PACS Group, Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PACS GROUP, INC. AND SUBSIDIARIES INDEX TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS R eport of Independent Registered Public Accounting Firm PCAOB ID No. 42 96 C ombined/Cons olidated Financial Statements C ombined /Consolidated Balance Sheets as of December 31, 2024 and 2023 98 C ombined/Consolidated Statements of Income for the Years Ended December 31, 2024, 2023, and 2022 99 C ombined/Consolidated Statements of S tockholders ’ Equi ty/(Deficit) for the Years Ended December 31, 2024, 2023, and 2022 100 C ombined/Consolidated Statements of Cash Flows for the Years Ended December 31, 2024, 2023, and 2022 101 N otes to Combined/Consolidated Financial Statements 102 95 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of PACS Group, Inc. Opinion on the Financial Statements We have audited the accompanying combined/consolidated balance sheets of PACS Group, Inc. and subsidiaries (the Company) as of December 31, 2024 and 2023, the related combined/consolidated statements of income, stockholders' equity/(deficit) and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “combined/consolidated financial statements”). In our opinion, the combined/consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the combined/consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 96 Table of Contents Professional liability and general liability claims reserve Description of the Matter At December 31, 2024, the Company’s professional liability and general liability claims reserve was $217 million. As further described in Note 18 to the combined/consolidated financial statements, the professional liability and general liability claims reserve includes an estimate of the Company’s liability for professional claims that have been reported as well as claims that have been incurred but not reported. The Company utilizes an external actuary to assist management in estimating the exposure for claims obligations, both asserted and unasserted. Auditing the professional liability and general liability claims reserve is complex and highly judgmental due to the significant estimation required in determining the claims reserve, particularly the assumptions regarding the severity and frequency of claims. The Company develops information relating to the ultimate size of the claims based on historical experience and current industry information which is used in the actuarial analysis. How We Addressed the Matter in Our Audit To test the professional liability and general liability claims reserve, our audit procedures included, among others, obtaining an understanding of the factors considered and assumptions made by management and its external actuary in developing the estimate of the professional liability and general liability claims reserve, including the sources of data relevant to these factors and assumptions. We tested underlying claims data, including the completeness and accuracy of open and settled cases. We reviewed the Company’s insurance contracts to understand the policy terms and verified that the policy terms were factored into the actuarial computations. We also involved our actuaries to assist in evaluating the methodologies and key assumptions used in the actuarial report. We compared the Company’s professional liability and general liability claims reserve to an independent range calculated by our actuaries. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2022. Salt Lake City, Utah November 19, 2025 97 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share and per share values) December 31, 2024 2023 ASSETS Current Assets: Cash and cash equivalents $ 157,674 $ 73,416 Accounts receivable, net 641,775 547,807 Other receivables 74,746 52,259 Prepaid expenses and other current assets 64,066 48,665 Total Current Assets 938,261 722,147 Property and equipment, net 990,580 577,528 Operating lease right-of-use assets 2,994,519 2,007,812 Insurance subsidiary deposits and investments 66,258 — Escrow funds 25,122 15,649 Goodwill and other indefinite-lived assets 67,061 65,291 Other assets 161,108 124,312 Total Assets $ 5,242,909 $ 3,512,739 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 175,062 $ 140,947 Accrued payroll and benefits 146,177 92,234 Current operating lease liabilities 136,232 109,438 Current maturities of long-term debt 14,852 16,822 Current portion of accrued self-insurance liabilities 75,966 27,536 Current line of credit 142,000 — Refund liability 145,795 — Other accrued expenses 142,348 69,949 Total Current Liabilities 978,432 456,926 Long-term operating lease liabilities 2,935,773 1,961,997 Lines of credit — 520,000 Long-term debt, less current maturities, net of deferred financing fees 250,984 195,708 Accrued self-insurance liabilities, less current portion 164,979 146,167 Other liabilities 197,050 130,215 Total Liabilities $ 4,527,218 $ 3,411,013 Commitments and contingencies (Note 18) Equity: PACS Group, Inc. stockholders' equity: Common stock: $ 0.001 par value; 1,250,000,000 shares authorized, 155,177,511 shares issued and outstanding as of December 31, 2024, and 64,361,693,000 shares authorized, 128,723,386 shares issued and outstanding as of December 31, 2023 155 129 Additional paid-in capital 591,363 — Retained earnings 118,036 95,997 Total PACS Group, Inc. stockholders' equity 709,554 96,126 Noncontrolling interest in subsidiary 6,137 5,600 Total Equity $ 715,691 $ 101,726 Total Liabilities and Equity $ 5,242,909 $ 3,512,739 See accompanying notes to combined/consolidated financial statements. 