UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

CHECK ONE:


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

For the Quarterly Period Ended: ~~June~~September 30, 2020


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

For the transition period from to .

Commission file No.: 1-12996

________________________________

Diversicare Healthcare Services, Inc.

(exact name of registrant as specified in its charter)

________________________________


Delaware						62-1559667
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

1621 Galleria Boulevard, Brentwood, TN 37027

(Address of principal executive offices) (Zip Code)

(615) 771-7575

(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
Common Stock, $0.01 par value per share	DVCR	OTCQX

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

¨(do not check if a smaller reporting company)

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

~~6,842,738~~6,849,194

(Outstanding shares of the issuer’s common stock as of ~~August 3,~~November 2, 2020)

Part I. FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
		(Unaudited)					(Unaudited)
CURRENT ASSETS:	CURRENT ASSETS:					CURRENT ASSETS:
Cash	Cash	$	29,081	$	2,710	Cash	$	30,223	$	2,710
Receivables		51,910		60,521
Accounts receivable						Accounts receivable	50,593		60,521
Self-insurance receivables, current portion	Self-insurance receivables, current portion	1,573		1,011		Self-insurance receivables, current portion	685		1,011
Other receivables	Other receivables	2,205		2,534		Other receivables	4,718		2,534
Supplies						Supplies	4,165		710
Prepaid expenses and other current assets	Prepaid expenses and other current assets	4,548		5,056		Prepaid expenses and other current assets	3,577		4,346
Income tax refundable	Income tax refundable	591		484		Income tax refundable	957		484

Total current assets	Total current assets	89,908		72,316		Total current assets	94,918		72,316
PROPERTY AND EQUIPMENT, at cost	PROPERTY AND EQUIPMENT, at cost	134,838		132,775		PROPERTY AND EQUIPMENT, at cost	135,863		132,775
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	(89,318)		(85,020)		Less accumulated depreciation and amortization	(91,275)		(85,020)
Property and equipment, net	Property and equipment, net	45,520		47,755		Property and equipment, net	44,588		47,755
OTHER ASSETS:	OTHER ASSETS:					OTHER ASSETS:

Operating lease right-of-use assets	Operating lease right-of-use assets	297,296		310,238		Operating lease right-of-use assets	290,508		310,238
Acquired leasehold interest, net	Acquired leasehold interest, net	5,469		5,736		Acquired leasehold interest, net	5,336		5,736

Other noncurrent assets	Other noncurrent assets	3,140		4,323		Other noncurrent assets	3,450		4,323

Total other assets	Total other assets	305,905		320,297		Total other assets	299,294		320,297
		$	441,333	$	440,368		$	438,800	$	440,368

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(continued)


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
		(Unaudited)					(Unaudited)
CURRENT LIABILITIES:	CURRENT LIABILITIES:					CURRENT LIABILITIES:
Current portion of long-term debt and finance lease obligations	Current portion of long-term debt and finance lease obligations	$	2,410	$	3,498	Current portion of long-term debt and finance lease obligations	$	1,516	$	3,498
Current portion of operating lease liabilities	Current portion of operating lease liabilities	25,390		23,736		Current portion of operating lease liabilities	26,217		23,736
Trade accounts payable	Trade accounts payable	10,878		14,641		Trade accounts payable	10,402		14,641

Accrued expenses:	Accrued expenses:					Accrued expenses:
Payroll and employee benefits	Payroll and employee benefits	16,891		16,780		Payroll and employee benefits	19,644		16,780
Self-insurance reserves, current portion	Self-insurance reserves, current portion	15,150		13,829		Self-insurance reserves, current portion	12,793		13,829

Deferred income, current portion		20,400		—
Deferred income						Deferred income	27,157		0
Other current liabilities	Other current liabilities	13,555		11,545		Other current liabilities	14,631		11,545
Total current liabilities	Total current liabilities	104,674		84,029		Total current liabilities	112,360		84,029
NONCURRENT LIABILITIES:	NONCURRENT LIABILITIES:					NONCURRENT LIABILITIES:
Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	57,546		70,637		Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	57,810		70,637
Operating lease liabilities, less current portion	Operating lease liabilities, less current portion	282,696		295,636		Operating lease liabilities, less current portion	275,909		295,636
Payroll and employee benefits, less current portion		3,185		—

Self-insurance reserves, less current portion	Self-insurance reserves, less current portion	14,683		16,291		Self-insurance reserves, less current portion	15,798		16,291
Government settlement accrual	Government settlement accrual	8,000		9,000		Government settlement accrual	8,000		9,000
Deferred income, less current portion		4,920		—

Other noncurrent liabilities	Other noncurrent liabilities	1,647		1,691		Other noncurrent liabilities	1,961		1,691

Total noncurrent liabilities	Total noncurrent liabilities	372,677		393,255		Total noncurrent liabilities	359,478		393,255
COMMITMENTS AND CONTINGENCIES	COMMITMENTS AND CONTINGENCIES					COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ DEFICIT:	SHAREHOLDERS’ DEFICIT:					SHAREHOLDERS’ DEFICIT:

Common stock, authorized 20,000 shares, $.01 par value, 7,075 and 6,908 shares issued, and 6,843 and 6,676 shares outstanding, respectively		70		69
Common stock, authorized 20,000 shares, $.01 par value, 7,081 and 6,908 shares issued, and 6,849 and 6,676 shares outstanding, respectively						Common stock, authorized 20,000 shares, $.01 par value, 7,081 and 6,908 shares issued, and 6,849 and 6,676 shares outstanding, respectively	70		69
Treasury stock at cost, 232 shares of common stock	Treasury stock at cost, 232 shares of common stock	(2,500)		(2,500)		Treasury stock at cost, 232 shares of common stock	(2,500)		(2,500)
Paid-in capital	Paid-in capital	24,444		24,026		Paid-in capital	24,520		24,026
Accumulated deficit	Accumulated deficit	(58,380)		(59,079)		Accumulated deficit	(55,581)		(59,079)
Accumulated other comprehensive income	Accumulated other comprehensive income	348		568		Accumulated other comprehensive income	453		568
Total shareholders’ deficit	Total shareholders’ deficit	(36,018)		(36,916)		Total shareholders’ deficit	(33,038)		(36,916)
		$	441,333	$	440,368		$	438,800	$	440,368

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)


		Three Months Ended June 30,							Three Months Ended September 30,
		2020		2019			2020		2019
PATIENT REVENUES, NET	PATIENT REVENUES, NET	$	118,243	$	117,967	PATIENT REVENUES, NET	$	117,965	$	118,630
OTHER OPERATING INCOME	OTHER OPERATING INCOME	5,148		—		OTHER OPERATING INCOME	9,563		0

EXPENSES:	EXPENSES:					EXPENSES:
Operating	Operating	95,775		94,658		Operating	98,706		95,591
Lease and rent expense	Lease and rent expense	13,523		13,114		Lease and rent expense	13,524		13,251
Professional liability	Professional liability	2,114		1,594		Professional liability	2,249		1,737
Government settlement expense		—		3,100

General and administrative	General and administrative	6,880		7,152		General and administrative	6,487		6,902
Depreciation and amortization	Depreciation and amortization	2,278		2,217		Depreciation and amortization	2,098		2,279

Total expenses	Total expenses	120,570		121,835		Total expenses	123,064		119,760
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	2,821		(3,868)		OPERATING INCOME (LOSS)	4,464		(1,130)
OTHER INCOME (EXPENSE):	OTHER INCOME (EXPENSE):					OTHER INCOME (EXPENSE):

Other income	Other income	409		40		Other income	90		25
Interest expense, net	Interest expense, net	(1,209)		(1,476)		Interest expense, net	(1,172)		(1,554)

Total other expense	Total other expense	(800)		(1,436)		Total other expense	(1,082)		(1,529)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2,021		(5,304)		INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,382		(2,659)
PROVISION FOR INCOME TAXES		(182)		(17,312)
BENEFIT (PROVISION) FOR INCOME TAXES						BENEFIT (PROVISION) FOR INCOME TAXES	(209)		741
INCOME (LOSS) FROM CONTINUING OPERATIONS	INCOME (LOSS) FROM CONTINUING OPERATIONS	1,839		(22,616)		INCOME (LOSS) FROM CONTINUING OPERATIONS	3,173		(1,918)
LOSS FROM DISCONTINUED OPERATIONS:	LOSS FROM DISCONTINUED OPERATIONS:					LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of tax benefit of $102 and $38, respectively		(387)		(1,980)

Operating loss, net of tax benefit of $100 and $459, respectively						Operating loss, net of tax benefit of $100 and $459, respectively	(374)		(3,689)
Gain on lease modification, net of tax						Gain on lease modification, net of tax	0		733
Loss from discontinued operations						Loss from discontinued operations	(374)		(2,956)
NET INCOME (LOSS)	NET INCOME (LOSS)	$	1,452	$	(24,596)	NET INCOME (LOSS)	$	2,799	$	(4,874)

NET INCOME (LOSS) PER COMMON SHARE:	NET INCOME (LOSS) PER COMMON SHARE:					NET INCOME (LOSS) PER COMMON SHARE:
Per common share – basic	Per common share – basic					Per common share – basic
Continuing operations	Continuing operations	$	0.28	$	(3.49)	Continuing operations	$	0.48	$	(0.30)
Discontinued operations	Discontinued operations	(0.06)		(0.31)		Discontinued operations	(0.06)		(0.45)
		$	0.22	$	(3.80)		$	0.42	$	(0.75)
Per common share – diluted	Per common share – diluted					Per common share – diluted
Continuing operations	Continuing operations	$	0.28	$	(3.49)	Continuing operations	$	0.48	$	(0.30)
Discontinued operations	Discontinued operations	(0.06)		(0.31)		Discontinued operations	(0.06)		(0.45)
		$	0.22	$	(3.80)		$	0.42	$	(0.75)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:	WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:					WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	Basic	6,649		6,472		Basic	6,577		6,470
Diluted	Diluted	6,704		6,472		Diluted	6,626		6,470

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)


		Three Months Ended June 30,							Three Months Ended September 30,
		2020		2019			2020		2019
NET INCOME (LOSS)	NET INCOME (LOSS)	$	1,452	$	(24,596)	NET INCOME (LOSS)	$	2,799	$	(4,874)
OTHER COMPREHENSIVE INCOME (LOSS):	OTHER COMPREHENSIVE INCOME (LOSS):					OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	Change in fair value of cash flow hedge, net of tax	59		(185)		Change in fair value of cash flow hedge, net of tax	105		(37)

Total other comprehensive income (loss)	Total other comprehensive income (loss)	59		(185)		Total other comprehensive income (loss)	105		(37)
COMPREHENSIVE INCOME (LOSS)	COMPREHENSIVE INCOME (LOSS)	$	1,511	$	(24,781)	COMPREHENSIVE INCOME (LOSS)	$	2,904	$	(4,911)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
PATIENT REVENUES, NET	PATIENT REVENUES, NET	$	238,230	$	235,517	PATIENT REVENUES, NET	$	356,195	$	354,145
OTHER OPERATING INCOME	OTHER OPERATING INCOME	5,148		—		OTHER OPERATING INCOME	14,711		0

EXPENSES:	EXPENSES:					EXPENSES:
Operating	Operating	190,634		189,080		Operating	289,340		284,643
Lease and rent expense	Lease and rent expense	27,036		26,229		Lease and rent expense	40,560		39,480
Professional liability	Professional liability	3,953		3,445		Professional liability	6,202		5,182
Government settlement expense	Government settlement expense	—		3,100		Government settlement expense	0		3,100
General and administrative	General and administrative	13,638		14,365		General and administrative	20,125		21,267
Depreciation and amortization	Depreciation and amortization	4,565		4,533		Depreciation and amortization	6,663		6,812

Total expenses	Total expenses	239,826		240,752		Total expenses	362,890		360,484
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	3,552		(5,235)		OPERATING INCOME (LOSS)	8,016		(6,339)
OTHER INCOME (EXPENSE):	OTHER INCOME (EXPENSE):					OTHER INCOME (EXPENSE):

Other income	Other income	524		200		Other income	614		207
Interest expense, net	Interest expense, net	(2,669)		(2,870)		Interest expense, net	(3,841)		(4,424)

Total other expense	Total other expense	(2,145)		(2,670)		Total other expense	(3,227)		(4,217)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,407		(7,905)		INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	4,789		(10,556)
PROVISION FOR INCOME TAXES	PROVISION FOR INCOME TAXES	(78)		(16,285)		PROVISION FOR INCOME TAXES	(287)		(15,544)
INCOME (LOSS) FROM CONTINUING OPERATIONS	INCOME (LOSS) FROM CONTINUING OPERATIONS	1,329		(24,190)		INCOME (LOSS) FROM CONTINUING OPERATIONS	4,502		(26,100)
LOSS FROM DISCONTINUED OPERATIONS:	LOSS FROM DISCONTINUED OPERATIONS:					LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of tax benefit of $167 and $111, respectively		(630)		(3,752)

Operating loss, net of tax benefit of $267 and $570, respectively						Operating loss, net of tax benefit of $267 and $570, respectively	(1,004)		(7,449)
Gain on lease modification, net of tax						Gain on lease modification, net of tax	0		733
Loss from discontinued operations						Loss from discontinued operations	(1,004)		(6,716)
NET INCOME (LOSS)	NET INCOME (LOSS)	$	699	$	(27,942)	NET INCOME (LOSS)	$	3,498	$	(32,816)

NET INCOME (LOSS) PER COMMON SHARE:	NET INCOME (LOSS) PER COMMON SHARE:					NET INCOME (LOSS) PER COMMON SHARE:
Per common share – basic	Per common share – basic					Per common share – basic
Continuing operations	Continuing operations	$	0.21	$	(3.75)	Continuing operations	$	0.68	$	(4.04)
Discontinued operations	Discontinued operations	(0.10)		(0.58)		Discontinued operations	(0.15)		(1.04)
		$	0.11	$	(4.33)		$	0.53	$	(5.08)
Per common share – diluted	Per common share – diluted					Per common share – diluted
Continuing operations	Continuing operations	$	0.21	$	(3.75)	Continuing operations	$	0.67	$	(4.04)
Discontinued operations	Discontinued operations	(0.10)		(0.58)		Discontinued operations	(0.15)		(1.04)
		$	0.11	$	(4.33)		$	0.52	$	(5.08)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:	WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:					WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	Basic	6,506		6,448		Basic	6,606		6,455
Diluted	Diluted	6,586		6,448		Diluted	6,676		6,455

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
NET INCOME (LOSS)	NET INCOME (LOSS)	$	699	$	(27,942)	NET INCOME (LOSS)	$	3,498	$	(32,816)
OTHER COMPREHENSIVE LOSS:	OTHER COMPREHENSIVE LOSS:					OTHER COMPREHENSIVE LOSS:
Change in fair value of cash flow hedge, net of tax	Change in fair value of cash flow hedge, net of tax	(220)		(248)		Change in fair value of cash flow hedge, net of tax	(115)		(285)

Total other comprehensive loss	Total other comprehensive loss	(220)		(248)		Total other comprehensive loss	(115)		(285)
COMPREHENSIVE INCOME (LOSS)	COMPREHENSIVE INCOME (LOSS)	$	479	$	(28,190)	COMPREHENSIVE INCOME (LOSS)	$	3,383	$	(33,101)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(in thousands and unaudited)


		Common Stock				Treasury Stock						Paid-in Capital		Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)						Total Shareholders' Deficit		Common Stock						Treasury Stock							Paid-in Capital			Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)							Total Shareholders' Deficit
		Shares Issued	Amount		Shares	Amount													Shares Issued	Amount				Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Deficit

BALANCE, DECEMBER 31, 2018	BALANCE, DECEMBER 31, 2018	6,751	$	68	232	$	(2,500)	$	23,413	$	(23,016)					$	837							$	(1,198)							BALANCE, DECEMBER 31, 2018	6,751			$	68		232	$	(2,500)	$	23,413		$	(23,016)	$	837	$	(1,198)
Net loss	Net loss	—	—		—	—		—		(3,346)		—				(3,346)		Net loss	—	—				—			—			—				(3,346)			—						(3,346)
Issuance of equity grants, net	Issuance of equity grants, net	163	1		—	—		41		—		—				42		Issuance of equity grants, net	163	1			—			—			41				—			—						42
Interest rate cash flow hedge	Interest rate cash flow hedge	—	—		—	—		—		—		(63)				(63)		Interest rate cash flow hedge	—	—			—			—			—				—			(63)						(63)
Stock-based compensation	Stock-based compensation	—	—		—	—		140		—		—				140		Stock-based compensation	—	—			—			—			140				—			—						140
BALANCE, MARCH 31, 2019	BALANCE, MARCH 31, 2019	6,914	$	69	232	$	(2,500)	$	23,594	$	(26,362)	$	774			$	(4,425)	BALANCE, MARCH 31, 2019	6,914	$		69		232			$	(2,500)		$	23,594			$	(26,362)		$	774					$	(4,425)
Net loss	Net loss	—	—		—	—		—		(24,596)		—				(24,596)		Net loss	—	—			—			—			—				(24,596)			—						(24,596)
Redemption of equity grants, net	Redemption of equity grants, net	(3)	—		—	—		—		—		—				—		Redemption of equity grants, net	(3)	—			—			—			—				—			—						—
Interest rate cash flow hedge	Interest rate cash flow hedge	—	—		—	—		—		—		(185)				(185)		Interest rate cash flow hedge	—	—			—			—			—				—			(185)						(185)
Stock-based compensation	Stock-based compensation	—	—		—	—		144		—		—				144		Stock-based compensation	—	—			—			—			144				—			—						144
BALANCE, JUNE 30, 2019	BALANCE, JUNE 30, 2019	6,911	$	69	232	$	(2,500)	$	23,738	$	(50,958)	$	589			$	(29,062)	BALANCE, JUNE 30, 2019	6,911	$	69		232			$	(2,500)		$	23,738			$	(50,958)		$	589					$	(29,062)
Net loss																		Net loss	—	—			—			—			—				(4,874)			—						(4,874)
Issuance/redemption of equity grants, net																		Issuance/redemption of equity grants, net	(4)	—			—			—			—				—			—						—
Interest rate cash flow hedge																		Interest rate cash flow hedge	—	—			—			—			—				—			(37)						(37)
Stock-based compensation																		Stock-based compensation	—	—			—			—			145				—			—						145
BALANCE, SEPTEMBER 30, 2019																		BALANCE, SEPTEMBER 30, 2019	6,907	$	69		232			$	(2,500)		$	23,883			$	(55,832)		$	552					$	(33,828)

BALANCE, DECEMBER 31, 2019		6,908	$	69	232	$	(2,500)	$	24,026	$	(59,079)	$	568			$	(36,916)
Net loss		—	—		—	—		—		(753)		—				(753)
Issuance of equity grants, net		190	1		—	—		3		—		—				4
Interest rate cash flow hedge		—	—		—	—		—		—		(279)				(279)
Stock-based compensation		—	—		—	—		338		—		—				338
BALANCE, MARCH 31, 2020		7,098	$	70	232	$	(2,500)	$	24,367	$	(59,832)	$	289			$	(37,606)
Net income		—	—		—	—		—		1,452		—				1,452
Redemption of equity grants, net		(23)	—		—	—		—		—		—				—
Interest rate cash flow hedge		—	—		—	—		—		—		59				59
Stock-based compensation		—	—		—	—		77		—		—				77
BALANCE, JUNE 30, 2020		7,075	$	70	232	$	(2,500)	$	24,444	$	(58,380)	$	348			$	(36,018)

