribution of one right (a Right) for each outstanding share of common stock, par value $0.001 per share, of the Company to stockholders of record at the close of business on March 11, 2021 (the Record Date). Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a Unit) of Series A Junior Participating Preferred Stock, par value $0.001 per share (the Series A Preferred Stock), at a purchase price of $4.50 per Unit, subject to adjustment (the Purchase Price). The Plan is intended to help protect the Company’s ability to use its tax net operating losses and certain other tax assets (Tax Benefits) by deterring any person from becoming the beneficial owner of 4.9% or more of the shares of the Company’s Common Stock then outstanding.

The Right will be triggered upon the acquisition of 4.9% or more of the Company’s outstanding common stock or future acquisitions by any existing holder of 4.9% or more of the Company’s outstanding common stock. If a person or group acquires 4.9% or more of the Company’s common stock, all rights holders, except the acquirer, will be entitled to acquire, at the then exercise price of a Right, that number of shares of the Company common stock which, at the time, has a market value of two times the exercise price of the Right.

 

In connection with the adoption of the Plan, the Board of Directors approved the Certificate of Designation, Preferences, and Rights of Series A Preferred Stock, which designates the rights, preferences and privileges of 4,000,000 shares of a series of the Company’s preferred stock, par value $0.001 per share, designated as Series A Junior Participating Preferred Stock.

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