98 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except for share and per share values) Year Ended December 31, 2024 2023 2022 Revenue Patient and resident service revenue $ 4,086,655 $ 3,110,114 $ 2,399,155 Additional funding — 375 21,482 Other revenues 3,079 1,003 1,357 Total Revenue $ 4,089,734 $ 3,111,492 $ 2,421,994 Operating Expenses Cost of services 3,297,091 2,447,713 1,861,314 Rent - cost of services 284,953 216,711 160,003 General and administrative expense 343,808 213,664 149,006 Depreciation and amortization 40,809 25,632 22,311 Total Operating Expenses $ 3,966,661 $ 2,903,720 $ 2,192,634 Operating income 123,073 207,772 229,360 Other (Expense) Income Interest expense ( 44,341 ) ( 49,919 ) ( 25,538 ) Gain on lease termination 8,046 — — Other income (expense), net 14,776 ( 536 ) 3,223 Total Other Expense, Net $ ( 21,519 ) $ ( 50,455 ) $ ( 22,315 ) Income before provision for income taxes 101,554 157,317 207,045 Provision for income taxes 46,210 44,435 56,549 Net Income $ 55,344 $ 112,882 $ 150,496 Less: Net (loss) income attributable to noncontrolling interest ( 416 ) 8 — Net Income Attributable To PACS Group, Inc. $ 55,760 $ 112,874 $ 150,496 Net Income Per Share Attributable To PACS Group, Inc. Basic $ 0.38 $ 0.88 $ 1.17 Diluted $ 0.38 $ 0.88 $ 1.17 Weighted-Average Common Shares Outstanding Basic 146,663,371 128,723,386 128,723,386 Diluted 148,574,606 128,723,386 128,723,386 See accompanying notes to combined/consolidated financial statements. 99 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT) (dollars in thousands, except for share values) Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Noncontrolling Interest Total Stockholders' Equity (Deficit) Shares Amount Balance January 1, 2022 128,723,386 $ 129 $ — $ ( 26,699 ) $ 1,759 $ ( 24,811 ) Contributions — — — — 3,246 3,246 Dividends on common stock ($ 0.4683 per share) — — — ( 60,280 ) — ( 60,280 ) Net Income — — — 150,496 — 150,496 Balance December 31, 2022 128,723,386 $ 129 $ — $ 63,517 $ 5,005 $ 68,651 Contributions — — — — 587 587 Dividends on common stock ($ 0.6246 per share) — — — ( 80,394 ) — ( 80,394 ) Net income attributable to noncontrolling interest — — — — 8 8 Net income attributable to PACS Group, Inc. — — — 112,874 — 112,874 Balance December 31, 2023 128,723,386 $ 129 $ — $ 95,997 $ 5,600 $ 101,726 Contributions — — — — 953 953 Issuance of common stock 24,206,350 24 509,418 — — 509,442 Employee stock-based compensation 3,847,652 4 115,540 — — 115,544 Tax withholdings related to net share settlement of equity awards ( 1,599,877 ) ( 2 ) ( 33,595 ) — — ( 33,597 ) Dividends on common stock ($ 0.2173 per share) — — — ( 33,721 ) — ( 33,721 ) Net loss attributable to noncontrolling interest — — — — ( 416 ) ( 416 ) Net income attributable to PACS Group, Inc. — — — 55,760 — 55,760 Balance December 31, 2024 155,177,511 $ 155 $ 591,363 $ 118,036 $ 6,137 $ 715,691 See accompanying notes to combined/consolidated financial statements. 100 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 2024 2023 2022 Cash flows from operating activities Net income $ 55,344 $ 112,882 $ 150,496 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 40,809 25,632 22,311 Amortization and write-off of deferred financing fees 3,115 6,068 1,205 Stock-based compensation 115,544 — — Loss on investment in partnership 4,565 391 346 Gain on insurance subsidiary deposits and investments ( 1,258 ) — — Deferred taxes ( 44,484 ) ( 9,923 ) ( 1,921 ) Noncash lease expense 34,647 22,727 14,464 Other noncash operating activities, net 843 581 4 Change in operating assets and liabilities Accounts receivable, net ( 93,968 ) ( 176,883 ) ( 114,416 ) Other receivables ( 22,487 ) ( 3,059 ) ( 202 ) Prepaid expenses and other current assets ( 17,210 ) ( 18,765 ) ( 6,371 ) Other assets ( 13,338 ) ( 3,338 ) ( 39,341 ) Escrow funds ( 9,473 ) 568 ( 4,526 ) Operating lease liabilities ( 20,784 ) ( 2,011 ) ( 92 ) Accounts payable 33,398 33,371 32,808 Accrued payroll and benefits 52,041 6,325 ( 5,564 ) Accrued self-insurance liabilities 67,242 35,576 67,636 Refund liability 145,795 — — Other accrued expenses 73,210 ( 55,501 ) ( 24,390 ) Other liabilities ( 36,210 ) 89,056 168 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 367,341 $ 63,697 $ 92,615 Cash flows from investing activities Investment in partnerships $ ( 32,891 ) $ ( 2,597 ) $ — Non-operating distributions from investment in partnership 3,521 1,862 2,905 Purchase of available-for-sale securities ( 90,874 ) — — Sale of available-for-sale securities 25,874 — — Acquisition of facilities ( 283,344 ) ( 127,024 ) ( 55,374 ) Purchase of property and equipment ( 66,465 ) ( 45,782 ) ( 22,862 ) Proceeds from the sale of assets 1,500 750 10 NET CASH USED IN INVESTING ACTIVITIES $ ( 442,679 ) $ ( 172,791 ) $ ( 75,321 ) Cash flows from financing activities Borrowing on lines of credit, net of deferred financing fees $ 676,000 $ 855,704 $ 154,528 Payments on lines of credit ( 1,054,000 ) ( 497,986 ) ( 119,149 ) Borrowings of long-term debt, net of deferred financing fees 72,305 411,313 87,906 Payments on long-term debt ( 19,455 ) ( 559,632 ) ( 53,901 ) Contributions from noncontrolling interest 502 587 3,246 Dividends on common stock ( 33,721 ) ( 80,394 ) ( 60,280 ) Proceeds from initial public offering, net of issuance costs 414,157 — — Proceeds from common stock offering, net of issuance costs 95,285 — — Taxes paid related to net share settlement of stock-based compensation awards ( 33,597 ) — — NET CASH PROVIDED BY FINANCING ACTIVITIES $ 117,476 $ 129,592 $ 12,350 Net change in cash 42,138 20,498 29,644 Cash, cash equivalents, and restricted cash - beginning of year 118,704 98,206 68,562 Cash, cash equivalents, and restricted cash - end of year $ 160,842 $ 118,704 $ 98,206 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 48,248 $ 50,558 $ 25,911 Income taxes $ 107,831 $ 60,009 $ 42,554 Non-cash financing and investing activity Accrued capital expenditures $ 3,716 $ 3,000 $ 717 Assets acquired in operation expansions in exchange for notes payable $ — $ 2,150 $ 8,200 Assets acquired in operation expansions through settlement of notes receivable $ 500 $ — $ — Contributions from noncontrolling interest through relief of notes payable $ 451 $ — $ — See accompanying notes to combined/consolidated financial statements. 