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(in thousands and unaudited)

(continued)


	Common Stock			Treasury Stock			Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Deficit
	Shares Issued	Amount		Shares	Amount

BALANCE, DECEMBER 31, 2019	6,908	$	69	232	$	(2,500)	$	24,026	$	(59,079)	$	568	$	(36,916)
Net loss	—	—		—	—		—		(753)		—		(753)
Issuance of equity grants, net	190	1		—	—		3		—		—		4
Interest rate cash flow hedge	—	—		—	—		—		—		(279)		(279)
Stock-based compensation	—	—		—	—		338		—		—		338
BALANCE, MARCH 31, 2020	7,098	$	70	232	$	(2,500)	$	24,367	$	(59,832)	$	289	$	(37,606)
Net income	—	—		—	—		—		1,452		—		1,452
Redemption of equity grants, net	(23)	—		—	—		—		—		—		—
Interest rate cash flow hedge	—	—		—	—		—		—		59		59
Stock-based compensation	—	—		—	—		77		—		—		77
BALANCE, JUNE 30, 2020	7,075	$	70	232	$	(2,500)	$	24,444	$	(58,380)	$	348	$	(36,018)
Net income	—	—		—	—		—		2,799		—		2,799
Issuance of equity grants, net	6	—		—	—		—		—		—		0
Interest rate cash flow hedge	—	—		—	—		—		—		105		105
Stock-based compensation	—	—		—	—		76		—		—		76
BALANCE, SEPTEMBER 30, 2020	7,081	$	70	232	$	(2,500)	$	24,520	$	(55,581)	$	453	$	(33,038)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:					CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	Net income (loss)	$	699	$	(27,942)	Net income (loss)	$	3,498	$	(32,816)
Loss from discontinued operations	Loss from discontinued operations	(630)		(3,752)		Loss from discontinued operations	(1,004)		(6,716)
Income (loss) from continuing operations	Income (loss) from continuing operations	1,329		(24,190)		Income (loss) from continuing operations	4,502		(26,100)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:						Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	4,565		4,533		Depreciation and amortization	6,663		6,812
Deferred income tax benefit	Deferred income tax benefit	—		16,008		Deferred income tax benefit	0		15,851
Provision for self-insured professional liability, net of cash payments	Provision for self-insured professional liability, net of cash payments	494		2,559		Provision for self-insured professional liability, net of cash payments	1,066		4,682
Amortization of right-of-use assets	Amortization of right-of-use assets	11,286		10,334		Amortization of right-of-use assets	17,253		15,631
Government settlement expense	Government settlement expense	—		3,100		Government settlement expense	0		3,100
Stock-based compensation	Stock-based compensation	415		284		Stock-based compensation	491		429
Provision for leases in excess of cash payments	Provision for leases in excess of cash payments	1,656		2,564		Provision for leases in excess of cash payments	2,477		3,768

Other	Other	602		487		Other	959		643
Changes in assets and liabilities affecting operating activities:	Changes in assets and liabilities affecting operating activities:					Changes in assets and liabilities affecting operating activities:
Receivables	Receivables	8,049		(41)		Receivables	10,254		7,024
Prepaid expenses and other assets	Prepaid expenses and other assets	(189)		(1,027)		Prepaid expenses and other assets	(6,029)		(4,071)
Trade accounts payable and accrued expenses	Trade accounts payable and accrued expenses	1,461		(2,283)		Trade accounts payable and accrued expenses	(518)		(3,447)
Deferred income	Deferred income	25,320		—		Deferred income	27,157		0
Operating lease liabilities	Operating lease liabilities	(11,286)		(10,330)		Operating lease liabilities	(17,246)		(15,635)
Net cash provided by continuing operations	Net cash provided by continuing operations	43,702		1,998		Net cash provided by continuing operations	47,029		8,687
Discontinued operations	Discontinued operations	(630)		(2,789)		Discontinued operations	(1,004)		(5,130)
Net cash provided by (used in) operating activities		43,072		(791)
Net cash provided by operating activities						Net cash provided by operating activities	46,025		3,557
NET CASH FLOWS FROM INVESTING ACTIVITIES:	NET CASH FLOWS FROM INVESTING ACTIVITIES:					NET CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	Purchases of property and equipment	(2,063)		(2,270)		Purchases of property and equipment	(3,096)		(3,745)
Purchases of property and equipment with stimulus funds	Purchases of property and equipment with stimulus funds	(712)		—		Purchases of property and equipment with stimulus funds	(898)		0

Net cash used in continuing operations	Net cash used in continuing operations	(2,775)		(2,270)		Net cash used in continuing operations	(3,994)		(3,745)
Discontinued operations	Discontinued operations	—		(226)		Discontinued operations	0		6
Net cash used in investing activities	Net cash used in investing activities	(2,775)		(2,496)		Net cash used in investing activities	(3,994)		(3,739)
CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:					CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and finance lease obligations	Repayment of debt and finance lease obligations	(18,763)		(2,741)		Repayment of debt and finance lease obligations	(19,414)		(6,867)
Proceeds from issuance of debt	Proceeds from issuance of debt	4,551		6,500		Proceeds from issuance of debt	4,551		8,477
Proceeds from stimulus funds used to purchase property and equipment	Proceeds from stimulus funds used to purchase property and equipment	712		—		Proceeds from stimulus funds used to purchase property and equipment	898		0
Financing costs	Financing costs	(430)		(213)		Financing costs	(556)		(215)
Issuance and redemption of employee equity awards, net	Issuance and redemption of employee equity awards, net	4		42		Issuance and redemption of employee equity awards, net	3		42

Net cash provided by (used in) continuing operations	Net cash provided by (used in) continuing operations	(13,926)		3,588		Net cash provided by (used in) continuing operations	(14,518)		1,437
Discontinued operations	Discontinued operations	—		—		Discontinued operations	0		0
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	$	(13,926)	$	3,588	Net cash provided by (used in) financing activities	$	(14,518)	$	1,437

The accompanying notes are an integral part of these interim consolidated financial statements.

910

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

(continued)


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
NET INCREASE IN CASH	NET INCREASE IN CASH	$	26,371	$	301	NET INCREASE IN CASH	$	27,513	$	1,255
CASH, beginning of period	CASH, beginning of period	2,710		2,685		CASH, beginning of period	2,710		2,685
CASH, end of period	CASH, end of period	$	29,081	$	2,986	CASH, end of period	$	30,223	$	3,940
SUPPLEMENTAL INFORMATION:	SUPPLEMENTAL INFORMATION:					SUPPLEMENTAL INFORMATION:
Cash payments of interest	Cash payments of interest	$	2,635	$	2,701	Cash payments of interest	$	3,592	$	4,100
Cash payments of income taxes	Cash payments of income taxes	$	187	$	254	Cash payments of income taxes	$	289	$	241
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:	SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:					SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Acquisition of equipment through finance leases	Acquisition of equipment through finance leases	$	—	$	239	Acquisition of equipment through finance leases	$	0	$	234
Acquisition of operating leases though adoption of ASC 842	Acquisition of operating leases though adoption of ASC 842	$	—	$	389,403	Acquisition of operating leases though adoption of ASC 842	$	0	$	389,403

Lease modification						Lease modification	$	0	$	(48,877)

The accompanying notes are an integral part of these interim consolidated financial statements.

1011

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

~~JUNE~~SEPTEMBER 30, 2020 AND 2019

(Dollars and shares in thousands, except per share data)

(Unaudited)

1. BUSINESS

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in 9 states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. Additionally, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Mississippi, Missouri, Ohio, Tennessee, and Texas.

As of ~~June~~September 30, 2020, the Company’s continuing operations consist of 62 nursing centers with 7,329 licensed nursing beds. The Company owns 15 and leases 47 of its nursing centers. Our nursing centers range in size from 50 to 320 licensed nursing beds. The licensed nursing bed count does not include 397 licensed assisted and residential living beds.

COVID-19 Pandemic

In January 2020, the Secretary of U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel coronavirus. In March 2020, the World Health Organization categorized COVID-19, a disease caused by this coronavirus (“COVID-19”), as a pandemic. According to the Centers for Disease Control and Prevention (“CDC”), older adults and people with certain underlying medical conditions are at higher risk for serious illness from COVID-19. CDC has identified nursing home populations as being at high risk of being affected by pathogens like COVID-19 as a result of the congregate nature of nursing homes and the resident population served.

The Centers for Medicare & Medicaid Services (“CMS”) and the CDC have issued guidance to state and local governments and long-term care facilities to help mitigate the spread of COVID-19. For example, on March 13, 2020, CMS issued a memorandum directing long-term care facilities to significantly restrict visitors and nonessential workers and to restrict communal activities, among other measures. On May 18, 2020, CMS provided “reopening” recommendations for state and local officials to determine the level of mitigation needed to prevent the transmission of COVID-19 in nursing homes, including criteria for relaxing various restrictions. CMS has also announced COVID-19 reporting requirements and focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic. CDC guidance includes infection prevention and control practices intended to protect both nursing home residents and healthcare personnel.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes, among other things, modifications to the limitation on business interest expense and net operating loss provisions relative to the payment of Federal income taxes, allows an optional payment deferral of the employer's portion of Social Security taxes that are otherwise due through December 31, 2020. These provisions of the CARES Act were effective after the date of enactment and also include the appropriation of stimulus funds to Medicare and Medicaid providers. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act") was enacted, which provides for additional emergency appropriations for COVID-19 response.

Together, the CARES Act and PPPHCE Act authorize $175 billion in funding to healthcare entities to be distributed through the Public Health and Social Services Emergency Fund ("PHSSEF"), also known as the Provider Relief Fund. Payments from PHSSEF are intended to compensate providers for lost revenues and healthcare-related expenses attributable to the COVID-19 pandemic only. ~~These~~As long as the recipient has sufficient COVID-19 attributable expenses and lost revenues between January 1, 2020 and June 30, 2021 and complies with certain terms and conditions, these payments are not required to be ~~repaid, provided the recipients attest~~repaid. The terms and conditions include, among others, requirements to ~~and~~ comply with certain ~~terms and conditions, including~~reporting requirements, limitations on balance billing and ~~not~~restrictions against using PHSSEF funds to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse. ~~The~~Despite signaling in September that the use of PPSSEF payments to support lost revenues would be capped at 2019 profits, on October 22, 2020 HHS revised its guidance to indicate that PPSSEF payments may be used to support COVID-19 lost revenues up to the provider's 2019 patient care revenues. On October 28, 2020, HHS released additional guidance related to how recipients should calculate COVID-19 attributable expenses and lost revenues. Currently, the Company is utilizing these funds to compensate for lost revenues and pay for permissible ~~costs under this legislation that include~~expenses, including but are not limited to increased wages and increased costs for personal protective equipment and other supplies. The Company is still evaluating the most recent guidance; however, the Company currently anticipates, but cannot guarantee, that it will have sufficient COVID-19 attributable expenses and lost revenues to retain the PPSSEF payments it has received to date. The Company will not be able to determine the amount of used funds until the reporting rules are finalized by the federal

government, and the Company knows the full extent of its COVID-19 attributable expenses and lost revenues. There also can be no assurance that the PHSSEF funds will ultimately be enough to reimburse the Company for the full extent of its COVID-19 attributable expenses.

In addition, we may experience supply chain disruptions, including delays and price increases in equipment, pharmaceuticals, and medical supplies. Staffing, equipment, and pharmaceutical and medical supplies shortages may impact our ability to admit and treat patients. We have incurred, and may continue to incur, increased expenses arising from the COVID-19 pandemic. We have also experienced reduced occupancy in our centers, in part due to perceived risks by patients and family members of residential care and their perception of restrictions such as limited visitation policies, a reduction in patients released to nursing homes from hospitals and other healthcare facilities, and a general reluctance to seek medical care or interface with the healthcare system during the pandemic or for an undetermined period of time. Occupancy may also be affected by the data each nursing home is required to report, including the number of confirmed and suspected cases of COVID-19 and resident deaths related to COVID-19, which is made publicly available through the CDC National Healthcare Safety Network.

Since the end of the quarter, there have been additional cases of COVID-19 at certain of our centers. The Company has continued to experience reduced occupancy and increased operating expenses at its centers in the form of increased wages and increased cost for personal protective equipment, food and certain other supplies. The Company expects such increased expenses to continue and likely increase further during the remainder of 2020. Refer to Note 4 "COVID-19 Pandemic" for further information.

2. CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020 and 2019, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at

~~June~~ September 30, 2020, the results of operations, and changes in shareholders' ~~deficit~~equity (deficit) for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020 and 2019 and cash flows for the ~~six~~nine months periods ended ~~June~~September 30, 2020 and 2019. The Company’s balance sheet information at December 31, 2019, was derived from its audited consolidated financial statements as of December 31, 2019.

The results of operations for the periods ended ~~June~~September 30, 2020 and 2019 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Reclassifications

A certain reclassification has been made to the condensed consolidated balance sheet as of December 31, 2019 to conform to the September 30, 2020 presentation. Supplies of $710 are now presented separately from "other current assets" on the December 31, 2019 consolidated balance sheet. This reclassification had no impact on total assets, shareholders' deficit, net income or net cash flows.

CARES Act and PPPHCE Act Funds

The Company implemented certain changes to our accounting policies related to the recognition of stimulus funds through the CARES Act and the PPPHCE Act. There is no U.S. GAAP that explicitly covers accounting for government "grants" to for-profit entities with the exception of certain agricultural subsidies. In the absence of authoritative U.S. GAAP guidance, the Company considered the application of other authoritative accounting guidance by analogy and concluded that the guidance outlined in International Accounting Standard 20 - Accounting for Government Grants and Disclosures of Government Assistance ("IAS 20") was the most appropriate analogy for the purpose of recording and classifying the federal stimulus funds received by the Company. Under IAS 20, once it is reasonably assured that the entity will comply with the conditions of the grant, the grant money should be recognized on a systematic basis over the periods in which the entity recognizes the related expenses or losses for which the grant money is intended to compensate. The Company recognizes grants once both of the following conditions are met: (1) the Company is able to comply with the relevant conditions of the grant and (2) the grant will be received. Federal stimulus funds that are recognized to offset healthcare related expenses and lost revenue attributable to COVID-19 are reflected as "other operating income" on the accompanying interim consolidated statement of operations. Federal stimulus funds received and used toward capital improvements that assist with the response to and prevention and spread of COVID-19 is accounted for as a capital grant. For such an asset acquired with the use of a stimulus funds, the

Company will recognize the asset as a net zero asset. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements included in this report for additional information.

Additionally, the Company has received Medicaid stimulus funds, which are recognized in accordance with ASC 606. Refer to Note 5, "Revenue Recognition and Accounts Receivable" to the interim consolidated financial statements included in this report for additional information.

Discontinued Operations

On December 1, 2018, the Company sold 3 Kentucky properties for $18,700, which are collectively referred to as the "Kentucky Properties." On August 30, 2019, the Company terminated operations of 10 centers in Kentucky and concurrently transferred operations to a new operator. These 10 centers are collectively referred to as the "Kentucky Centers." The sale of the Kentucky Properties and the termination of operations at the Kentucky Centers are referred to collectively as the "Kentucky Exit." As a result of the Kentucky Exit, the Company no longer operates any skilled nursing centers in the State of Kentucky. The Company's exit from the state represented a strategic shift that has (or will have) a major effect on the Company's financial position, results of operations and cash flows. In accordance with ASC 205, the Company's discontinued operating results have been reclassified on the face of the financial statements and footnotes for all periods presented to reflect the discontinued status of these operations. Refer to Note 13, "Discontinued Operations" for more information.

3. RECENT ACCOUNTING GUIDANCE

Accounting Standards Recently Issued But Not Yet Adopted by the Company

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance intends to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for smaller reporting companies for the fiscal year beginning after December 15, 2022 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The new guidance contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of

derivatives consistent with past presentation. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate changes in the market and may apply other elections, as applicable, in the future as allowed under ASU No. 2020-04.

4. COVID-19 PANDEMIC

As of ~~June~~September 30, 2020, the Company has received ~~$31,180 of Medicare stimulus funds,~~$42,274 from the PHSSEF, and recognized ~~$5,148~~$9,563 and $14,711 as income, which is reflected in "other operating income" in the Company's results of operations for the three and ~~six~~nine month periods ended ~~June~~September 30, ~~2020.~~2020, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020, the Company utilized ~~$712~~$898 of these stimulus dollars to fund capital improvements to prevent the spread of COVID-19. The remaining stimulus funds of ~~$25,320~~$27,157 as of ~~June~~September 30, 2020 are classified as "deferred income" on the interim consolidated balance sheet. Additionally, the Families First Coronavirus Response Act provided states with a temporary increase in the regular federal matching rate, or federal medical assistance percentage, used to determine the federal government's share of the cost of covered services in state Medicaid programs, provided the states agreed to certain conditions such as not imposing cost-sharing requirements for COVID-19-related testing and treatment. The Company ~~received $4,203~~recognized $6,645 and ~~$5,064~~$11,709 for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020, respectively, of Medicaid and Hospice dollars related to this temporary increase in the federal matching rate, which related to patient services rendered between March and ~~June~~September 2020 and is reflected in "patient revenues, net" in the Company's results of operations for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020.

The Company ~~expects that it will fully utilize the stimulus funds received through June 30, 2020 in accordance with the terms and conditions of the stimulus programs.~~

~~Also, the Company has~~initially elected to participate in the payment deferral of the employer's portion of Social Security ~~taxes that are otherwise due from March 27,~~taxes. During the third quarter of 2020, ~~through December 31,~~the Company ceased the deferral election and paid $3,185. As of September 30, 2020, ~~with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. To date,~~ the Company has ~~deferred $3,185 of Social Security taxes which is presented as "payroll~~no remaining liability related to the payment deferral and ~~employee benefits, less current portion" on~~does not expect to participate in the ~~Company's balance sheet as of June 30, 2020.~~payment deferral going forward.

The CARES Act also includes other provisions offering financial relief, for example lifting the Medicare sequestration from May 1, 2020 through December 31, 2020, which would have otherwise reduced payments to Medicare providers by 2%. For the three and ~~six~~nine month periods ended ~~June~~September 30, 2020, the suspension of the Medicare sequestration positively impacted net patient revenues by ~~$307.~~$724 and $1,031, respectively.

The Company incurred an additional ~~$2,200~~$6,595 of salaries expense, ~~$1,100~~$5,801 of supplies expense and ~~$100~~$276 of travel expense related to the COVID-19 pandemic for the three month period ended ~~June~~September 30, 2020. The Company incurred an additional ~~$2,600~~$9,376 of salaries expense, ~~$1,200~~$7,237 of supplies expense and ~~$100~~$379 of travel expense related to the COVID-19 pandemic for the ~~six~~nine month period ended ~~June~~September 30, 2020. These expenses are reflected in "operating expense" in the Company's results of operations for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020.

The Company is closely monitoring and evaluating the impact of the COVID-19 pandemic on all aspects of its business. We have identified team members and patients who have tested positive for COVID-19 at a number of our centers, and we have incurred an increase in the costs of caring for the team members, patients, and residents in those centers. The Company has also experienced reduced occupancy at its centers and has incurred additional expenditures preparing its centers for potential outbreaks and maintaining the healthcare delivery capacity of its centers. While we have experienced reduced occupancy and increased expenses, we received additional PHSSEF and other stimulus funds ~~through the CARES Act, PPPHCE Act, and the Families First Coronavirus Response Act~~ during the ~~second~~third quarter of 2020, which have been used and are expected to continue to be used to mitigate the impact of ~~the~~COVID-19 derived lost revenues associated with the reduced occupancy as well as ~~the~~ increased expenses, and any cash flow or liquidity impacts therefrom. The Company has an

interdisciplinary team monitoring and staying up to date on the latest information about ~~the virus and its prevalence.~~COVID-19. The Company has implemented precautionary measures and response protocols to minimize the spread of ~~the virus,~~COVID-19, following guidance from CMS and the ~~CDC, but~~CDC. Nevertheless, the Company ~~nevertheless~~ expects additional COVID-19 cases ~~of the virus~~ will occur at ~~these and other~~our facilities. The Company is continuing to evaluate and consider the potential impact that ~~the virus~~COVID-19 may have on its liquidity, financial condition and results of operations due to numerous uncertainties. However, given the uncertainty as to the duration of the COVID-19 pandemic and the timing and availability of effective medical treatment and vaccines, it could have a material adverse effect on the Company's future results of operations, financial condition and liquidity.

5. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

The Company's revenue is derived from providing quality healthcare services to its patients. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The promise to provide quality care is accounted for as a single performance obligation satisfied at a point in time, when those services are rendered.

The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were

evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was determined that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private Pay and other (Assisted Living, Hospice and Veterans).

Disaggregation of Revenue and Accounts Receivable

In accordance with ASC 606, the Company recognized ~~$4,203~~$6,645 and ~~$5,064~~$11,709 of Medicaid and Hospice stimulus dollars for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020, respectively, that are reflected as patient revenues in the Company's results of operations. Refer to Note 4, "COVID-19 Pandemic" for more information. The following table summarizes revenue from contracts with customers by payor source from continuing operations for the periods presented (dollar amounts in thousands):


		Three Months Ended June 30,																Three Months Ended September 30,
		2020						2019							2020					2019
Medicaid	Medicaid	$	54,161	45.8	%	$	53,812	45.6	%	Medicaid	$	55,844	47.3	%		$	57,191	48.2	%
Medicare	Medicare	22,424		19.0	%	19,545		16.6	%	Medicare	24,374		20.7	%		19,274		16.2	%
Managed Care	Managed Care	12,355		10.4	%	13,120		11.1	%	Managed Care	11,967		10.1	%		11,794		9.9	%
Private Pay and other	Private Pay and other	29,303		24.8	%	31,490		26.7	%	Private Pay and other	25,780		21.9	%		30,371		25.7	%
Total	Total	$	118,243	100.0	%	$	117,967	100.0	%	Total	$	117,965	100.0	%		$	118,630	100.0	%


		Six Months Ended June 30,																Nine Months Ended September 30,
		2020						2019							2020					2019
Medicaid	Medicaid	$	108,491	45.5	%	$	107,623	45.7	%	Medicaid	$	164,335	46.1	%		$	164,815	46.5	%
Medicare	Medicare	43,096		18.1	%	39,936		17.0	%	Medicare	67,470		18.9	%		59,211		16.7	%
Managed Care	Managed Care	24,951		10.5	%	26,118		11.1	%	Managed Care	36,918		10.4	%		37,911		10.7	%
Private Pay and other	Private Pay and other	61,692		25.9	%	61,840		26.2	%	Private Pay and other	87,472		24.6	%		92,208		26.1	%
Total	Total	$	238,230	100.0	%	$	235,517	100.0	%	Total	$	356,195	100.0	%		$	354,145	100.0	%

Accounts receivable from continuing operations as of ~~June~~September 30, 2020 and December 31, 2019 are summarized in the following table:


		June 30,		December 31,			September 30,		December 31,
		2020		2019			2020		2019
Medicaid	Medicaid	$	18,722	$	21,998	Medicaid	$	19,218	$	21,998
Medicare	Medicare	9,659		11,811		Medicare	9,962		11,811
Managed Care	Managed Care	7,057		9,103		Managed Care	6,615		9,103
Private Pay and other	Private Pay and other	16,472		17,609		Private Pay and other	14,798		17,609
Total accounts receivable	Total accounts receivable	$	51,910	$	60,521	Total accounts receivable	$	50,593	$	60,521

6. LONG-TERM DEBT AND INTEREST RATE SWAP

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $80,000 mortgage loan subsequently amended ("Amended Mortgage Loan") and a $52,250 revolver subsequently amended ("Amended Revolver"). The Amended Mortgage Loan and Amended Revolver both have a ~~five-year~~five-year maturity through September 30, 2021. The Amended Mortgage Loan consists of $67,500 term and $12,500 acquisition loan facilities. The Amended Mortgage Loan requires monthly principal and interest payments monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000. The Amended Mortgage Loan balance was ~~$60,112~~$59,585 as of ~~June~~September 30, 2020, consisting of ~~$48,712~~$48,185 on the term loan facility with an interest rate of 4.50% and $11,400 on the acquisition loan facility with an interest rate of 5.25%. The Amended Mortgage Loan is secured by 15 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The

Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

In connection with the sale of the Kentucky Properties, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver effective December 1, 2018. The Sixth Amendment decreased the Amended Revolver capacity from $52,250 to $42,250 and also placed a $2,100 reserve against the acquisition loan facility, thereby reducing the maximum borrowing capacity of that facility to $10,400. The Company also applied $4,947 of net proceeds from the sale of the Kentucky Properties to the outstanding borrowings under the Amended Revolver.

Effective April 3, 2020, the Company entered into a Seventh Amendment ("Seventh Amendment") to amend the Amended Mortgage Loan, a Ninth Amendment ("Ninth Amendment") to amend the Amended Revolver and a Second Amendment ("Second Amendment") to the affiliated revolver. The Seventh Amendment removed the reserve of $2,100 on the acquisition loan availability, thereby increasing the borrowing capacity of that facility from $10,400 to $12,500 as of June 30, 2020. The Ninth Amendment and Second Amendment increased the eligible days of qualifying accounts receivable from 120 days to 150 days for the purpose of calculating our borrowing capacity on the revolvers. The new LIBOR base rate was set at 0.5%.

The Company is participating in the Texas Quality Incentive Payment Program ("QIPP"). Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of 3 of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of 4 of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by $2,000. At the same time, the operators of these 4 facilities entered into a separate revolving loan (the "affiliated revolver") with the same syndicate of banks to provide for the temporary working capital requirements of the 4 QIPP centers. The affiliated revolver, which is guaranteed by the Company, had an initial capacity of $5,000, which amount was reduced by $1,000 on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of September 30, 2021. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 12, "Business Development and Other Significant Transactions." As of ~~June~~September 30, 2020, the Company had no0 outstanding borrowings under the affiliated revolver. The interest rate related to the affiliated revolver was 5.75% as of ~~June~~September 30, 2020. The balance available for borrowing under the affiliated revolver was ~~$1,027~~$905 at ~~June~~September 30, 2020.

As of ~~June~~September 30, 2020, the Company had 0 outstanding borrowings under the Amended Revolver compared to $15,000 outstanding borrowings as of December 31, 2019. The interest rate related to the Amended Revolver was 5.75% as of ~~June~~September 30, 2020. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The

Company has 4 letters of credit with a total value of $12,143 outstanding as of ~~June~~September 30, 2020. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of ~~$27,727,~~$28,060, the balance available for borrowing under the Amended Revolver and affiliated revolver was ~~$15,584~~$15,917 at ~~June~~September 30, 2020.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at ~~June~~September 30, 2020.

Subsequent to the third quarter of 2020, the Company refinanced its Amended Mortgage Loan, Amended Revolver, and affiliated revolver. Refer to Note 14, "Subsequent Events."

Interest Rate Swap Transaction

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has a maturity date of February 26, 2021, and has an amortizing notional amount of ~~$26,314~~$26,073 as of ~~June~~September 30, 2020. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amount. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at ~~June~~September 30, 2020, the Company determined that the interest rate swap was highly effective. The interest rate swap valuation model indicated a net liability of ~~$276~~$172 at ~~June~~September 30, 2020. The fair value of the interest rate swap is included in “other current liabilities” on the Company’s interim consolidated balance sheet. The change in fair value of the interest rate swap liability of ~~$59~~$105 is included in accumulated other comprehensive income for the three months ended ~~June~~September 30, 2020. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a discounted cash flow analysis. This analysis reflects the contractual terms

of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB guidance set forth in ASC 820, Fair Value Measurement.

In connection with the Company's debt refinancing, the Company terminated its interest rate swap subsequent to the third quarter of 2020. Refer to Note 14, "Subsequent Events."

7. LEASES

The Company has operating and finance leases for facilities, corporate offices, and certain equipment. The Company recognizes lease expense for these operating leases on a straight-line basis over the lease term. Leases with an initial term of one year or less are not recorded on the balance sheet. The Company's other leases have original lease terms of one to twelve years, some of which include options to extend the lease for up to twenty years, and some of which include options to terminate the leases within one year. The exercise of lease renewal options is at our sole discretion. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Upon adoption of Topic 842, the Company elected the practical expedient to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs.

Leases


		Classification	June 30, 2020		December 31, 2019			Classification	September 30, 2020		December 31, 2019
Assets	Assets						Assets
Operating lease assets	Operating lease assets	Operating lease right-of-use assets	$	297,296	$	310,238	Operating lease assets	Operating lease right-of-use assets	$	290,508	$	310,238
Finance lease assets	Finance lease assets	Property and equipment, net^(a)	618		906		Finance lease assets	Property and equipment, net (a)	568		906
Total leased assets	Total leased assets		$	297,914	$	311,144	Total leased assets		$	291,076	$	311,144

Liabilities	Liabilities						Liabilities
Current	Current						Current
Operating	Operating	Current portion of operating lease liabilities	$	25,390	$	23,736	Operating	Current portion of operating lease liabilities	$	26,217	$	23,736
Finance	Finance	Current portion of long-term debt and finance lease obligations	238		231		Finance	Current portion of long-term debt and finance lease obligations	237		231
Noncurrent	Noncurrent						Noncurrent
Operating	Operating	Operating lease liabilities, less current portion	282,696		295,636		Operating	Operating lease liabilities, less current portion	275,909		295,636
Finance	Finance	Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	376		445		Finance	Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	314		445
Total lease liabilities	Total lease liabilities		$	308,700	$	320,048	Total lease liabilities		$	302,677	$	320,048

^(a)Finance lease assets are recorded net of accumulated amortization of $422 and $1,522 as of June 30, 2020 and December 31, 2019, respectively.
(a) Finance lease assets are recorded net of accumulated amortization of $411 and $1,522 as of September 30, 2020 and December 31, 2019, respectively.							(a) Finance lease assets are recorded net of accumulated amortization of $411 and $1,522 as of September 30, 2020 and December 31, 2019, respectively.

Lease Cost of Continuing Operations


			Three Months Ended June 30,								Three Months Ended September 30,
		Classification	2020		2019			Classification	2020		2019
Operating lease cost ^(a)	Operating lease cost ^(a)	Lease and rent expense	$	13,523	$	13,114	Operating lease cost (a)	Lease and rent expense	$	13,524	$	13,251
Finance lease cost:	Finance lease cost:						Finance lease cost:
Amortization of finance lease assets	Amortization of finance lease assets	Depreciation and amortization	55		76		Amortization of finance lease assets	Depreciation and amortization	50		54
Interest on finance lease liabilities	Interest on finance lease liabilities	Interest expense, net	10		15		Interest on finance lease liabilities	Interest expense, net	7		11
Short term lease cost	Short term lease cost	Operating expense	155		162		Short term lease cost	Operating expense	111		169
Net lease cost	Net lease cost		$	13,743	$	13,367	Net lease cost		$	13,692	$	13,485

^(a)Includes variable lease costs, which are immaterial	^(a)Includes variable lease costs, which are immaterial									(a) Includes variable lease costs, which are immaterial


			Six Months Ended June 30,								Nine Months Ended September 30,
		Classification	2020		2019			Classification	2020		2019
Operating lease cost (a)	Operating lease cost (a)	Lease and rent expense	$	27,036	$	26,229	Operating lease cost (a)	Lease and rent expense	$	40,560	$	39,480
Finance lease cost:	Finance lease cost:						Finance lease cost:
Amortization of finance lease assets	Amortization of finance lease assets	Depreciation and amortization	116		143		Amortization of finance lease assets	Depreciation and amortization	165		196
Interest on finance lease liabilities	Interest on finance lease liabilities	Interest expense, net	19		26		Interest on finance lease liabilities	Interest expense, net	26		37
Short term lease cost	Short term lease cost	Operating expense	334		303		Short term lease cost	Operating expense	445		472
Net lease cost	Net lease cost		$	27,505	$	26,701	Net lease cost		$	41,196	$	40,185

(a) Includes variable lease costs, which are immaterial	(a) Includes variable lease costs, which are immaterial									(a) Includes variable lease costs, which are immaterial

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Maturity of Lease Liabilities

As of June 30, 2020
Operating Leases ^(a)
Finance Leases ^(a)
Total
2020 $ 51,388 $ 273 $ 51,661
2021 52,387 235 52,622
2022 53,395 114 53,509
2023 53,956 46 54,002
2024 54,169 — 54,169
After 2024 173,361 — 173,361
Total lease payments $ 438,656 $ 668 $ 439,324
Less: Interest (130,570) (54) (130,624)
Present value of lease liabilities $ 308,086 $ 614 $ 308,700
^(a)Operating and Finance lease payments exclude option to extend lease terms that are not reasonably certain of being exercised.


As of September 30, 2020
	Operating Leases (a)		Finance Leases (a)		Total

2021	$	51,636	$	271	$	51,907
2022	52,635		222		52,857
2023	53,637		74		53,711
2024	53,897		32		53,929
2025	54,440		0		54,440
After 2025	159,740		0		159,740
Total lease payments	$	425,985	$	599	$	426,584
Less: Interest	(123,859)		(48)		(123,907)
Present value of lease liabilities	$	302,126	$	551	$	302,677

(a) Operating and Finance lease payments exclude option to extend lease terms that are not reasonably certain of being exercised.

The measurement of right-of-use assets and lease liabilities requires the Company to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for the majority of our leases, the rate implicit in the lease is not known. In these instances, the Company utilizes an incremental borrowing rate, which represents the rate of interest that it would pay to borrow on a collateralized basis over a similar term.

Lease Term and Discount Rate


		June 30, 2020	December 31, 2019		September 30, 2020	December 31, 2019

Weighted-average remaining lease term (years)	Weighted-average remaining lease term (years)			Weighted-average remaining lease term (years)
Operating leases	Operating leases	8.34	8.81	Operating leases	8.10	8.81
Finance leases	Finance leases	2.65	3.00	Finance leases	2.43	3.00
Weighted-average discount rate	Weighted-average discount rate			Weighted-average discount rate
Operating leases	Operating leases	8.9%	8.9%	Operating leases	8.9%	8.9%
Finance leases	Finance leases	6.1%	6.1%	Finance leases	6.1%	6.1%

Other Information


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
Cash paid for amounts included in the measurement of lease liabilities	Cash paid for amounts included in the measurement of lease liabilities					Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases	Operating cash flows for operating leases	$	25,347	$	29,033	Operating cash flows for operating leases	$	38,018	$	42,816
Operating cash flows for finance leases	Operating cash flows for finance leases	$	19	$	26	Operating cash flows for finance leases	26		37
Financing cash flows for finance leases	Financing cash flows for finance leases	$	113	$	250	Financing cash flows for finance leases	175		373
Acquisition of operating leases through adoption of ASC 842	Acquisition of operating leases through adoption of ASC 842	$	—	$	389,403	Acquisition of operating leases through adoption of ASC 842	0		389,403

Lease modification						Lease modification	0		(48,877)

8. COMMITMENTS AND CONTINGENCIES

Professional Liability and Other Liability Insurance

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers in Florida, and Tennessee are now covered under the captive insurance policies along with many of the nursing centers in Alabama, Ohio

1820

and Texas, as well as those previously operated by the Company in Kentucky. The insurance coverage provided for these centers under the SHC policy provides coverage limits of at least $1,000 per medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.

Reserve for Estimated Self-Insured Professional Liability Claims

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will likely exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of ~~$26,136~~$25,584 and $27,390 as of ~~June~~September 30, 2020 and December 31, 2019, respectively. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis and are presented without regard to any potential insurance recoveries. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, the actuary has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. The actuary primarily utilizes historical data regarding the frequency and cost of the Company’s past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third-party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claims information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

As of ~~June~~September 30, 2020, the Company is engaged in 9482 professional liability lawsuits. NaN lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The Company’s cash expenditures for self-insured professional liability costs were ~~$3,590~~$5,136 and ~~$3,606~~$5,398 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The Company follows the accounting guidance in ASC Topic 954 that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the estimated insurance recovery receivables are included within "Self-insurance receivables, current portion" and "other noncurrent assets" on the Consolidated Balance Sheet. As of ~~June~~September 30, 2020 and December 31, 2019 there are estimated insurance recovery receivables of ~~$1,573~~$686 and $1,011 in "Self-insurance receivables, current portion" and $155 and $1,555 in "other noncurrent assets," respectively.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Any potential claims or settlements related to COVID-19 are uncertain at this time. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

Civil Investigative Demand ("CID")

In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January 1, 2010 through December 31, 2015. This agreement requires annual payments for a period of five years ending in February 2025 and also requires a contingent payment in the event the Company sells any of its owned facilities during the five-year payment period. Relative to the settlement agreement, the Company paid $500 during the first quarter of 2020, and

1921

the Company has included $1,000 and $8,000 within "Other current liabilities" and "Government Settlement Accrual", respectively, on the Consolidated Balance Sheets as of ~~June~~September 30, 2020. Failure to make timely any of these payments could result in rescission of the settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

In conjunction with the settlement of the government investigation related to our therapy practices, we entered into a corporate integrity agreement ("CIA") with the Office of the Inspector General of CMS. The CIA has a term of five years and imposes material burdens on the Company, its officers and directors to take actions designed to ensure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the agreement.

Other Insurance

With respect to workers’ compensation insurance, substantially all of the Company’s employees are covered under either a prefunded deductible policy or state-sponsored programs. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and, therefore, is completely self-insured for employee injuries with respect to its Texas operations. From the period from July 1, 2008 through ~~June~~September 30, 2020, the Company is covered by a prefunded deductible policy. Under this prefunded policy, the Company is self-insured for the first $500 per claim, subject to an aggregate maximum of $3,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims was ~~$1,249~~$520 and $921 at ~~June~~September 30, 2020 and December 31, 2019, respectively. The Company has a non-current receivable for workers’ compensation policies covering previous years of ~~$1,792~~$2,101 and $1,575 which is included in "other noncurrent assets" on the Consolidated Balance Sheets as of ~~June~~September 30, 2020 and December 31, 2019, respectively. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred. Any potential claims or settlements related to COVID-19 are uncertain at this time.

As of ~~June~~September 30, 2020, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $200 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims was ~~$2,448~~$2,487 and $1,810 at ~~June~~September 30, 2020 and December 31, 2019, respectively. The differences between actual settlements and reserves are included in expense in the period finalized. Any potential claims or settlements related to COVID-19 are uncertain at this time.

9. STOCK-BASED COMPENSATION

Overview of Plans

In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers. The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase restricted shares or restricted share units (“RSU's”) at 85% of the quoted market price of a share of the Company's common stock on the date of purchase. The restriction period under the Stock Purchase Plan is generally two years from the date of purchase and during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to the shareholder and the shares cannot be sold, assigned or disposed of during the restriction period. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150 shares to 350 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. In June 2017, our shareholders approved an amendment to the 2010 Plan to increase the number of shares of our common stock authorized under the 2010 Plan from 380 shares to 680 shares. No grants can be made under the 2010 Plan after May 31, 2027.