101 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 1. ORGANIZATION AND NATURE OF BUSINESS PACS Group, Inc. (PACS Group or the Company), a Delaware corporation, was incorporated on March 24, 2023. PACS Group is a holding company which consolidates various operating and other subsidiaries. PACS Group’s applicable operating subsidiaries operate various skilled nursing facilities (SNF) and assisted living facilities (ALF). PACS Group also owns other subsidiaries that are engaged in the acquisition, ownership, and leasing of health care-related properties. As of December 31, 2024 PACS Group subsidiaries operated 314 health care facilities in the states of Alaska, Arizona, California, Colorado, Idaho, Kansas, Kentucky, Missouri, Montana, Nevada, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, and Washington. PACS Group subsidiaries operated 32,016 skilled nursing beds and 2,244 assisted living beds as of that date. As of December 31, 2024, PACS Group subsidiaries operated 270 facilities under long-term lease arrangements and had options to purchase 37 of those facilities. PACS Group owns subsidiaries that own real estate and related improvements that are leased to applicable affiliated SNF operating entities and one non-affiliated ALF operating entity. PACS Group’s real estate portfolio includes 44 properties which are operated and managed by applicable PACS Group subsidiaries. PACS Group subsidiaries also have equity method investments in partnerships that own the underlying real estate and related improvements of 49 post-acute care facilities that are operated by other PACS Group subsidiaries and three post-acute care facilities that are operated by non-affiliated operating entities. Providence Administrative Consulting Services, Inc. (PACS), a California corporation, is a subsidiary of PACS Group and provides administrative support services, on a consulting basis, to other subsidiaries of PACS Group. PACS Group also has a wholly-owned captive insurance subsidiary, Welsch Insurance Ltd. (Welsch). Welsch provides coverage to various consolidated operating subsidiaries related to Professional Liability and General Liability (PLGL) insurance. Reorganization Prior to June 30, 2023, Providence Group, Inc. (PGI) owned the operating subsidiaries of PACS Group. On June 30, 2023, PGI and its consolidated subsidiaries reorganized (the Reorganization) to facilitate their entrance into a new credit agreement, dated June 30, 2023 (2023 Credit Agreement), between certain lenders party thereto, Truist Bank, as administrative agent, PACS Group, and PACS Holdings, LLC (PACS Holdings) as borrower thereunder. PACS Group and its wholly owned subsidiary PACS Holdings were created on March 24, 2023, and April 10, 2023, respectively, in anticipation of the Reorganization. The equity interests of certain other direct or indirect wholly-owned subsidiaries of PGI at the time of the Reorganization were also contributed to other new direct or indirect wholly-owned subsidiaries of PACS Group to facilitate the New Credit Agreement. PACS Group and its consolidated subsidiaries subsequent to the Reorganization are collectively referred to herein as the Company. The New Credit Agreement is described in Note 10, “Credit Facilities”. The Reorganization was effected by the two then-existing stockholders of PGI (which at the time was the direct or indirect parent company of all consolidated entities comprising the Company), contributing their respective shares in PGI to newly-formed PACS Holdings, in exchange for a proportionate interest of shares in newly-formed PACS Group (via issuance of shares of PACS Group), and thus became the sole stockholders of PACS Group. As a result of the Reorganization, (i) for most practical purposes PACS Group in effect became the successor to the historical consolidated business of PGI, and (ii) both of the two stockholders of PGI immediately prior to the Reorganization became the sole stockholders of PACS Group, and maintained their respective pro rata ownership percentage in PACS Group that they held in PGI immediately prior to the Reorganization (which was and remained 50 / 50 ). The Reorganization was accounted for as an equity reorganization between entities under common control. The Reorganization combined entities that historically have not been presented together resulting in financial statements that are effectively considered to be those of a different reporting entity. Accordingly, the historical financial statements for periods prior to the Reorganization are presented as combined financial statements and the financial statements after the Reorganization are presented as consolidated financial statements. The contribution of shares of PGI and receipt of shares of PACS Group are accounted for on a retrospective basis. Accordingly, all share and per share amounts in these 102 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) combined/consolidated financial statements and related notes have been retrospectively restated, where applicable, for all periods herein, to give effect to the current shares outstanding of PACS Group. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying combined/consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The combined/consolidated financial statements include the accounts of PACS Group, and its consolidated subsidiaries, or the Company as defined above. All intercompany transactions and balances have been eliminated in combination and consolidation. The Company presents noncontrolling interests within the equity section of its combined/consolidated balance sheets and the amount of combined/consolidated income that is attributable to the Company and the noncontrolling interest in its combined/consolidated statements of income. Use of Estimates The preparation of the combined/consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined/consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates in the Company’s combined/consolidated financial statements include those related to revenue, acquired property, business combinations, right-of-use assets, lease liabilities, impairment of long-lived assets, and general and professional liabilities included in accrued self-insurance liabilities. Actual results could materially differ from estimated amounts. Restricted Cash, Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less at the time of purchase and therefore approximate fair value. The Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash and short-term investment balances in several high-credit quality financial institutions. Included in restricted cash are funds held for PLGL and, prior to 2023, workers’ compensation (WC) claims. Funds held in restricted cash are contractually obligated to be segregated from the Company’s other cash accounts and are legally restricted for the use of funding WC and PLGL claims. See Note 8, “Fair Value Measurement”, for information on the use of restricted cash in other assets to purchase investments in the period. At any point in time the Company has funds in operating accounts and restricted cash accounts that are with third-party financial institutions. While management monitors the cash balances in operating accounts, these cash and restricted cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. The following presents all cash and cash equivalents and restricted cash on the combined/consolidated balance sheets and reconcile to total cash included on the combined/consolidated statement of cash flows as of December 31, 2024, 2023 and 2022: Year Ended December 31, 2024 2023 2022 Cash and cash equivalents $ 157,674 $ 73,416 $ 58,269 Restricted cash (included in prepaid expenses and other current assets) 3,168 4,977 7,847 Restricted cash (included in other assets) — 40,311 32,090 Total cash, cash equivalents, and restricted cash $ 160,842 $ 118,704 $ 98,206 103 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Cash in Excess of FDIC Limits The Company currently has bank deposits with financial institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250,000. The Company has not experienced any losses in such accounts. Insurance Subsidiary Deposits and Investments The Company's captive insurance subsidiary cash and cash equivalents, deposits and investments are designated to support long-term insurance subsidiary liabilities and have been classified as short-term and long-term assets based on the timing of expected future payments of the Company's captive insurance liabilities. Patient and Resident Service Revenue Patient and resident service revenue is derived from services rendered, under short-term contracts, to patients for skilled and intermediate nursing, rehabilitation therapy, and assisted living services. Patient and resident service revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered. Accounts Receivable and Allowance for Credit Losses Accounts receivable consist primarily of amounts due from Medicare and Medicaid, managed care health plans and private payor sources, net of estimates for variable consideration. At December 31, 2024 and 2023, the allowance for credit losses was immaterial to the combined/consolidated financial statements. The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors. Contractual adjustments are based on contractual agreements and historical experience with those payors. The Company considers the patient's ability and intent to pay the amount of consideration upon admission and records an implicit price concession based on historical patient collection experience. The allowance for implicit price concession is routinely evaluated and any subsequent changes are recorded as an adjustment to patient and resident service revenue in the combined/consolidated statements of income. Government Grants In the absence of specific guidance to account for government grants under U.S. GAAP, the Company accounts for government grants in accordance with International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, and as such, the Company recognizes grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate. Additional funding presented on the combined/consolidated statements of income is associated with government grants received through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). See