Equity Grants and Valuations

During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Compensation Committee of the Board of Directors approved grants totaling approximately 198 and 151 shares of restricted common stock respectively, to certain employees and members of the Board of Directors. The fair value of restricted shares is determined as the quoted market price of the underlying common shares at the date of the grant. The restricted shares typically vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. On March 13, 2020, the Compensation Committee of the Board of Directors approved the grant of 100 shares of common stock to the Company's Chief Executive Officer, as a one-time bonus in lieu of a 2020 salary increase and as recognition for completing the settlement with the Office of the Inspector General and the disposition of all of the Company's facilities in the State of Kentucky. The stock was fully vested on the date of the grant, and the grant date fair value of which was expensed during the quarter ended March 31, 2020.

In computing the fair value estimates for options and stock-only stock appreciation rights ("SOSARs") using the Black-Scholes-Merton valuation method, the Company took into consideration the exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.

Upon vesting of equity awards, all restrictions are removed. Our policy is to account for forfeitures of share-based compensation awards as they occur.

Summarized activity of the equity compensation plans is presented below:


			Weighted				Weighted
		Options/	Average			Options/	Average
		SOSARs	Exercise Price			SOSARs	Exercise Price
Outstanding, December 31, 2019	Outstanding, December 31, 2019	76	$	7.55	Outstanding, December 31, 2019	76	$	7.55
Granted	Granted	—	—		Granted	0	0
Exercised	Exercised	—	—		Exercised	0	0
Expired or cancelled	Expired or cancelled	(11)	5.45		Expired or cancelled	(11)	5.45
Outstanding, June 30, 2020		65	$	7.92
Outstanding, September 30, 2020					Outstanding, September 30, 2020	65	$	7.92

Exercisable, June 30, 2020		65	$	7.92
Exercisable, September 30, 2020					Exercisable, September 30, 2020	65	$	7.92


		Weighted
		Average
	Restricted	Grant Date
	Shares	Fair Value
Outstanding, December 31, 2019	207	$	5.28
Granted	198	2.00

Vested	(188)	3.93
Cancelled	(23)	4.68
Outstanding, September 30, 2020	194	$	3.32

2123

Weighted
Average
Restricted Grant Date
Shares Fair Value
Outstanding, December 31, 2019 207 $ 5.28
Granted 198 2.00
Vested (188) 3.93
Cancelled (23) 4.68
Outstanding, June 30, 2020 194 $ 3.32

Summarized activity of the ~~Restricted Share Units~~RSU's for the Stock Purchase Plan is as follows:


			Weighted				Weighted
			Average				Average
		Restricted	Grant Date				Grant Date
		Share Units	Fair Value			RSU's	Fair Value
Outstanding, December 31, 2019	Outstanding, December 31, 2019	48	$	5.08	Outstanding, December 31, 2019	48	$	5.08
Granted	Granted	29	2.00		Granted	29	2.00

Vested	Vested	(13)	8.11		Vested	(22)	6.45
Outstanding, June 30, 2020		64	$	3.05
Outstanding, September 30, 2020					Outstanding, September 30, 2020	55	$	2.92

The SOSARs and Options were valued and recorded in the same manner, and, other than amounts that may be settled pursuant to employment agreements with certain members of management, will be settled with issuance of new stock for the difference between the market price on the date of exercise and the exercise price. The Company estimated the total recognized and unrecognized compensation related to SOSARs and stock options using the Black-Scholes-Merton equity grant valuation model.

The following table summarizes information regarding stock options and SOSAR grants outstanding as of ~~June~~September 30, 2020:


		Weighted									Weighted
		Average			Intrinsic			Intrinsic			Average			Intrinsic			Intrinsic
Range of	Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants		Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable		Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$8.14 to $10.21	$8.14 to $10.21	$	8.83	45	$	—	45	$	—	$8.14 to $10.21	$	8.83	45	$	0	45	$	0
$5.86	$5.86	$	5.86	20	$	—	20	$	—	$5.86	$	5.86	20	$	0	20	$	0
				65			65						65			65

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of ~~$416~~$491 and ~~$284~~$429 in the ~~six~~nine month periods ended ~~June~~September 30, 2020 and 2019, respectively.

10. INCOME TAXES

The Company recorded an income tax expense from continuing operations of ~~$78~~$287 during the ~~six~~nine months ended ~~June~~September 30, 2020 and an expense of ~~$16,285~~$15,544 during the ~~six~~nine months ended ~~June~~September 30, 2019.

When assessing the recoverability of the Company’s recorded deferred tax assets, the accounting guidance, ASC 740, Income Taxes, requires that all available positive and negative evidence be considered in evaluating the likelihood that the Company will be able to realize the benefit of its deferred tax assets in the future, which is highly judgmental. Such evidence includes, but may not be limited to, scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations.

When assessing all available evidence, the Company recognized that governmental and regulatory changes have put downward revenue pressure on the long-term care industry as a piece of negative evidence in its analysis. In 2019 and 2018 combined, the Company recognized a total expense of $9.5 million related to the CID settlement in principle. Additionally, in 2017 it recorded

an additional $5.5 million of income tax expense related to the revaluation of deferred tax assets in accordance with the Tax Cuts and Jobs Act. Because of these items and other financial results, the Company entered a cumulative loss for the 36 preceding months ended June 30, 2019 and performed a thorough assessment of the available positive and negative evidence in order to ascertain whether it is more likely than not that in future periods the Company will generate sufficient pre-tax income to utilize all of its federal deferred tax assets and its net operating loss and other carryforwards and credits.

The Company also identified several pieces of positive evidence that were considered and weighed in the analysis performed regarding the valuation of deferred tax assets. The evidence included the termination of operations for 10 nursing facilities in Kentucky completed in the third quarter of 2019, the related corporate and regional restructuring and other cost saving initiatives already in process. The evidence also included consideration of participation in revenue incentive programs that are expected to generate additional revenue, the long-term expiration dates of a majority of the net operating losses and credits, and the Company’s history of not having carryforwards or credits expire unutilized.

In performing the analysis, the Company contemplated utilization of the recorded deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that a full valuation allowance of $20.0 million was necessary as of June 30, 2019. As of ~~June~~September 30, 2020, the Company has a valuation allowance in the amount of ~~$21.3~~$20.4 million. The Company will continue to periodically assess the realizability of its future deferred tax assets.

On March 27, 2020, the CARES Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and are reflected in the first quarter of 2020, or the period of enactment. The CARES Act contains modifications on the depreciation of qualified improvement property, as well as the limitation of business interest for tax years beginning in 2019 and 2020. The new life classification of the qualified improvement property, allowing for bonus depreciation to be taken, along with the modification to Section 163(j) to increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income significantly increased the allowable deductions of the Company and result in additional taxable losses for the year-ended 2019, resulting in greater net operating losses (“NOL”) to be carried back. The NOL carryback resulted in a tax refund of $321 and an increase to the Work Opportunity Tax Credit (“WOTC”) deferred tax asset, which is offset by a full valuation allowance. These changes pursuant to the CARES Act did not have a significant impact toduring the ~~first quarter of~~nine-month period ended September 30, 2020, other than the tax refund and net adjustments to the WOTC credit and NOL deferred tax assets, which are offset by a valuation allowance. As a

result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense expected to be incurred in 2020.

The Company is not currently under examination by any major income tax jurisdiction. During 2020, the statutes of limitations will lapse on the Company's 2016 Federal tax year and certain 2015 and 2016 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim consolidated financial statements for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

11. EARNINGS PER COMMON SHARE

Information with respect to basic and diluted net loss per common share is presented below in thousands, except per share:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,

		2020		2019		2020		2019			2020		2019		2020		2019
Net income (loss)	Net income (loss)									Net income (loss)
Income (loss) from continuing operations	Income (loss) from continuing operations	$	1,839	$	(22,616)	$	1,329	$	(24,190)	Income (loss) from continuing operations	$	3,173	$	(1,918)	$	4,502	$	(26,100)

Loss from discontinued operations, net of income taxes	Loss from discontinued operations, net of income taxes	(387)		(1,980)		(630)		(3,752)		Loss from discontinued operations, net of income taxes	(374)		(2,956)		(1,004)		(6,716)
Net income (loss)	Net income (loss)	$	1,452	$	(24,596)	$	699	$	(27,942)	Net income (loss)	$	2,799	$	(4,874)	$	3,498	$	(32,816)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Net income (loss) per common share:	Net income (loss) per common share:									Net income (loss) per common share:
Per common share – basic	Per common share – basic									Per common share – basic
Income (loss) from continuing operations	Income (loss) from continuing operations	$	0.28	$	(3.49)	$	0.21	$	(3.75)	Income (loss) from continuing operations	$	0.48	$	(0.30)	$	0.68	$	(4.04)
Loss from discontinued operations	Loss from discontinued operations	(0.06)		(0.31)		(0.10)		(0.58)		Loss from discontinued operations	(0.06)		(0.45)		(0.15)		(1.04)

Net income (loss) per common share – basic	Net income (loss) per common share – basic	$	0.22	$	(3.80)	$	0.11	$	(4.33)	Net income (loss) per common share – basic	$	0.42	$	(0.75)	$	0.53	$	(5.08)
Per common share – diluted	Per common share – diluted									Per common share – diluted
Income (loss) from continuing operations	Income (loss) from continuing operations	$	0.28	$	(3.49)	$	0.21	$	(3.75)	Income (loss) from continuing operations	$	0.48	$	(0.30)	$	0.67	$	(4.04)
Loss from discontinued operations	Loss from discontinued operations	(0.06)		(0.31)		(0.10)		(0.58)		Loss from discontinued operations	(0.06)		(0.45)		(0.15)		(1.04)

Net income (loss) per common share – diluted	Net income (loss) per common share – diluted	$	0.22	$	(3.80)	$	0.11	$	(4.33)	Net income (loss) per common share – diluted	$	0.42	$	(0.75)	$	0.52	$	(5.08)
Weighted Average Common Shares Outstanding:	Weighted Average Common Shares Outstanding:									Weighted Average Common Shares Outstanding:
Basic	Basic	6,649		6,472		6,506		6,448		Basic	6,577		6,470		6,606		6,455
Diluted	Diluted	6,704		6,472		6,586		6,448		Diluted	6,626		6,470		6,676		6,455

The effects of 65 and 9998 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively, because these securities would have been anti-dilutive.

12. BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

2018 New Master Lease Agreement

On August 30, 2019, the Company terminated operations of 10 centers in Kentucky and concurrently transferred operations to a new operator. The agreement effectively amended the Lease with Omega Healthcare Investors to remove the 10 Kentucky facilities, reduce the annual rent expense, and release the Company from any further obligations arising under the Lease with respect to the Kentucky facilities. The remaining Lease terms are unchanged with an initial term of twelve years and 2 optional 10-year extensions. The annual lease fixed escalator remains at 2.15% beginning on October 1, 2019.

Quality Incentive Payment Program

During 2019, the Company expanded its participation in QIPP as administered by the Texas Health and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had 1 of its Texas skilled nursing centers participating in the QIPP. During April 2019, the Company enrolled an additional 11 of its Texas skilled nursing centers in the program, such that 12 of the Company’s centers participate in the QIPP effective September 1, 2019. To allow 4 of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district already participating in the QIPP, providing for the transfer of the provider license from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district. In response to the COVID-19 pandemic, the Texas Health and Human Services Commission waived some of the performance and reporting requirements for QIPP effective March 1, 2020, through the remainder of the state's fiscal year ~~ending~~ended August 31, 2020.

13. DISCONTINUED OPERATIONS

Kentucky Disposition

On October 30, 2018 the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and Rehabilitation, LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC,

Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the operations of the Kentucky Properties. On December 1, 2018, the Company completed the sale of the Kentucky Properties with the Buyers for a purchase price of $18,700. This transaction did not meet the accounting criteria to be reported as a discontinued operation. The carrying value of these centers' assets was $13,331, resulting in a gain of $4,825, with the remaining proceeds for miscellaneous closing costs. The proceeds were used to relieve debt, as required under the terms of the Company's Amended Mortgage Loan and Amended Revolver. Refer to Note 6, "Long-term Debt and Interest Rate Swap" for more information on this transaction.

On May 22, 2019, the Company announced that it entered into an agreement with Omega to amend its master lease to terminate operations of 10 nursing facilities, totaling approximately 885 skilled nursing beds, located in Kentucky and to concurrently transfer operations to an operator selected by Omega. On August 30, 2019, the Company completed the transaction and no longer operates any skilled nursing centers in the State of Kentucky. The Company's exit from the state represented a strategic shift that has (or will have) a major effect on the Company's operations and financial results. In accordance with ASC 205, the Company's discontinued financial position, results of operations and cash flows have been reclassified on the face of the financial statements and footnotes for all periods presented to reflect the discontinued status of these operations.

The transaction resulted in a gain on the modification of the Omega lease, which was presented within Discontinued Operations on the Consolidated Statements of Operations for the third quarter of 2019. The net gain on the transaction was $733.

These centers contributed revenues of ~~$17,404~~$11,812 for the three months ended ~~June~~September 30, 2019 and a net loss of ~~$387~~$374 and ~~$1,980~~$2,956 for the three months ended ~~June~~September 30, 2020 and 2019, respectively. The centers contributed revenues of ~~$34,207~~$46,019 for the ~~six~~nine months ended ~~June~~September 30, 2019, and net loss of ~~$630~~$1,004 and ~~$3,752~~$6,716 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The Company did not transfer the accounts receivable or liabilities, inclusive of the reserves for professional liability and workers' compensation, to the new operator. The Company expects to pay the remaining liabilities in the ordinary course of business through its future operating cash flows. The Company does not have significant uncollected accounts receivable associated with these centers as of ~~June~~September 30, 2020.

14. SUBSEQUENT EVENTS

Debt Refinance

On October 14, 2020 the Company executed an Amended and Restated Credit Agreement (“2020 Credit Agreement”) with a syndicate of financial institutions and banks, including CIBC Bank USA, the administering agent, which modifies the terms of the Amended Mortgage Loan, the Amended Revolver and the affiliated revolver. The Company’s 2020 Credit Agreement has a borrowing capacity of $100.0 million allocated among a $62.0 million Mortgage Loan ("2020 Mortgage Loan"), a $36.0 million Revolver ("2020 Revolver") and a $2.0 million affiliated revolver (“2020 Affiliated Revolver”).

Under the terms of the new agreements, the syndicate of banks provided the 2020 Mortgage Loan, the 2020 Revolver and the 2020 Affiliate Revolver through September 30, 2023. The 2020 Mortgage Loan has a term of three years, with principal and interest payable monthly based on a 25-year amortization. Interest is based on LIBOR plus 4.0%. The 2020 Mortgage Loan is secured by the Company's 15 owned nursing centers and related equipment. The 2020 Revolver is secured by the accounts receivable on all facilities, both leased and owned, except for the accounts receivable of the 4 facilities that are the subject of the 2020 Affiliated Revolver. The 2020 Affiliated Revolver is secured by accounts receivable of the 4 facilities subject to that loan. The 2020 Revolver, the 2020 Mortgage Loan and the 2020 Affiliated Revolver are cross defaulted. The 2020 Revolver and the 2020 Mortgage Loan are cross collateralized.

Pursuant to the 2020 Credit Agreement, the Company’s Fixed Charge Coverage Ratio should not be less than 1.05 to 1.00 for the fiscal quarter (i) ending September 30, 2020, measured on the last day of such fiscal quarter on a trailing nine month basis, and (ii) ending December 31, 2020 and for each fiscal quarter thereafter, each measured on the last day of the applicable fiscal quarter on a trailing twelve month basis. The Company's minimum Adjusted EBITDA cannot be less than $9.75 million for the fiscal quarter ending September 30, 2020, measured on the last day of the applicable fiscal quarter on a trailing nine month basis, and (iii) $13.0 million for the fiscal quarter ending December 31, 2020 and for each fiscal quarter thereafter, each measured on the last day of the applicable fiscal quarter on a trailing twelve month basis.

The minimum Adjusted EBITDAR of the Company's 15 owned nursing centers cannot be less than $10.0 million for the fiscal quarter ending September 30, 2020 and for each fiscal quarter thereafter, measured on the last day of the applicable fiscal quarter on trailing twelve month basis.

The minimum Adjusted EBITDA of the four facilities subject to the Amended Affiliated Revolver cannot be less than $825,000 for the fiscal quarter ending September 30, 2020 and for each fiscal quarter thereafter, measured on the last day of the applicable fiscal quarter on a trailing twelve month basis.

The debt balances as of September 30, 2020 are classified in accordance with the terms of the new debt agreement.

In connection with the 2020 Credit Agreement, the Company terminated the interest rate swap agreement related to the prior Credit Agreement.

Therapy Service

Effective November 1, 2020, the Company entered into agreements with a third party therapy company to outsource the therapy services that have been provided by the Company through its wholly owned subsidiary Diversicare Therapy Services. The outsourced services include all physical, occupational, and speech therapy provided to patients of the Company’s facilities. The contracts are for a three year term, absent termination for cause by either party. The third party provider has extensive expertise in providing therapy.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in nine states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. Additionally, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Mississippi, Missouri, Ohio, Tennessee, and Texas. The Company's operating results also include the results of discontinued operations in the state of Kentucky that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations for all periods presented.

Key Performance Metrics

Skilled Mix. Skilled mix represents the number of days our Medicare or Managed Care patients are receiving services at the skilled nursing facilities divided by the total number of days (less days from assisted living patients).

Average rate per day. Average rate per day is the revenue by payor source for a period at the skilled nursing facility divided by actual patient days for the revenue source for a given period.

Average daily skilled nursing census. Average daily skilled nursing census is the average number of patients who are receiving skilled nursing care.

COVID-19 and Federal Relief Legislation

As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to address public health needs. These measures include temporary relaxation of conditions of participation for healthcare providers, relaxation of licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by expanding the scope of services for which reimbursement is available, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the public health emergency period. They also include requirements for skilled nursing centers to report to public health authorities, residents and their representatives when residents and staff are confirmed as having or are being investigated for having COVID-19.

We are working with federal, state, and local health authorities to respond to the COVID-19 pandemic and are taking measures to try to limit the spread of the virus. For example, we have implemented screening protocols for staff, residents, and visitors. CMS has announced that it will begin requiring nursing homes in states with positive testing rates above a certain threshold to test all staff on a weekly basis. Although we are implementing considerable safety measures, caring for COVID-19 patients has associated risks. In addition, we may experience supply chain disruptions, including delays and price increases in equipment, pharmaceuticals, and medical supplies. Staffing, equipment, and pharmaceutical and medical supplies shortages may impact our ability to admit and treat patients. We have incurred, and may continue to incur, increased expenses arising from the COVID-19 pandemic. We have also experienced reduced occupancy in our centers, in part due to perceived risks by patients and family members of residential care and their perception of restrictions such as limited visitation policies, a reduction in patients released to nursing homes from hospitals and other healthcare facilities, and a general reluctance to seek medical care or interface with the healthcare system during the pandemic or for an undetermined period of time. Occupancy may also be affected by the data each nursing home is required to report, including the number of confirmed and suspected cases of COVID-19 and resident deaths related to COVID-19, which is made publicly available through the CDC National Healthcare Safety Network.