Note 4, “Revenue and Accounts Receivable”, for more details. Property and Equipment, Net Property and equipment are stated at historical cost less accumulated depreciation and amortization. Repair and maintenance charges which do not increase the useful lives of the assets are charged to expense as incurred. Depreciation is 104 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) computed using the straight-line method over the estimated useful life of the property and equipment. The following is a summary of the estimated useful lives of the Company’s depreciable assets: • Buildings and improvements - minimum of 5 years to a maximum of 40 years, but generally 30 years • Leasehold improvements - shorter of the lease term or the estimated useful life, generally 5 years to 15 years • Furniture and equipment - minimum of 3 years to a maximum of 15 years Upon sale or retirement, the cost and the related accumulated depreciation and amortization are eliminated from the respective accounts and the resulting gain or loss is included in other income (expense), net. Leases The Company leases skilled nursing facilities, assisted living facilities, and commercial office space. The Company determines if an arrangement is a lease (for accounting purposes) upon execution of each respective agreement. Real estate leases are generally classified as operating leases and therefore the Company records rent expense on a straight-line basis over the term of the lease. The lease term is calculated from the date the Company is given control of the leased premises through the end of the lease term. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably certain at the commencement of the lease. The Company has made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheets and recognize those lease payments in the combined/consolidated statements of income on a straight-line basis over the lease term. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its leases. In determining the discount rate used to measure the right-of-use asset and lease liability, the Company uses rates implicit in the lease, or if not readily available, the Company will use its incremental borrowing rate. The Company’s incremental borrowing rate is based on an estimated secured rate comprised of a risk-free rate plus a credit spread as secured by its assets. Determining a credit spread as secured by the Company’s assets may require significant judgment. The Company’s real estate leases generally have initial lease terms of ten years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional three to twenty years . Exercise of renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term, including contractual rent escalators. Business Combinations The Company accounts for acquisitions using the acquisition method of accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations (ASC 805). Acquisitions are included in the combined/consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date. In determining the fair value of identifiable assets, the Company uses various valuation techniques. These valuation methods require management to make estimates and assumptions surrounding projected revenues and costs, future growth, and discount rates. ASC 805 defines the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. When substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. The Company assesses goodwill for impairment at least annually on 105 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) October 1st. The Company will perform an impairment assessment at other times if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. When assessing goodwill for impairment the Company may elect to first perform a qualitative assessment to determine if the quantitative impairment test is necessary. If the Company does not perform a qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs a quantitative test. The Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. The Company’s indefinite-lived intangible assets primarily consist of costs to obtain licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. The Company may elect to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If the Company does not perform the qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the Company calculates the estimated fair value of the indefinite-lived intangible asset. If the estimated fair value of the indefinite-lived intangible asset is lower than its carrying amount, an impairment loss is recognized for the difference. Fair Value Measurements The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. The three-tiers include: Level 1: observable inputs such as quoted market prices in active markets; Level 2: inputs other than quoted market prices included in Level 1 that are directly or indirectly observable for the asset or liability and Level 3: unobservable inputs for which little or no market data exists, thereby requiring management to develop their own estimates and assumptions. Impairment of Long-Lived Assets The Company's non-financial assets, which include goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis. In accordance with FASB ASC Topic 360, Property, Plant, and Equipment (ASC 360), long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the fair value of the related assets. The Company did not identify any indicators of impairment of its long-lived assets during the years ended December 31, 2024, 2023, and 2022. Accrued Risk Reserves The Company is principally self-insured for risks related to PLGL claims. Additionally, the Company is partially self-insured for risks related to WC policies. Accrued risk reserves primarily represent the accrual for risks associated with WC and PLGL claims. The accrued risk reserves include a liability for unpaid reported claims and estimates for incurred but unreported claims. The Company’s policy with respect to its PLGL claims, is to use an external actuary to assist management in estimating the Company’s exposure for claims obligation (for both asserted and unasserted claims). The Company’s retrospective-rated premium WC policy is subject to an annual assessment of the policy premium in relation to the payroll and losses incurred for the policy period. The Company recognizes the WC retrospective policy adjustment as the amount of settlement is determined. 