The Company is closely monitoring and evaluating the impact of the COVID-19 pandemic on all aspects of its business. We have identified team members and patients who have tested positive for COVID-19 at a select number of our centers, and we have incurred an increase in the costs of caring for the patients and residents in those centers. The Company incurred an additional ~~$2,600~~$9.4 million of salaries expense, ~~$1,200~~$7.2 million of supplies expense and ~~$100~~$0.4 million of travel expense related to COVID-19 pandemic for the ~~six~~nine month period ended ~~June~~September 30, 2020. The Company has also experienced reduced occupancy at its centers and has incurred additional expenditures preparing our centers for potential outbreaks. The Company has an interdisciplinary team monitoring and staying up to date on the latest information about the virus and its prevalence. The Company has implemented

precautionary measures and response protocols to minimize the spread of the virus, following

guidance from the CDC, but the Company nevertheless expects additional cases of the virus will occur at these and other facilities.

One of the primary sources of relief for healthcare providers is the CARES Act, an economic stimulus package signed into law on March 27, 2020, which included, among other things, modifications to the limitation on business interest expense and net operating loss provisions relative to the payment of Federal income taxes, allows an optional payment deferral of the employer's portion of Social Security taxes that are otherwise due through December 31, 2020. These provisions of the CARES Act were effective after the date of enactment and also include the appropriation of stimulus funds to Medicare and Medicaid providers. The PPPHCE Act, an expansion of the CARES Act that includes additional emergency appropriations, was signed into law on April 24, 2020. Together, the CARES Act and the PPPHCE Act include $175 billion of funding to be distributed through the PHSSEF to eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers. PHSSEF payments are intended to compensate healthcare providers for lost revenues and healthcare-related expenses incurred in response to the COVID-19 ~~pandemic~~pandemic. As long as the recipient has sufficient COVID-19 attributable expenses and lost revenues between January 1, 2020 and June 30, 2021 and complies with certain terms and conditions, the PHSSEF payments are not required to be ~~repaid, provided that recipients attest to and comply with certain~~repaid. The terms and conditions ~~including~~include, among other things, complying with reporting requirements, limitations on balance billing and ~~not~~restrictions against using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse.

In addition, the CARES Act expands the Medicare Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Skilled nursing centers ~~may~~were able to request an accelerated payment of up to 100% of the Medicare payment amount for a three-month period (not including Medicare Advantage payments)~~, although~~. On April 26, 2020, CMS ~~is now reevaluating pending~~paused the program and ~~new applications in light~~as of ~~direct payments made available through the PHSSEF.~~October 8, 2020 CMS has stopped accepting applications. The Medicare Accelerated and Advanced Payment Program payments are advances that providers must repay. The Continuing Appropriations Act, 2021 and other Extensions Act (P.L. 116-159, October 1, 2020) delayed and revised the repayment terms for the Medicare Accelerated and Advanced Payment Program. Beginning one year after receiving payment, CMS must ~~recoup~~begin recouping the accelerated payments ~~beginning 120 days after receipt~~that have not been voluntarily repaid before that time by ~~the provider by~~ withholding a portion of future Medicare payments for ~~claims. Currently,~~claims.For the first eleven months of recoupment, CMS will recoup 25% of any Medicare payments due to the provider, and for the six months thereafter CMS will recoup 50% of any Medicare payments due to the provider. If after that time period, there is a remaining balance, the provider or supplier will be required to repay the balance. The Company has not elected to participate in this program. The CARES Act also includes other provisions offering financial relief, for example lifting the Medicare sequestration from May 1, 2020 through December 31, 2020, which would have otherwise reduced payments to Medicare providers by 2%.

In addition to the funds appropriated under the CARES Act, the PPPHCE Act, a stimulus package signed into law on April 24, 2020, includes additional emergency appropriations for COVID-19 response, including $75 billion to be distributed to eligible providers through the PHSSEF. This funding is also intended to reimburse providers for lost revenues and healthcare-related expenses attributable to the COVID-19 ~~pandemic. Applicants for the~~pandemic, but requires recipients to abide by terms and conditions.

Recipients of more than $10 thousand in PHSSEF funds will be required to submit reports to HHS that include information about their expenses and lost revenues. The initial report covering 2020, will be due to HHS by February 15, 2021. If a ~~justification statement for~~recipient has not utilized all of its PHSSEF funds by December 31, 2020, a second report must be submitted by July 31, 2021. Guidance was released by HHS on September 19, 2020 and updated on October 22, 2020 related to these reporting requirements. HHS issued responses to some "frequently asked questions" on October 28, 2020 that provide some additional details and examples related to how recipients should calculate their COVID-19 attributable expenses and lost revenues. These reporting requirements are still evolving. Ultimately, to the ~~payments. Recipients will~~extent that reports submitted by a recipient do not ~~be required~~demonstrate sufficient lost revenues and expenses attributable to COVID-19 (as those terms are defined by HHS), the recipient may have to repay ~~the government for~~any excess funds ~~received, provided they comply with terms and conditions, which have not yet been finalized.~~received.

During the ~~six~~nine months ended ~~June~~September 30, 2020, we received ~~$31.2~~$42.3 million from the PHSSEF established under the CARES Act and the ~~PPHCE~~PPPHCE Act. We are eligible to apply for any additional Phase 3 General Distribution PHSSEF payments and will apply; however, we do not know whether we will ultimately receive additional payment. Due to the recent enactment of the CARES Act and the PPPHCE Act and evolving guidance, there is still a high degree of uncertainty surrounding their ~~implementation, and the public health emergency continues to evolve.~~implementation. We are closely tracking our use of the funds received from PHSSEF under the CARES Act and PPPHCE Act in order to demonstrate compliance with the terms and conditions, including applicable reporting requirements. The Company is still evaluating the most recent guidance; however, the Company currently anticipates, but cannot guarantee, that it will have sufficient COVID-19 attributable expenses and lost revenues to retain the PPSSEF payments it has received to date. The Company will not be able to determine the amount of used funds until the reporting rules are finalized by the federal government, and the Company knows the full extent of its COVID-19 attributable expenses and lost revenues. The Company is working to track and document that we appropriately ~~used the~~use all PHSSEF funds ~~and thus are not required to repay them. However,~~received, however, the Company can offer no assurance that it will be in compliance with all requirements related to retaining the ~~forgiveness of the~~PHSSEF payments received under the CARES Act or the PPPHCE Act. If we fail to appropriately comply with all of the terms and conditions or do not have

sufficient expenses and lost revenues (as defined by these programs), the Company may be required to repay some or all of these amounts, which could have a material adverse ~~impact on our financial results. The Company expects that it will fully utilize the stimulus funds received through June 30, 2020 in accordance with the terms and conditions of the stimulus programs.~~impact.

The Company is continuing to evaluate and consider the potential impact that ~~the virus~~COVID-19 may have on its liquidity, financial condition and results of operations due to numerous uncertainties. We also continue to assess the potential impact of the CARES Act, the PPPHCE Act, ~~the potential impact of~~and other stimulus measures, if any, ~~and~~as well as the impact of other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows. Given the uncertainty as to the duration and severity of the COVID-19 pandemic, it could have a material adverse effect on the Company's future results of operations, financial condition and liquidity.

Strategic Operating Initiatives

We identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving our facilities' quality metrics, improving skilled mix in our nursing centers, improving our average Medicare rate, implementing and maintaining Electronic Medical Records (“EMR”) to improve Medicaid capture, and completing strategic acquisitions and divestitures. We have experienced success in these initiatives and expect to continue to build on these improvements.

Improving skilled mix and average Medicare rate:

One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships

that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the three months ended ~~June~~September 30, 2020 and 2019 was ~~15.0%~~16.5% and ~~14.3%~~13.3%, respectively. The Company's skilled mix for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was ~~14.4%~~15% and ~~14.6%~~14.2%, respectively. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert certain skilled nursing referrals to home health or other community-based care settings.

Utilizing Electronic Medical Records to improve Medicaid acuity capture:

As another part of our strategic operating initiatives, all of our nursing centers utilize EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. By using EMR, we have increased our average Medicaid rate in certain acuity based states by accurate and timely capture of care delivery.

Completing strategic transactions and other business developments:

Our strategic operating initiatives include a focus on completing strategic acquisitions and divestitures. We continue to pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within our existing geographic areas of operation. As part of our strategic efforts, we routinely perform thorough analyses on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business.

On December 1, 2018, the Company sold three Kentucky properties for a purchase price of $18.7 million, which are collectively referred to as the "Kentucky Properties." On August 30, 2019, the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. These ten centers are collectively referred to as the "Kentucky Centers." The sale of the Kentucky Properties and the termination of operations at the Kentucky Centers are referred to collectively as the "Kentucky Exit." As a result of the Kentucky Exit, the Company no longer operates any skilled nursing centers in the State of Kentucky. The Kentucky Exit represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results. In accordance with ASC 205, the Company's discontinued operating results have been reclassified on the face of the financial statements and footnotes to reflect the discontinued status of these operations. Refer to Note 13, "Discontinued Operations" to the interim consolidated financial statements.

During 2019, the Company expanded its participation in the Texas Quality Incentive Program ("QIPP") as administered by the Texas Health and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had one of its Texas skilled nursing centers participating in the

QIPP. During April 2019, the Company enrolled an additional eleven of its Texas skilled nursing centers in the program, such that twelve of the Company’s centers participate in the QIPP effective September 1, 2019. To allow four of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district already participating in the QIPP, providing for the transfer of the related provider licenses from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district. In response to the COVID-19 pandemic, the Texas Health and Human Services Commission waived some of the performance and reporting requirements for QIPP effective March 1, 2020 through the remainder of state's fiscal year ~~ending~~ended August 31, 2020.

On October 1, 2018, the Company entered into a new Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the "Lessor") to lease 34 centers currently owned by the Lessor and operated by Diversicare. The old Master Lease with the Lessor provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operated 11 centers owned by the Lessor under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by Diversicare and the Lessor consolidated the leases for all 34 centers under one ~~New Master Lease.~~new master lease. The Lease has an initial term of twelve years with two optional 10 year extensions. The Lease has a common date of annual lease fixed escalators of 2.15% beginning on October 1, 2019. The Lease was subsequently amended on August 30, 2019 when the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. The agreement effectively amended the Lease to remove the ten Kentucky facilities, reduce the annual rent expense, and release the Company from any further obligations arising under the Lease with respect to the Kentucky facilities. The remaining Lease terms remain unchanged with an initial term of twelve years and two optional 10-year extensions. The annual lease fixed escalator remains at 2.15% beginning on October 1, 2019.

Basis of Financial Statements

Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our other operating income consists of Medicare stimulus funds recognized. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our 2019 Annual Report on Form 10-K. We are including the following critical accounting policies and judgments, which updates the corresponding critical accounting policies and judgments disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, and adding new critical accounting policies and judgments, both which should be read in conjunction with our description of critical accounting policies and judgments in Part I, Item 7, "Critical Accounting Policies and Judgments" of our Annual Report on Form 10-K for the year ended December 31, 2019:

Recognition CARES Act and PPPHCE Act Funds

The Company implemented certain changes to our accounting policies related to the recognition of stimulus funds through the CARES Act and the PPPHCE Act. There is no U.S. GAAP that covers accounting for government "grants" to for-profit entities with the exception of certain agricultural subsidies. In the absence of authoritative U.S. GAAP guidance, the Company considered the application of other authoritative accounting guidance by analogy and concluded that the guidance outlined in International Accounting Standard 20 - Accounting for Government Grants and Disclosures of Government Assistance ("IAS 20") was the most appropriate analogy for the purpose of recording and classifying the federal stimulus funds received by the Company. Under IAS 20, once it is reasonably assured that the entity will comply with the conditions of the grant, the grant money should be recognized on a systematic basis over the periods in which the entity recognizes the related expenses or losses for which the grant money is intended to compensate. The Company recognizes grants once both of the following conditions are met: (1) the Company is able to comply with the relevant conditions of the grant and (2) the grant will be received. Federal stimulus funds that are recognized to offset healthcare related expenses and lost revenue attributable to COVID-19 are reflected as "other operating income" on the accompanying interim consolidated statement of operations. Federal stimulus funds received and used toward capital improvements that assist with the response to and prevention and spread of COVID-19 isare accounted for as a capital grant. For such an asset acquired with the use of a stimulus funds, the Company will recognize the asset as a net zero asset. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements included in this report for additional information. Additionally, the Company has received Medicaid stimulus funds, which are recognized in accordance with ASC 606. Refer to Note 5 "Revenue Recognition and Accounts Receivable" to the interim consolidated financial statements included in this report for additional information.

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and Private Pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. The Private Pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the Private Pay and other payors are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The Company recognized ~~$4.2~~$6.6 million and ~~$5.1~~$11.7 million of Medicaid and Hospice stimulus dollars for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020, respectively, that are reflected as patient revenues from Medicaid and Private Pay and Other in the Company's results of operations. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements included in this report for more information. The following table ~~sets forth net patient and resident revenues related to our~~summarizes revenue from contracts with customers by payor source from continuing operations ~~by primary payor source~~ for the periods presented (dollar amounts in thousands).


		Three Months Ended June 30,															Six Months Ended June 30,															Three Months Ended September 30,						Nine Months Ended September 30,
		2020						2019						2020							2019					2020				2019					2020		2019
Medicaid	Medicaid	$	54,161	45.8	%	$	53,812	45.6	%	$	108,491	45.5	%		$	107,623	45.7	%	Medicaid	$	55,844	47.3	%	$	57,191	48.2	%	$	164,335	46.1	%		$	164,815	46.5	%
Medicare	Medicare	22,424		19.0	%	19,545		16.6	%	43,096		18.1	%		39,936		17.0	%	Medicare	24,374		20.7	%	19,274		16.2	%	67,470		18.9	%		59,211		16.7	%
Managed Care	Managed Care	12,355		10.4	%	13,120		11.1	%	24,951		10.5	%		26,118		11.1	%	Managed Care	11,967		10.1	%	11,794		9.9	%	36,918		10.4	%		37,911		10.7	%
Private Pay and other	Private Pay and other	29,303		24.8	%	31,490		26.7	%	61,692		25.9	%		61,840		26.2	%	Private Pay and other	25,780		21.9	%	30,371		25.7	%	87,472		24.6	%		92,208		26.1	%
Total	Total	$	118,243	100.0	%	$	117,967	100.0	%	$	238,230	100.0	%		$	235,517	100.0	%	Total	$	117,965	100.0	%	$	118,630	100.0	%	$	356,195	100.0	%		$	354,145	100.0	%

The following table sets forth average daily skilled nursing census by primary payor source for our continuing operations for the periods presented:


		Three Months Ended June 30,														Six Months Ended June 30,										Three Months Ended September 30,						Nine Months Ended September 30,
		2020				2019						2020						2019			2020					2019				2020	2019
Medicaid	Medicaid	3,516	67.3	%	4,462	69.2	%	3,667	67.8	%	4,443	68.9	%	Medicaid	3,240		66.3		%	3,971	69.9	%	3,524	67.3	%		3,913	68.8	%
Medicare	Medicare	544	10.4	%	625	9.7	%	524	9.7	%	638	9.9	%	Medicare	570		11.7		%	504	8.9	%	539	10.3	%		539	9.5	%
Managed Care	Managed Care	240	4.6	%	296	4.6	%	253	4.7	%	302	4.7	%	Managed Care	237		4.8		%	248	4.4	%	247	4.7	%		269	4.7	%
Private Pay and other	Private Pay and other	921	17.7	%	1,067	16.5	%	968	17.8	%	1,064	16.5	%	Private Pay and other	843		17.2		%	962	16.8	%	927	17.7	%		965	17.0	%
Total	Total	5,221	100.0	%	6,450	100.0	%	5,412	100.0	%	6,447	100.0	%	Total	4,890		100.0		%	5,685	100.0	%	5,237	100.0	%		5,686	100.0	%

Consistent with the nursing home industry in general, changes in the mix of a facility’s patient population among Medicaid, Medicare, Managed Care, and Private Pay and other can significantly affect the profitability of the facility’s operations.

Health Care Industry

The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of patient care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of a number of statutes and regulations, including those regulating fraud and abuse, false claims, patient privacy and quality of care issues. Violations of these laws and regulations could result in exclusion from government health care programs, significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation. The Company is involved in regulatory actions of this type from time to time.

In recent years, the U.S. Congress and some state legislatures have considered and enacted significant reforms affecting the availability, payment and reimbursement of healthcare services in the United States. Reforms that we believe may have a material impact on the long-term care industry and on our business include, among others, possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. The most prominent of the federal legislative reform efforts, the Affordable Care Act,

affects how health care services are covered, delivered and reimbursed. The Affordable Care Act expands coverage through a combination of public program expansion and private sector reforms, provides for reduced growth in Medicare program spending, and promotes initiatives that tie reimbursement to quality and care coordination. Some of the provisions, such as the requirement that large employers provide health insurance benefits to full-time employees, have increased our operating expenses. The Affordable Care Act expands the role of home-based and community services, which may place downward pressure on our sustaining population of Medicaid patients. However, there is considerable uncertainty regarding the future of the Affordable Care Act. The Presidential administration and certain members of Congress have made and expressed their intent to repeal or make additional significant changes to the law, its implementation or its interpretation. For example, effective January 1, 2019, Congress eliminated the financial penalty associated with the individual mandate. As a result of this change, a federal judge in Texas ruled in December 2018 that the individual mandate was unconstitutional and determined that the rest of the Affordable Care Act was, therefore, invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. The law remains in place pending appeal.

Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay. CMS has instituted a number of test programs designed to extend the reimbursement and financial responsibilities under consolidating billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to, home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Currently, these test programs for bundled reimbursement are confined to a small set of clinical conditions, but CMS has indicated that it is developing additional bundled payment models. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. The potential impact on skilled nursing center utilization and reimbursement is currently unknown. The process for defining bundled services has not been fully determined by CMS and is therefore subject to change during the rulemaking process. CMS has indicated that it is working toward a unified payment system for post-acute care services, including those provided by skilled nursing centers.

On August 7, 2019, CMS issued a final rule outlining Medicare payment rates for skilled nursing facilities that became effective October 1, 2019. CMS projects that aggregate payments to skilled nursing facilities will increase by 2.4%, reflecting a

~~Skilled~~ skilled nursing facility market basket percentage update of 2.8% with a 0.4 percentage point reduction for the multifactor productivity adjustment. In addition, the Patient-Driven Payment Model ("PDPM") took effect October 1, 2019. The PDPM is a payment system for patients in a covered Medicare Part A skilled nursing facility stay that replaces the Resource Utilization Group ("RUG-IV") model, which primarily used volume of services as the basis for payment classification. The PDPM model instead classifies patients into payment groups based on specific patient characteristics and shifts the focus away from paying for the volume of services provided. CMS will use a budget neutrality factor to satisfy the requirement that PDPM be budget neutral relative to RUG-IV. CMS stated that it intends for the new model not to change the aggregate amount of Medicare payments to skilled nursing facilities, but to more accurately reflect resource utilization.

On July 31, 2020, CMS issued a final rule outlining Medicare payment rates for ~~the update of Federal~~skilled nursing facilities for federal fiscal year ~~2021~~2021. Effective October 1, 2020, payments to skilled nursing facilities ~~that includes~~are estimated to increase by 2.2% based on a ~~proposed net~~ market basket ~~increase~~percentage update of 2.2%, ~~effective October 1, 2020.~~adjusted by a 0.0 percentage point multifactor productivity adjustment.

CMS publishes rankings based on performance scores on the Nursing Home Compare website, which is intended to assist the public in finding and comparing skilled care providers. The Nursing Home Compare website also publishes for each nursing home a rating between 1 and 5 stars as part of CMS’s Five-Star Quality Rating System. An overall star rating is determined based on three components (information from the last three years of health inspections, staffing information, and quality measures), each of which also has its own five-star rating. The ratings are based, in part, on the quality data nursing centers are required to report. For example, nursing centers must report the rate of short-stay residents who are successfully discharged into the community and the percentage who had an outpatient emergency department visit. As a result of the COVID-19 pandemic, CMS issued temporary waivers and flexibilities that impact the information posted on the Nursing Home Compare website and used in the Five-Star Quality Rating System. For example, CMS temporarily waived the requirement to submit staffing data and issued guidance prioritizing or suspending certain nursing home surveys. Some of these measures have been lifted, while some are subject to phased re-opening criteria. However, due to these changes and their impact on data, CMS is adjusting some ratings (e.g., by holding specific quality measures constant). In addition to the standard Nursing Home Compare data, CMS is posting COVID-19 data submitted by nursing homes on the CDC National Healthcare Safety Network and linking to this information from the Nursing Home Compare website. The information posted includes the reported number of confirmed and suspected cases of COVID-19 in each facility, resident deaths related to COVID-19, availability of personal protective equipment and COVID-19 testing, and potential staffing shortages.

In September 2020, CMS launched its Care Compare website. Care Compare is a streamlined redesign of eight existing CMS healthcare compare tools, including Nursing Home Compare. Care Compare provides a single interface that patients and

caregivers can use to find information and quality metrics for doctors, hospitals, nursing homes, and other healthcare services instead of searching through multiple tools.

We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results. Our focus has been and continues to be on the delivery of quality care to our patients and residents.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of ~~June~~September 30, 2020, summarized by the period in which payment is due, as follows (dollar amounts in thousands):


Contractual Obligations	Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years		Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations ⁽¹⁾	Long-term debt obligations ⁽¹⁾	$	66,531	$	6,765	$	59,720	$	46	$	—	Long-term debt obligations (1)	$	65,885	$	5,882	$	59,971	$	32	$	—
Settlement obligations ⁽²⁾	Settlement obligations ⁽²⁾	3,356		2,996		360		—		—		Settlement obligations (2)	3,488		3,128		360		—		—
Settlement of civil investigative demand ⁽³⁾	Settlement of civil investigative demand ⁽³⁾	9,732		1,203		2,838		5,691		—		Settlement of civil investigative demand (3)	9,732		1,203		2,838		5,691		—
Operating leases ⁽⁴⁾	Operating leases ⁽⁴⁾	438,656		51,388		105,782		108,125		173,361		Operating leases (4)	425,985		51,636		106,272		108,337		159,740
Required capital expenditures under operating leases ⁽⁵⁾	Required capital expenditures under operating leases ⁽⁵⁾	16,964		2,010		4,018		4,020		6,916		Required capital expenditures under operating leases (5)	16,309		1,993		3,986		3,986		6,344
Social Security tax payment deferral ⁽⁶⁾		$	3,185	$	—	$	3,185	$	—	$	—
Total	Total	$	538,424	$	64,362	$	175,903	$	117,882	$	180,277	Total	$	521,399	$	63,842	$	173,427	$	118,046	$	166,084

(1)Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our finance lease obligations. Our long-term debt obligations decreased ~~$14.7~~$15.4 million between December 31, 2019 and ~~June~~September 30, 2020. Subsequent to the third quarter of 2020, the Company refinanced its Amended Mortgage Loan, Amended Revolver, and affiliated revolver. See Note 6, "Long-Term Debt and Interest Rate Swap," and Note 14, "Subsequent Events," to the interim consolidated financial statements included in this report for additional information.

(2)Settlement obligations relate to professional liability cases that are expected to be paid. The professional liabilities are included in our self-insurance reserves.

(3)Settlement of civil investigative demand relates to our settlement agreement, including interest, with the U.S. Department of Justice and the State of Tennessee. See additional description of our contingencies in Note 8 "Commitments and Contingencies" to the interim consolidated financial statements and "Item 1. Legal Proceedings."

(4)Represents minimum annual undiscounted lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease agreements, which does not include renewals. Our operating lease obligations decreased ~~$25.1~~

$37.7 million between December 31, 2019 and ~~June~~September 30, 2020. See Note 7, "Leases," to the interim consolidated financial statements included in this report for additional information.

(5)Includes annual expenditure requirements under operating leases. Our required capital expenditures decreased ~~$1.7~~$2.4 million between December 31, 2019 and ~~June~~September 30, 2020.

~~(6)~~Represents the Company's portion of Social Security taxes that are otherwise due from March 27, 2020 through December 31, 2020, deferral of which is permitted under the CARES Act. The law requires repayment of half of the balance by the end of 2021 and the remaining by the end of 2022. See Note 4, "COVID-19 Pandemic," to the interim consolidated financial statements included in this report for additional information.

Employment Agreements

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately $1.5 million as of ~~June~~September 30, 2020. The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee.

3235

Results of Continuing Operations

The following tables present the unaudited interim consolidated statements of operations and related data for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020 and 2019:


(in thousands)	(in thousands)	Three Months Ended June 30,															(in thousands)	Three Months Ended September 30,
		2020		2019		Change		%			2020		2019		Change			%

PATIENT REVENUES, NET	PATIENT REVENUES, NET	$	118,243	$	117,967	$	276	0.2	%	PATIENT REVENUES, NET	$	117,965	$	118,630	$	(665)		(0.6)	%
OTHER OPERATING INCOME	OTHER OPERATING INCOME	5,148		—		5,148		100.0	%	OTHER OPERATING INCOME	9,563		—		9,563			100.0	%

EXPENSES:	EXPENSES:									EXPENSES:
Operating	Operating	95,775		94,658		1,117		1.2	%	Operating	98,706		95,591		3,115			3.3	%
Lease and rent expense	Lease and rent expense	13,523		13,114		409		3.1	%	Lease and rent expense	13,524		13,251		273			2.1	%
Professional liability	Professional liability	2,114		1,594		520		32.6	%	Professional liability	2,249		1,737		512			29.5	%
Government settlement expense		—		3,100		(3,100)		100.0	%

General and administrative	General and administrative	6,880		7,152		(272)		(3.8)	%	General and administrative	6,487		6,902		(415)			(6.0)	%
Depreciation and amortization	Depreciation and amortization	2,278		2,217		61		2.8	%	Depreciation and amortization	2,098		2,279		(181)			(7.9)	%
Total expenses	Total expenses	120,570		121,835		(1,265)		(1.0)	%	Total expenses	123,064		119,760		3,304			2.8	%
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	2,821		(3,868)		6,689		N/M		OPERATING INCOME (LOSS)	4,464		(1,130)		5,594			N/M
OTHER INCOME (EXPENSE):	OTHER INCOME (EXPENSE):									OTHER INCOME (EXPENSE):

Other income	Other income	409		40		369		N/M		Other income	90		25		65			N/M
Interest expense, net	Interest expense, net	(1,209)		(1,476)		267		18.1	%	Interest expense, net	(1,172)		(1,554)		382			24.6	%

Total other expenses	Total other expenses	(800)		(1,436)		636		44.3	%	Total other expenses	(1,082)		(1,529)		447			29.2	%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2,021		(5,304)		7,325		41.0	%	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,382		(2,659)		6,041			(132.5)	%
PROVISION FOR INCOME TAXES		(182)		(17,312)		17,130		98.9	%
BENEFIT (PROVISION) FOR INCOME TAXES										BENEFIT (PROVISION) FOR INCOME TAXES	(209)		741		(950)			(128.2)	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	INCOME (LOSS) FROM CONTINUING OPERATIONS	$	1,839	$	(22,616)	$	24,455	85.4	%	INCOME (LOSS) FROM CONTINUING OPERATIONS	$	3,173	$	(1,918)	$	5,091		(233.2)	%

N/M = Not Meaningful


(in thousands)	(in thousands)	Six Months Ended June 30,															(in thousands)	Nine Months Ended September 30,
		2020		2019		Change		%			2020		2019		Change			%

PATIENT REVENUES, NET	PATIENT REVENUES, NET	$	238,230	$	235,517	$	2,713	1.2	%	PATIENT REVENUES, NET	$	356,195	$	354,145	$	2,050		0.6	%
OTHER OPERATING INCOME	OTHER OPERATING INCOME	5,148		—		5,148		100.0	%	OTHER OPERATING INCOME	14,711		—		14,711			100.0	%

EXPENSES:	EXPENSES:									EXPENSES:
Operating	Operating	190,634		189,080		1,554		0.8	%	Operating	289,340		284,643		4,697			1.7	%
Lease and rent expense	Lease and rent expense	27,036		26,229		807		3.1	%	Lease and rent expense	40,560		39,480		1,080			2.7	%
Professional liability	Professional liability	3,953		3,445		508		14.7	%	Professional liability	6,202		5,182		1,020			19.7	%
Government settlement expense	Government settlement expense	—		3,100		(3,100)		(100.0)	%	Government settlement expense	—		3,100		(3,100)			(100.0)	%
General and administrative	General and administrative	13,638		14,365		(727)		(5.1)	%	General and administrative	20,125		21,267		(1,142)			(5.4)	%
Depreciation and amortization	Depreciation and amortization	4,565		4,533		32		0.7	%	Depreciation and amortization	6,663		6,812		(149)			(2.2)	%
Total expenses	Total expenses	239,826		240,752		(926)		(0.4)	%	Total expenses	362,890		360,484		2,406			0.7	%
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	3,552		(5,235)		8,787		N/M		OPERATING INCOME (LOSS)	8,016		(6,339)		14,355			N/M
OTHER INCOME (EXPENSE):	OTHER INCOME (EXPENSE):									OTHER INCOME (EXPENSE):

Other income	Other income	524		200		324		N/M		Other income	614		207		407			N/M
Interest expense, net	Interest expense, net	(2,669)		(2,870)		201		7.0	%	Interest expense, net	(3,841)		(4,424)		583			13.2	%

Total other expenses	Total other expenses	(2,145)		(2,670)		525		19.7	%	Total other expenses	(3,227)		(4,217)		990			23.5	%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,407		(7,905)		9,312		N/M		INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	4,789		(10,556)		15,345			N/M
PROVISION FOR INCOME TAXES	PROVISION FOR INCOME TAXES	(78)		(16,285)		16,207		99.5	%	PROVISION FOR INCOME TAXES	(287)		(15,544)		15,257			98.2	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	INCOME (LOSS) FROM CONTINUING OPERATIONS	$	1,329	$	(24,190)	$	25,519	105.5	%	INCOME (LOSS) FROM CONTINUING OPERATIONS	$	4,502	$	(26,100)	$	30,602		117.2	%

N/M = Not Meaningful

3336


Percentage of Total Patient Revenues	Percentage of Total Patient Revenues	Three Months Ended June 30,						Six Months Ended June 30,							Percentage of Total Patient Revenues	Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019			2020		2019

PATIENT REVENUES, NET	PATIENT REVENUES, NET	100.0	%	100.0	%	100.0	%	100.0	%	PATIENT REVENUES, NET	100.0	%	100.0	%		100.0	%	100.0	%
OTHER OPERATING INCOME	OTHER OPERATING INCOME	4.4		—		2.2		—		OTHER OPERATING INCOME	8.1		—			4.1		—

EXPENSES:	EXPENSES:									EXPENSES:
Operating	Operating	81.0		80.2		80.0		80.3		Operating	83.7		80.6			81.2		80.4
Lease and rent expense	Lease and rent expense	11.4		11.1		11.3		11.1		Lease and rent expense	11.5		11.2			11.4		11.1
Professional liability	Professional liability	1.8		1.4		1.7		1.5		Professional liability	1.9		1.5			1.7		1.5
Government settlement expense	Government settlement expense	—		2.6		—		1.3		Government settlement expense	—		—			—		0.9
General and administrative	General and administrative	5.8		6.1		5.7		6.1		General and administrative	5.5		5.8			5.6		6.0
Depreciation and amortization	Depreciation and amortization	1.9		1.9		1.9		1.9		Depreciation and amortization	1.8		1.9			1.9		1.9
Total expenses	Total expenses	101.9		103.3		100.6		102.2		Total expenses	104.4		101.0			101.8		101.8
OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)	2.5		(3.3)		1.6		(2.2)		OPERATING INCOME (LOSS)	3.7		(1.0)			2.3		(1.8)
OTHER INCOME (EXPENSE):	OTHER INCOME (EXPENSE):									OTHER INCOME (EXPENSE):

Other income	Other income	0.3		—		0.2		0.1		Other income	0.1		—			0.2		0.1
Interest expense, net	Interest expense, net	(1.0)		(1.1)		(1.1)		(1.2)		Interest expense, net	(1.0)		(1.2)			(1.1)		(1.2)
Total other expenses	Total other expenses	(0.7)		(1.1)		(0.9)		(1.1)		Total other expenses	(0.9)		(1.2)			(0.9)		(1.1)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1.8		(4.4)		0.7		(3.3)		INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2.8		(2.2)			1.4		(2.9)
PROVISION FOR INCOME TAXES		(0.2)		(14.7)		—		(6.9)
BENEFIT (PROVISION) FOR INCOME TAXES										BENEFIT (PROVISION) FOR INCOME TAXES	(0.2)		0.6			(0.1)		(4.4)
INCOME (LOSS) FROM CONTINUING OPERATIONS	INCOME (LOSS) FROM CONTINUING OPERATIONS	1.6	%	(19.1)	%	0.7	%	(10.2)	%	INCOME (LOSS) FROM CONTINUING OPERATIONS	2.6	%	(1.6)	%		1.3	%	(7.3)	%

3437

Three Months Ended ~~June~~September 30, 2020 Compared To Three Months Ended ~~June~~September 30, 2019

Patient Revenues

Patient revenues were ~~$118.2~~$118.0 million and ~~$118.0~~$118.6 million for the three months ended ~~June~~September 30, 2020 and 2019, respectively, ~~an increase~~a decrease of ~~$0.2~~$0.6 million.

Our Medicaid, Medicare and Managed Care rates for the ~~second~~third quarter of 2020 increased ~~1.4%~~2.8%, ~~9.0%~~10.8% and ~~8.7%~~10.6%, respectively, resulting in a revenue increase of ~~$0.8~~$1.5 million, ~~$1.7~~$1.9 million and ~~$0.7~~$0.9 million, respectively. Our Medicaid, Private, ~~and~~ Managed Care and Hospice average daily census for the ~~second~~third quarter of 2020 decreased ~~9.6%~~18.4%, ~~13.4%~~16.7%, 4.8% and ~~13.4%~~5.5%, respectively, resulting in lost revenue of ~~$6.1~~$12.0 million, ~~$1.1~~$1.4 million, $0.4 million and ~~$1.3~~$0.5 million, respectively. Our Medicare census for the third quarter of 2020 increased 13.2% resulting in increased revenue of $2.8 million. The decline in census for the ~~second~~third quarter of 2020 was mainly due to the impact of the COVID-19 pandemic. We ~~received $3.7~~recognized $6.6 million ~~and $0.5 million of~~ Medicaid ~~and Hospice, respectively,~~ state stimulus funds during the ~~second~~third quarter of 2020. Additionally, the suspension of sequestration ~~during~~for the ~~second~~third quarter of 2020 resulted in an increase in revenue of ~~$0.3~~$0.7 million. ~~The QIPP resulted in $1.0 million in additional revenues for the second quarter of 2020 compared to the second quarter of 2019.~~

The following table summarizes key revenue and census statistics for continuing operations for each period:


		Three Months Ended June 30,										Three Months Ended September 30,
		2020			2019				2020			2019
Skilled nursing occupancy	Skilled nursing occupancy	71.2		%	77.6		%	Skilled nursing occupancy	66.7		%	77.6		%
As a percent of total census:	As a percent of total census:							As a percent of total census:
Medicare census	Medicare census	10.4		%	9.7		%	Medicare census	11.7		%	8.9		%
Medicaid census	Medicaid census	67.3		%	69.2		%	Medicaid census	66.3		%	69.9		%
Managed Care census	Managed Care census	4.6		%	4.6		%	Managed Care census	4.8		%	4.4		%
As a percent of total revenues:	As a percent of total revenues:							As a percent of total revenues:
Medicare revenues	Medicare revenues	19.0		%	16.6		%	Medicare revenues	20.7		%	16.2		%
Medicaid revenues	Medicaid revenues	45.8		%	45.6		%	Medicaid revenues	47.3		%	48.2		%
Managed Care revenues	Managed Care revenues	10.4		%	11.1		%	Managed Care revenues	10.1		%	9.9		%
*Average rate per day:	*Average rate per day:							*Average rate per day:
Medicare	Medicare	$	495.34		$	454.42		Medicare	$	503.75		$	454.52
Medicaid	Medicaid	$	181.52		$	179.04		Medicaid	$	183.27		$	178.35
Managed Care	Managed Care	$	423.54		$	389.58		Managed Care	$	430.88		$	389.69

*Excludes COVID-19 stimulus payments
*Excludes COVID-19 federal and state stimulus payments								*Excludes COVID-19 federal and state stimulus payments

Other Operating Income

During the ~~second quarter of~~nine month period ended September 30, 2020, we received ~~$31.2~~$42.3 million of ~~Medicare stimulus funds~~provider relief from the PHSSEF. We recognized ~~$5.1~~$9.6 million of the funds during the ~~second~~third quarter of 2020, which is classified as "Other Operating Income" in the Company's results of operations for the three month period ended ~~June~~September 30, 2020. The Medicare stimulus funds that we recognized during the quarter were used to offset healthcare-related expenses and lost revenues attributable to COVID-19. Increased healthcare related expenses included but were not limited to increased wages and increased costs for personal protective equipment, testing and other supplies.

Operating Expense

Operating expense increased in the ~~second~~third quarter of 2020 to ~~$95.8~~$98.7 million from ~~$94.7~~$95.6 million in the ~~second~~third quarter of 2019, an increase of ~~$1.1~~$3.1 million. Operating expense increased as a percentage of patient revenues to ~~81.0%~~83.7% for the ~~second~~third quarter of 2020 as compared to ~~80.2%~~80.6% for the ~~second~~third quarter of 2019.

The primary driver for the increase in operating expense was COVID-19 related expenses of ~~$3.7~~$12.7 million. COVID-19 expenses included increased wages and increased cost for personal protective equipment, testing, food and certain other supplies.

Excluding COVID-19, we benefited from our cost saving initiatives including decreased wages of ~~$55.9~~$5.4 million to $52.8 million in the ~~second~~third quarter of 2020, compared to ~~$56.6~~$58.2 million in the ~~second~~third quarter of 2019. Additionally, our ~~health insurance,~~ nursing and ancillary and ~~maintenance~~health insurance costs decreased by ~~$0.5 million, $1.3~~$1.8 million and ~~$0.3~~$1.4 million, respectively.

3538

Lease Expense

Lease expense in the ~~second~~third quarter of 2020 increased to $13.5 million as compared to ~~$13.1~~$13.3 million in the ~~second~~third quarter of 2019, an increase of ~~$0.4~~$0.2 million. The increase in lease expense was due to rent increases resulting from the amendment to the Lease with Omega Healthcare Investors in conjunction with the Kentucky Exit.

Professional Liability

Professional liability expense was ~~$2.1~~$2.2 million and ~~$1.6~~$1.7 million in the ~~second~~third quarters of 2020 and 2019, respectively. Our cash expenditures for professional liability costs, including those relative to claims for the centers that we formerly operated in the State of Kentucky, were $1.8 million and $1.9 million for the ~~second~~third quarters of 2020 and 2019, respectively. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies, premiums and cash expenditures are incurred to defend and settle existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

~~Government Settlement Expense~~

In June 2019, the Company and the U.S. Department of Justice reached an agreement in principle on the financial terms of a settlement regarding a civil investigation demand. In anticipation of the execution of final agreements and payment of a settlement amount of $9.5 million, the Company recorded an additional contingent liability related to the DOJ investigation of $3.1 million during the three months ended June 30, 2019 to increase previously estimated and recorded liability relative to this investigation.

General and Administrative Expense

General and administrative expense was ~~$6.9~~$6.5 million for the ~~second~~third quarter of 2020 compared to ~~$7.2~~$6.9 million for the ~~second~~third quarter of 2019, a decrease of ~~$0.3~~$0.4 million or ~~3.8%~~6.0%. The decrease in general and administrative expenses was mainly attributable to a decrease in travel expenses and legal fees of ~~$0.4 million.~~$0.2 and $0.1 million, respectively.

Depreciation and Amortization

Depreciation and amortization expense ~~remained consistent at~~decreased to $2.1 million for the third quarter of 2020 compared to $2.3 ~~million and $2.2~~ million in the ~~second quarters~~third quarter of ~~2020 and 2019, respectively.~~2019.

Interest Expense, Net

Interest expense was $1.2 million in the ~~second~~third quarter of 2020 and ~~$1.5~~$1.6 million in the ~~second~~third quarter of 2019. The decrease of ~~$0.3~~$0.4 million was due to a decrease in the outstanding borrowings on our loan facilities.

Income Tax ~~Expense~~Benefit (Provision)

The Company recorded income tax ~~expense~~provision for continuing operations of $0.2 million and ~~$17.3~~income tax benefit of $0.7 million during the ~~second~~third quarters of 2020 and 2019, respectively. ~~The decrease in income tax expense was related to a valuation allowance recorded against our deferred tax assets in the second quarter of 2019.~~

Income ~~(loss)~~ from Continuing Operations before Income Taxes; ~~Income (loss)~~Loss from Continuing Operations per Common Share

As a result of the above, continuing operations reported income of ~~$2.0~~$3.4 million before income taxes for the ~~second~~third quarter of 2020 as compared to a loss of ~~$5.3~~$2.7 million for the ~~second~~third quarter of 2019. Both basic and diluted income per common share from continuing operations were ~~$0.28~~$0.48 for the ~~second~~third quarter of 2020 as compared to both basic and diluted loss per common share from continuing operations of ~~$3.49~~$0.30 in the ~~second~~third quarter of 2019.

COVID-19 Impact on Continuing Operations

3639

~~Six~~Nine Months Ended ~~June~~September 30, 2020 Compared To ~~Six~~Nine Months Ended ~~June~~September 30, 2019

Patient Revenues

Patient revenues were ~~$238.2~~$356.2 million and ~~$235.5~~$354.1 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively, an increase of ~~$2.7~~$2.1 million.

Our Medicaid, Medicare and Managed Care rate for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~1.2%~~1.7%, ~~8.2%~~9.2% and ~~3.9%~~6.0%, respectively, resulting in a revenue increase of ~~$1.5~~$3.0 million, ~~$3.3~~$5.1 million and ~~$0.7~~$1.6 million, respectively. Our Hospice average daily census for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~15.2%~~7.9% resulting in ~~$2.3~~$1.9 million in additional revenue. Conversely, our Medicaid, ~~Medicare,~~ Private, ~~and~~ Managed Care and Veterans average daily census for the ~~six~~nine months ended ~~June~~September 30, 2020 decreased ~~5.6%~~10.0%, ~~6.0%~~14.2%, ~~13.1%~~8.2%, and ~~9.7%,~~40.5% respectively, resulting in revenue losses of ~~$7.1~~$19.1 million, ~~$2.7~~$3.6 million, ~~$2.2~~$2.4 million, and ~~$1.9~~$0.7 million, respectively. The decline in census for the ~~six~~nine months ended ~~June~~September 30, 2020 was mainly due to the impact of the COVID-19 pandemic. The QIPP resulted in ~~$2.5~~$2.7 million of additional revenues for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to the ~~six~~nine months ended ~~June~~September 30, 2019. An additional day of revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to the ~~six~~nine months ended ~~June~~September 30, 2019 resulted in ~~$1.3~~$1.2 million in additional revenue. We ~~received $4.6 million and $0.5~~recognized $11.7 million in Medicaid and Hospice state stimulus funds, ~~respectively,~~collectively, during the ~~six~~nine months ended ~~June~~September 30, 2020. Additionally, the suspension of sequestration ~~during the second quarter of 2020~~ resulted in an increase in revenue of ~~$0.3 million.~~$1.0 million for the nine months ended September 30, 2020.

The following table summarizes key revenue and census statistics for continuing operations for each period:


		Six Months Ended June 30,										Nine Months Ended September 30,
		2020			2019				2020			2019
Skilled nursing occupancy	Skilled nursing occupancy	73.8		%	77.6		%	Skilled nursing occupancy	71.6		%	77.6		%
As a percent of total census:	As a percent of total census:							As a percent of total census:
Medicare census	Medicare census	9.7		%	9.9		%	Medicare census	10.3		%	9.5		%
Medicaid census	Medicaid census	67.8		%	68.9		%	Medicaid census	67.3		%	68.8		%
Managed Care census	Managed Care census	4.7		%	4.7		%	Managed Care census	4.7		%	4.7		%
As a percent of total revenues:	As a percent of total revenues:							As a percent of total revenues:
Medicare revenues	Medicare revenues	18.1		%	17.0		%	Medicare revenues	18.9		%	16.7		%
Medicaid revenues	Medicaid revenues	45.5		%	45.7		%	Medicaid revenues	46.1		%	46.5		%
Managed Care revenues	Managed Care revenues	10.5		%	11.1		%	Managed Care revenues	10.4		%	10.7		%
*Average rate per day:	*Average rate per day:							*Average rate per day:
Medicare	Medicare	$	491.34		$	454.02		Medicare	$	495.74		$	454.18
Medicaid	Medicaid	$	181.41		$	179.20		Medicaid	$	181.99		$	178.91
Managed Care	Managed Care	$	406.63		$	391.34		Managed Care	$	414.42		$	390.83

*Excludes COVID-19 stimulus payments	*Excludes COVID-19 stimulus payments							*Excludes COVID-19 stimulus payments

Other Operating Income

During the ~~six~~nine months ended ~~June~~September 30, 2020, we received ~~$31.2~~$42.3 million of Medicare stimulus funds from PHSSEF. We ~~recognized $5.1~~recognized $14.7 million of the funds during the ~~six~~nine months ended ~~June~~September 30, 2020, which is classified as "Other Operating Income" in the Company's results of operations for the ~~six~~nine month period ended ~~June~~September 30, 2020. The Medicare stimulus funds that we recognized during the ~~quarter~~nine months ended September 30, 2020 were used to offset increased healthcare-related expenses and lost revenues attributable to COVID-19. Increased healthcare-related expenses included but were not limited to increased wages and increased costs for personal protective equipment and other supplies.

Operating Expense

Operating expense increased in the ~~six~~nine months ended ~~June~~September 30, 2020 to ~~$190.6~~$289.3 million from ~~$189.1~~$284.6 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$1.5~~$4.7 million. Operating expense ~~decreased~~increased as a percentage of patient revenue to ~~80.0%~~81.2% for the ~~six~~nine months ended ~~June~~September 30, 2020 as compared to ~~80.3%~~80.4% for the ~~six~~nine months ended ~~June~~September 30, ~~2019.~~2020.

The primary driver for the increase in operating expense was COVID-19 related expenses of ~~$4.2 million.~~$17.0 million for the nine months ended September 30, 2020. COVID-19 expenses included increased wages and increased cost for personal protective equipment, food and certain other supplies.

3740

Excluding COVID-19, we benefited from our cost saving initiatives, including decreased wages of ~~$112.7~~$5.7 million to $165.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$113.2~~$171.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Additionally, our health insurance and nursing and ancillary costs decreased by ~~$0.4~~$1.9 million and ~~$2.1~~$3.9 million, respectively.

Lease Expense

Lease expense for the ~~six~~nine months ended ~~June~~September 30, 2020 increased to ~~$27.0~~$40.6 million as compared to ~~$26.2~~$39.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in lease expense was due to rent increases resulting from the amendment to the Lease with Omega Healthcare Investors in conjunction with the Kentucky Exit.

Professional Liability

Professional liability expense was ~~$4.0~~$6.2 million and ~~$3.4~~$5.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. Our cash expenditures for professional liability costs, including those relative to claims for the centers that we ~~formely~~formerly operated in the State of Kentucky, were ~~$3.6~~$5.1 million and ~~$3.6~~$5.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies, premiums and cash expenditures are incurred to defend and settle existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

Government Settlement Expense

In June 2019, the Company and the U.S. Department of Justice reached an agreement in principle on the financial terms of a settlement regarding a civil investigation demand. In anticipation of the execution of final agreements and payment of a settlement amount of $9.5 million, the Company recorded an additional contingent liability related to the DOJ investigation of $3.1 million during the ~~six~~nine months ended ~~June~~September 30, 2019 to increase previously estimated and recorded liability relative to this investigation.

General and Administrative Expense

General and administrative expense was ~~$13.6~~$20.1 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$14.4~~$21.3 million for the ~~six~~nine months ended ~~June~~September 30, 2019, a decrease of ~~$0.8~~$1.2 million or ~~5.1%~~5.4%. The decrease in general and administrative expenses was mainly attributable to a decrease in legal fees of ~~$0.9~~$1.0 million.

Depreciation and Amortization

Depreciation and amortization expense remained consistent at ~~$4.6~~$6.7 million and ~~$4.5~~$6.8 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

Interest Expense, Net

Interest expense was ~~$2.7~~$3.8 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~$2.9~~$4.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease of ~~$0.2~~$0.6 million was due to a decrease in the outstanding borrowings on our loan facilities.

Income Tax Expense

The Company recorded income tax expense for continuing operations of ~~$0.1~~$0.3 million and ~~$16.3~~$15.5 million during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The decrease in income tax expense was related to a valuation allowance recorded against our deferred tax assets during the ~~six~~nine months ended ~~June~~September 30, 2019.

Income ~~(loss)~~ from Continuing Operations before Income Taxes; ~~Income (loss)~~Loss from Continuing Operations per Common Share

As a result of the above, continuing operations reported income of ~~$1.4~~$4.8 million before income taxes for the ~~six~~nine months ended ~~June~~September 30, 2020 as compared to a loss of ~~$7.9~~$10.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019. ~~Both basic~~Basic income per common share from continuing operations were $0.68 and diluted income per common share from continuing operations were ~~$0.21~~$0.67 for the ~~six~~nine months ended ~~June~~September 30, 2020 as compared to both basic and diluted loss per common share from continuing operations of ~~$3.75~~$4.04 for the ~~six~~nine months ended ~~June~~September 30, 2019.

COVID-19 Impact on Continuing Operations

Since the ~~six~~nine months ended ~~June~~September 30, 2020, there have been additional cases of COVID-19 at certain of our centers. The Company has continued to experience reduced occupancy and increased operating expenses at its centers in the form of increased wages and increased cost for personal protective equipment, food and certain other supplies. The Company expects such increased expenses to continue and likely increase further during the remainder of 2020.

3841

Liquidity and Capital Resources

COVID-19 Impact on Liquidity

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. While the Company incurred significant disruptions during the ~~six~~nine months ended ~~June~~September 30, 2020 from the COVID-19 pandemic, it is unable to fully predict the impact that the COVID-19 pandemic will have on its liquidity, financial condition and results of operations due to numerous uncertainties. As a result of the COVID-19 pandemic, we have recognized less revenue and increased operating expenses, but we have received additional stimulus funds through the CARES Act, PPPHCE Act, and the Families First Coronavirus Response Act during the ~~second quarter of~~nine months ended September 30, 2020, which have been used and are expected to continue to be used to mitigate the impact of the reduced revenues and increased operating expenses, and any cash flow or liquidity impacts therefrom. The increased operating expenses include increased wages and the increased cost of personal protective equipment, infection control supplies, food and dietary supplies. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements.

Liquidity

Our primary sources of liquidity are the net cash flow provided by the operating activities of our centers and draws on our revolving credit facility. We believe that these internally generated cash flows will be adequate to service existing debt obligations and fund required capital expenditures for twelve months after the date of issuance of these interim financial statements. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long-term. Options for our use of cash include, but are not limited to, capital improvements, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.

Net cash provided by operating activities of continuing operations totaled ~~$43.7~~$47.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to net cash provided by operating activities of continuing operations of ~~$2.0~~$8.7 million in the same period of 2019. The primary drivers of the increase in net cash provided by operating activities were income from continuing operations and federal stimulus of ~~$31.2~~$42.3 million that was received for the ~~six~~nine months ended ~~June~~September 30, 2020 through the CARES Act and PPPHCE. ~~These~~As of September 30, 2020 the Company had $27.2 million remaining funds.These funds are required to be used to offset lost revenue and increased expenses that both result from the COVID-19 pandemic. Such increased expenses include but are not limited to increased wages and increased costs for personal protective equipment and other supplies. An increase in ~~the collections of~~trade accounts ~~receivable~~payable and accrued expenses partially due to additional COVID-19 expenses incurred also contributed to the increase in cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~June~~September 30, 2019.

Our cash expenditures related to professional liability claims of continuing operations were ~~$3.6~~$5.1 million and ~~$3.6~~$5.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our inability to meet all of our cash needs as they become due.

Investing activities of continuing operations used cash of ~~$2.8~~$4.0 million and ~~$2.3~~$3.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The cash used for investing activities represents capital expenditures for improvements to our centers and purchases of clinical equipment.

Financing activities of continuing operations used cash of ~~$13.9~~$14.5 million and provided cash of ~~$3.6~~$1.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020, we used cash to repay ~~$14.2~~$14.6 million net of outstanding borrowings on our loan facilities. In part, the Company utilized stimulus funds to assist with managing working capital and to temporarily pay down the outstanding borrowings on our loan facilities. The Company will use the availability under our credit facilities as needed to assist with the payment of increased expenses and to offset the lost revenue due to the COVID-19 pandemic.

Professional Liability

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company's nursing centers in Alabama, Ohio, and Texas, as well as those previously operated by the Company in Kentucky. The insurance coverage provided for these

centers under the SHC policy provides coverage limits of at least ~~$1,000~~$1.0 million per medical incident with a sublimit per center of ~~$3,000~~$3.0 million and total annual aggregate policy limits of ~~$5,000.~~$5.0 million. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.

As of ~~June~~September 30, 2020, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of ~~$26.1~~$25.6 million. Our calculation of this estimated liability is based on the Company's best estimate of the likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of ~~June~~September 30, 2020, we had ~~$60.8~~$60.1 million of outstanding long-term debt and finance lease obligations. The ~~$60.8~~$60.1 million total includes ~~$0.7~~$0.6 million in finance lease obligations. The balance of the long-term debt is comprised of ~~$60.1~~$59.6 million owed on our mortgage loan, which includes ~~$48.7~~$48.2 million on the term loan facility and $11.4 million on the acquisition loan facility.

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $80.0 million mortgage loan subsequently amended ("Amended Mortgage Loan") and a $52.3 million revolver subsequently amended ("Amended Revolver"). The Amended Mortgage Loan and Amended Revolver both have a five-year maturity through September 30, 2021. The Amended Mortgage Loan consists of $67.5 million term and $12.5 million acquisition loan facilities. The Amended Mortgage Loan requires monthly principal and interest payments based on a 25-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30.0 million. The Amended Mortgage Loan balance was ~~$60.1~~$59.6 million as of ~~June~~September 30, 2020, consisting of ~~$48.7~~$48.2 million on the term loan facility with an interest rate of 4.50% and $11.4 million on the acquisition loan facility with an interest rate of 5.25%. The Amended Mortgage Loan is secured by fifteen owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

In connection with the sale of the Kentucky Properties, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver effective December 1, 2018. The Sixth Amendment decreased the Amended Revolver capacity from $52.3 million to $42.3 million and also placed a $2.1 million reserve against the acquisition loan facility,thereby reducing the maximum borrowing capacity of that facility to $10.4 million. The Company also applied $4.9 million of net proceeds from the sale of the Kentucky Properties to the outstanding borrowings under the Amended Revolver.

Effective April ~~3,2020,~~3, 2020, the Company entered into a Seventh Amendment ("Seventh Amendment") to amend the Amended Mortgage Loan, a Ninth Amendment ("Ninth Amendment") to amend the Amended Revolver and a Second Amendment ("Second Amendment") to the affiliated revolver. The Seventh Amendment removed the reserve of $2.1 million on the acquisition loan availability, thereby increasing our borrowing capacity of that facility from $10.4 million to $12.5 million as of June 30, 2020. The Ninth Amendment and Second Amendment increases the eligible days of qualifying accounts receivable from 120 days to 150 days for the purpose of calculating our borrowing capacity on the revolvers. The new LIBOR base rate was set at 0.5%.

The Company is participating in the Texas Quality Incentive Payment Program ("QIPP"). Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of three of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of four of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by $2.0 million. At the same time, the operators of these four facilities entered into a separate revolving loan (the "affiliated revolver") with the same syndicate of banks to provide for the temporary working capital requirements of the four QIPP centers. The affiliated revolver, which is guaranteed by the Company, had an initial capacity of $5.0 million, which amount was reduced by $1.0 million on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 11, "Business Development and Other Significant Transactions." As of ~~June~~September 30, 2020, the Company had no outstanding borrowings under the affiliated revolver. The interest rate related to the affiliated revolver was 5.75% as of ~~June~~September 30, 2020. The balance available for borrowing under the affiliated revolver was ~~$1.0~~$0.9 million at ~~June~~September 30, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of September 30, 2021. ~~The~~Subsequent to

the third quarter of 2020, the Company ~~is in the process of refinancing the loan facilities with terms substantially similiar~~refinanced its debt facilities. Refer to Note 14, "Subsequent Events" to the ~~existing agreements and to extend the maturity date. The Company expects to have the refinancing completed by quarter ended September 30, 2020.~~interim consolidated financial statements included in this report for additional information.

As of ~~June~~September 30, 2020, the Company had no outstanding borrowings under the Amended Revolver compared to $15.0 million outstanding borrowings as of December 31, 2019. The interest rate related to the Amended Revolver was 5.75% as of ~~June~~September 30, 2020. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has four letters

of credit with a total value of $12.1 million outstanding as of ~~June~~September 30, 2020. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of ~~$27.7~~$28.1 million, the balance available for borrowing under the Amended Revolver and affiliated revolver was ~~$15.6~~$15.9 million at ~~June~~September 30, 2020.

Subsequent to the third quarter of 2020, the Company refinanced its Amended Mortgage Loan, Amended Revolver, and affiliated revolver. Refer to Note 14, "Subsequent Events."

Our lending agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. We are in compliance with all such covenants at ~~June~~September 30, 2020.

Our calculated compliance with financial covenants is presented below:


	Requirement	Level at ~~June~~September 30, 2020
Credit Facility:
Minimum fixed charge coverage ratio	~~1.01:~~1.05:1.00	~~1.14:~~1.22:1.00
Minimum adjusted EBITDA	$~~6.5~~9.75 million	$~~9.9~~18.4 million
~~Current ratio (as defined in agreement)~~	~~1.00:1.00~~	~~1.13:1.00~~
Affiliated Revolver:
~~Minimum fixed charge coverage ratio~~	~~1.00:1.00~~	~~1.79:1.00~~
Minimum adjusted EBITDA	$0.8 million	$~~1.4~~1.7 million
Mortgaged Centers:
EBITDAR	$10.0 million	$~~14.6~~14.1 million

As part of our debt agreements, we have an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings. Subsequent to the third quarter of 2020, the Company terminated its interest rate swap.

In connection with the Company's debt refinancing, the Company terminated its interest rate swap subsequent to the third quarter of 2020. Refer to Note 14, "Subsequent Events."

Off-Balance Sheet Arrangements

We have four letters of credit outstanding with an aggregate value of approximately $12.1 million as of ~~June~~September 30, 2020. The letters of credit serve as a security deposits for certain center leases. These letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

Exchange Listing

As previously disclosed, on June 19, 2019, the Company received written notification from Nasdaq stating that the Company’s Common Stock was subject to delisting from Nasdaq, pending the Company’s opportunity to request a hearing before the Nasdaq Hearings Panel. The Company appealed the Notification on August 22, 2019. On August 27, 2019, the Company was notified by the Panel that it denied the Company’s appeal and determined to delist the Company’s Common Stock from the Nasdaq Capital Market. Accordingly, the trading of the Company’s Common Stock was suspended on the Nasdaq Capital Market at the opening of business on August 29, 2019 and the Company's Common stock began trading on the OTCQX under the trading symbol "DVCR." On October 11, 2019 Nasdaq filed a Form 25 with the Securities & Exchange Commission to effect the formal delisting of the Company’s common stock from the Nasdaq Capital Market, which became effective October 21, 2019. The Form 25 filing did not cause the removal of any shares of the Company’s common stock from registration under the Exchange Act. The Company remains subject to the periodic reporting requirements of the Exchange Act. Delisting from Nasdaq may adversely affect our ability to raise additional financing through the public or private sale of equity securities.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our interim consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and similar words indicating possible future expectations, events or actions. In addition to any

assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to:

•the potential adverse effect of the COVID-19 pandemic on the economy, our patients and residents and supply chain, including, changes in the occupancy of our centers, increased operation costs in addressing COVID-19, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its patients served,

•the duration and severity of the COVID-19 pandemic and the extent and severity of the impact on the Company's patients and residents,

•actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting our centers,

•the impact of the CARES Act, the PPPHCE Act and any other COVID-19 relief aid adopted by governments or the implementation or modifications to such acts, including any obligation of the Company to repay any stimulus payments received under such relief aid,

•perceptions regarding the safety of senior living communities during and after the pandemic, changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet the demand, changes in the acuity levels of our new residents, the disproportionate impact of COVID-19 on seniors generally and those residing in our communities,

•increased regulatory requirements, including unfunded mandatory testing, increased and enforcement actions resulting from COVID-19, including those that may limit our collection efforts for delinquent accounts and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts,

•our ability to successfully integrate the operations of new nursing centers, as well as successfully operate all of our centers,

•our ability to increase census at our centers and occupancy rates at our centers,

•changes in governmental reimbursement, including the new Patient-Driven Payment Model that was implemented in October of 2019,

•government regulation,

•the impact of the Affordable Care Act, efforts to repeal or further modify the Affordable Care Act, and other health care reform initiatives,

•any increases in the cost of borrowing under our credit agreements,

•our ability to comply with covenants contained in those credit agreements,

•our ability to comply with the terms of our master lease agreements,

•our ability to renew or extend our leases at or prior to the end of the existing lease terms,

•the outcome of professional liability lawsuits and claims,

•our ability to control ultimate professional liability costs,

•the accuracy of our estimate of our anticipated professional liability expense,

•the impact of future licensing surveys,

•our ability to comply with the terms of our Corporate Integrity Agreement,

•the outcome of proceedings alleging violations of state or Federal False Claims Acts,

•laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors,

•the costs of investing in our business initiatives and development,

•our ability to control costs,

•our ability to attract and retain qualified healthcare professionals,

•changes to our valuation of deferred tax assets,

•changing economic and competitive conditions,

•changes in anticipated revenue and cost growth,

•changes in the anticipated results of operations,

•the effect of changes in accounting policies as well as others.

Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019 and in "Part II. Item 1A. Risk Factors" below, for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of ~~June~~September 30, 2020, we had outstanding borrowings of approximately ~~$60.1~~$59.6 million, ~~$33.8~~$33.5 million of which was subject to variable interest rates. In connection with our February 2016 financing agreement, we entered into an interest rate swap with an initial notional amount of $30.0 million to mitigate the floating interest rate risk of a portion of such borrowing. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.3 million annually, representing the impact of increased or decreased interest expense on variable rate debt.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of ~~June~~September 30, 2020. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is properly recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission’s rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

Based on an evaluation of the effectiveness of the design and operation of disclosure controls and procedures, our chief executive officer and chief financial officer concluded that, as of ~~June~~September 30, 2020, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

We implemented certain changes to our accounting processes and control activities related to the COVID-19 pandemic, specifically for identifying, capturing and recording all COVID-19 expenses, calculating lost revenue and recognizing stimulus revenue and other operating income. We continue to assess the potential impact of COVID-19 to our control environment and make changes as necessary.

Other than the items described above, there have been no changes to our internal control over financial reporting during the quarter ended ~~June~~September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facilities. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of ~~June~~September 30, 2020, we are engaged in 9482 professional liability lawsuits. ~~Twenty-six~~Twenty-two lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January 1, 2010 through December 31, 2015. This agreement requires material annual payments for a period of five years ending in February 2025 and also requires a contingent payment in the event the Company sells any of its owned facilities during the five year payment period. Failure to make timely any of these payments could result in rescission of the settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

In conjunction with the settlement of the government investigation related to our therapy practices, we entered into ~~the CIA~~a corporate integrity agreement (the "CIA") with the Office of the Inspector General of CMS. The CIA has a term of five years and imposes material burdens on the Company, its officers and directors to take actions designed to insure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the CIA.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The Company answered the original complaint in 2009, and there was no other activity in the case until May 2017. At that time, plaintiff filed an amended complaint asserting new causes of action. The amended complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over a multi-year period by failing to meet minimum staffing requirements, failing to otherwise adequately staff the Center and failing to provide a clean and safe living environment in the Center. The Company filed an answer to the amended complaint denying plaintiffs’ allegations and asked the Court to dismiss the new causes of action asserted in the amended complaint because the Company was prejudiced by plaintiff’s long delay in filing the amended complaint. The Court has not yet ruled on the motion to dismiss, so the lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of these lawsuits, any of our professional liability actions, any regulatory action, or any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act law could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem

to be not material also may materially and adversely affect our business, financial condition and/or operating results. We are

including the following revised risk factors, which update and supersede the corresponding risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, and adding new risk factors, both which should be read in conjunction with our description of risk factors in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019:

Disasters and similar events may seriously harm our business.

Natural and man-made disasters, pandemics or epidemics, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes and wildfires, may cause damage or disruption to us, our employees and our centers, which could have an adverse impact on our patients and our business. Our affiliated facilities in Kansas, Missouri, Mississippi, Florida, Alabama and Texas may be more susceptible to damage caused by natural disasters including hurricanes, tornadoes and flooding. 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 centers, and the availability of employees to provide services at our centers. If the delivery of goods or the ability of employees to reach our centers were interrupted in any material respect due to a natural disaster, pandemic or other reasons, it would have a significant impact on our centers and 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 centers, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters, pandemics and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our centers, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

The COVID-19 outbreak has disrupted many aspects of the economy and our industry and it is unclear what the ultimate impact on our business will be. Federal, state and local governments and health departments have taken a number of unprecedented actions as precautionary measures to avoid the spread of COVID-19 and may take additional steps. Governments have implemented social distancing measurements which have caused, and may continue to cause patients to postpone or refuse necessary care in an attempt to avoid possible exposure to COVID-19. Restrictions or limitations on admissions to our centers may have a negative impact on us. Although social contact restrictions have eased across the U.S., some restrictions remain in place, and some states are re-imposing these restrictions due to increasing rates of COVID-19 cases. Measures we are taking to limit the spread of the virus include implementing screening protocols for staff, residents, and visitors. CMS has announced that it will begin requiring nursing homes in states with positive testing rates above a certain threshold to test all staff on a weekly basis.

Although we are implementing considerable safety measures, caring for COVID-19 patients has associated risks. In addition, we have experienced reduced occupancy in our centers, in part due to perceived risks by patients and family members of residential care and their perception of restrictions such as limited visitation policies, a reduction in patients released to nursing homes from hospitals and other healthcare facilities, and a general reluctance to seek medical care or interface with the healthcare system during the pandemic or for an undetermined period of time. Occupancy may also be affected by the data each nursing home is required to report, including the number of confirmed and suspected cases of COVID-19 and resident deaths related to COVID-19, which is made publicly available through the CDC National Healthcare Safety Network.

We have incurred, and may continue to incur, increased expenses arising from the COVID-19 pandemic. Residents in our centers that have tested positive for COVID-19 have caused an increase in the costs of caring for the residents in that center and may also cause a reduced occupancy at those centers. We have also incurred additional expenditures preparing our centers for potential outbreaks and providing care to our residents during required or recommended periods of isolation. In addition, we may experience supply chain disruptions, including delays and price increases in equipment, pharmaceuticals, and medical supplies. Staffing, equipment, and pharmaceutical and medical supplies shortages may impact our ability to admit and treat patients. The COVID-19 outbreak has caused our centers and our management to spend considerable time planning, which diverts their attention from other business concerns. 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:

•duration and severity of the spread of COVID-19 in our core markets and among our patients and staff;

•effectiveness of measures we are taking to respond to COVID-19;

•increases in patients and/or staff infected by COVID-19 who reside or work at our centers and the resulting impact on occupancy and new admissions;

•significantly reduced occupancy as a result of local government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocol within the healthcare system across the United States, including cancelled or rescheduled elective procedures at referring hospitals in our markets and the resulting impact to the volume of new admissions to our centers;

•governmental and administrative regulations as well as the nature and adequacy of financial relief and other forms of support for our industry;

•the timing and impact of termination of state or federal financial relief measures or the inability of states to continue to make payments to our centers for state funded services;

•disruptions to operations due to shortages in center-based staffing needs;

•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;~~expenditures including additional protocols implemented in connection with CDC and related isolation procedures, including obligations to test patients and staff for COVID-19;

•increases in workers' compensation expense, insurance premiums and potential lawsuits against the Company by patients or their families as a result of COVID-19 in our centers; and

•Significant disruption of the global financial markets, which could have a negative impact on our ability to access capital in the future.

We are continuing to evaluate and consider the potential impact of the COVID-19 outbreak, which could result in these or other negative outcomes and adversely impact our business, operating results and financial condition. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. There can be no assurances that COVID-19 or another pandemic, epidemic or outbreak of a contagious illness, will not have a material and adverse impact on our business, operating results and financial condition in the future.

There is a high degree of uncertainty regarding the implementation and impact of the CARES Act, the PPPHCE Act, and future stimulus or relief legislation, if any. There can be no assurance as to the total amount of financial assistance or types of assistance we will receive or retain, that we will be able to benefit from provisions intended to increase access to resources and ease regulatory burdens for healthcare providers or that additional stimulus legislation will be enacted.

The CARES Act is a $2 trillion economic stimulus package signed into law on March 27, 2020, in response to the COVID-19 pandemic. In an effort to stabilize the U.S. economy, the CARES Act provides for cash payments to individuals and loans and grants to small businesses, among other measures. The PPPHCE Act, an expansion of the CARES Act that includes additional emergency appropriations, was signed into law on April 24, 2020. Together, the CARES Act and the PPPHCE Act ~~authorize$175~~authorize $175 billion in funding to be distributed to hospitals and other healthcare providers through the PHSSEF. These funds are intended to reimburse eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers and suppliers, for healthcare-related expenses or lost revenues attributable to COVID-19. ~~Recipients are not required to repay these funds to~~As long as the ~~government, provided that they attest to~~recipient has sufficient COVID-19 attributable expenses and ~~comply~~lost revenues between January 1, 2020 and June 30, 2021 and complies with certain terms and conditions, PHSSEF payments are not required to be repaid. The terms and conditions including, among other things, complying with reporting requirements, limitations on balance billing and ~~not~~restrictions against using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse. HHS initially allocated $50 billion of the provider relief funding for general distribution to Medicare providers impacted by COVID-19, to be distributed proportional to providers' share of 2018 net patient revenue. HHS ~~expects~~is currently working to distribute $15 billion to eligible Medicaid, CHIP, dental and ~~CHIP~~assisted living providers that have not received a payment from the general distribution allocation. Recently, HHS announced a new "Phase 3" $20 billion General Distribution for all previously eligible applicants, behavioral health providers and certain new providers that began operations in 2020. In addition to the general distributions, HHS allocated $4.9 billion in targeted distribution funding to skilled nursing facilities, with a fixed $50,000 distribution for each skilled nursing facility and variable distributions based on number of beds, and an additional $5 billion to be distributed to nursing homes that complete training focused on infection control and best practices. HHS ~~is making~~made other targeted distributions for providers in areas particularly impacted by COVID-19, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for treatment of uninsured Americans, among others. A portion of the available funding is being distributed to reimburse health care providers that submit claims requests for COVID-19 related testing and treatment of uninsured patients at Medicare rates.

The CARES Act also ~~makes~~made available or expanded other forms of financial assistance ~~available to~~for healthcare providers, including through Medicare and Medicaid payments adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which makes available accelerated payments of Medicare funds in order to increase cash flow to providers. ~~Currently,~~This program is no longer available and the Company ~~has~~elected not ~~elected~~ to participate in this program. In addition to financial assistance, the CARES Act includes provisions intended to increase access to medical supplies and equipment and ease legal and regulatory burdens on healthcare providers. Many of these measures, such as flexibilities related to the provision of telehealth services and waiver of the requirement for a three-day prior hospitalization for Medicare coverage of a skilled nursing facility

stay, are effective only for the duration of the public health emergency. The CARES Act also includes numerous income tax provisions including changes to the Net Operating Loss rules and business interest expense deduction rules.

During the ~~six~~nine months ended ~~June~~September 30, 2020, we received ~~$31.2~~$42.3 million in payments from the PHSSEF established under the CARES Act and the PPPHCE Act. We are eligible to apply; however, we do not know whether we will ultimately receive additional payment. We are closely tracking our use of the funds received under the CARES Act and the PPPHCE Act in order to demonstrate compliance with the terms and conditions, including applicable reporting requirements. Given uncertainty in HHS reporting requirements, we cannot predict with certainty whether we will have sufficient COVID-19 attributable expenses and lost revenues to retain all of the PPHSSEF funds that we have received. The Company is working to track and document that we appropriately ~~used the~~use all CARES Act and PPHCE funds received, ~~and thus are not required to repay the government,~~ however the Company can offer no assurance that it will be in compliance with all requirements related to retaining or the forgiveness of the payments received under the CARES Act or the PPPHCE Act. If we fail to appropriately comply with all of the terms and conditions or do not have sufficient expenses and lost revenues (as defined by these programs), the Company may be required to repay some or all of these amounts, which could have a material adverse impact.

Due to the recent enactment of the CARES Act, the PPPHCE Act, and other enacted legislation, there is still a high degree of uncertainty surrounding their implementation, and the COVID-19 pandemic continues to evolve. Some of the measures allowing for flexibility in delivery of care and various financial supports for health care providers are available only for the duration of the public health emergency, and it is unclear whether or for how long the public health emergency declaration will be extended. The current declaration expires ~~October 23, 2020.~~January 21, 2021. The HHS Secretary may choose to renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever he determines that the public health emergency no longer exists. The federal government may consider additional stimulus and relief efforts, but we are unable to predict whether additional stimulus measures will be enacted or their impact. There can be no assurance as to the total amount of financial and other types of assistance we will ~~receive~~retain under the CARES Act, the PPPHCE Act, or will receive from future legislation, if any, and it is difficult to predict the impact of such legislation on our operations or how it will affect operations of our competitors. Moreover, we are unable to assess the extent to which anticipated negative impacts on us arising from the COVID-19 pandemic will be covered by amounts or benefits received, and which we may in the future receive, under the CARES Act or PPPHCE Act. There can be no assurance that the terms and conditions of provider relief funding or other relief programs will not change in ways that affect our ability to comply with such terms and conditions in the future, the amount of total stimulus funding we will receive or our eligibility to participate in such stimulus funding. We continue to assess the potential impact of COVID-19 and government responses to the pandemic on our business, results of operations, financial condition and cash flows.

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 growing number of professional liability and employment related claims have been filed or are 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 companies in our industry. 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 they have requested information from us. We intend to cooperate fully with these investigations.

While we deny any wrongdoing and will vigorously defend our self 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.

The high levels of infected COVID-19 patients and deaths at senior living communities and resulting negative publicity may have a long-term significant detrimental impact on the senior living industry, including us, even if our senior living communities do not experience similar levels of COVID-19 infections and deaths as others in the industry.

COVID-19 has proven to be particularly harmful to seniors and persons with other pre-existing health conditions. If the senior living industry continues to experience high levels of residents infected with COVID-19 and related deaths, and news accounts emphasize these experiences, seniors may delay or forgo moving into senior living communities or using other services provided by senior living operators. These trends could be realized across the senior living industry and not discriminate among owners and operators that have higher or lower levels of residents experiencing COVID-19 infections and related deaths. As a result, our senior living communities’ business and our results of operations may experience a long-term significant detrimental impact.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

The following exhibits are filed as part of this report on Form 10-Q.



Exhibit Number						Description of Exhibits
3.1						Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.2						Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006).

3.3						Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.4						Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2007).

3.5						Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company’s Form 8-A filed March 30, 1995 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.6						Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001).

3.7						Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed March 14, 2013).

3.8						Amendment to Certificate of Incorporation dated June 9, 2016 (incorporated by reference to Exhibit 3.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

3.9						Bylaw Second Amendment adopted April 14, 2016.

4.1						Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).


10.1						~~Ninth Amendment to Third~~ Amended ~~and Restated Revolving~~Mortgage Loan and Security Agreement dated ~~April 3,~~October 14, 2020.

10.2						~~Seventh Amendment to Second~~ Amended ~~and Restated Term Loan~~Revolver and Security Agreement dated ~~April 3,~~ October 14, 2020.

10.3						~~Second Amendment to Revolving Loan~~Amended Affiliated Revolver and Security Agreement dated ~~April 3,~~October 14, 2020.

31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32						Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

101.INS						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

4852

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Diversicare Healthcare Services, Inc.

~~August 6,~~November 5, 2020

By:

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

President and Chief Executive Officer, Principal Executive Officer ~~and~~

~~An Officer Duly Authorized to Sign on Behalf of the Registrant~~(duly authorized officer)

By:

/s/ Kerry D. Massey

Kerry D. Massey

Executive Vice President and Chief Financial Officer ~~and~~

~~An Officer Duly Authorized to Sign on Behalf of the Registrant~~(principal financial officer)

4953


As of June 30, 2020
	Operating Leases ^(a)		Finance Leases ^(a)		Total

2020	$	51,388	$	273	$	51,661
2021	52,387		235		52,622
2022	53,395		114		53,509
2023	53,956		46		54,002
2024	54,169		—		54,169
After 2024	173,361		—		173,361
Total lease payments	$	438,656	$	668	$	439,324
Less: Interest	(130,570)		(54)		(130,624)
Present value of lease liabilities	$	308,086	$	614	$	308,700

^(a)Operating and Finance lease payments exclude option to extend lease terms that are not reasonably certain of being exercised.