106 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Investments in Partnerships Investments in various partnerships, in which the Company exercises significant influence over operating and financial policies, are accounted for using the equity method of accounting. Under this method, the investment is carried at cost and is adjusted to recognize the investor’s share of earnings or losses of the investee, after the date of acquisition, including amortization of certain basis differences, in the other (expense) income, net line in the Company’s combined/consolidated statements of income. Any difference between the carrying amount of the equity method investment on the Company’s combined/consolidated balance sheet and the underlying equity in net assets on the investee’s balance sheet results in a basis difference which is adjusted as the related underlying assets are depreciated, amortized, or sold and the liabilities are settled. The investment is adjusted for impairment whenever it is determined that a decline in the fair value below the cost basis is other than temporary. The fair value of the investment then becomes the new cost basis of the investment, and it is not adjusted for subsequent recoveries in fair value. The Company’s maximum exposure to loss on these equity method investments is the total invested capital. These investments are included in other assets in the Company’s combined/consolidated balance sheets. The Company evaluates its investments, including cost in excess of book value (equity method goodwill) for impairment whenever indicators of impairment exist. No indicators of impairment existed as of December 31, 2024 and 2023. U.S. GAAP requires the Company to identify entities for which control is achieved through voting rights or other means and to determine which business enterprise is the primary beneficiary of variable interest entities (VIE). If the Company is determined to be the primary beneficiary of the VIE, the Company consolidates the VIE. The Company may change its original assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary. The Company identifies the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis. As it relates to investments in partnerships, the Company assesses any partners’ rights and their impact on the presumption of control of the partnership by any single partner. The Company reassesses its determination of which investing entity controls the investee if: there is a change to the terms or in the exercisability of the rights of any partners or members, the managing member increases or decreases its ownership interests, or there is an increase or decrease in the number of outstanding ownership interests. As of December 31, 2024, the Company’s determination of which entity controls its investments in partnerships has not changed as a result of any reassessment. Noncontrolling Interest The Company is the majority-owner in a subsidiary which was formed to develop land, a building, and other assets to be leased to an entity operated by the Company upon completion which occurred during the year ended December 31, 2024. The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the contribution date and is presented within total equity in the Company’s combined/consolidated balance sheets since these interests are not redeemable. The Company presents net (loss) income attributable to noncontrolling interest and net income attributable to PACS Group, Inc. in its combined/consolidated statements of income. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest. Advertising Advertising costs are expensed as incurred. For the years ended December 31, 2024, 2023, and 2022, advertising expenses included in the Company’s combined/consolidated statements of income were $ 7,633 , $ 7,127 , and $ 5,414 , respectively. 107 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Income Taxes The Company utilizes FASB ASC Topic 740, Income Taxes (ASC 740), which requires an asset and liability approach for financial accounting and reporting for income taxes. Under this guidance, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 12, “Income Taxes”, for further discussion of the Company’s accounting for income taxes. Under ASC 740, tax positions are evaluated for recognition using a more–likely–than–not threshold, and those tax positions requiring recognition are measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Liabilities for income tax matters include amounts for income taxes, applicable penalties, and interest thereon and are the result of the potential alternative interpretations of tax laws and the judgmental nature of the timing of recognition of taxable income. The Company recognizes deferred tax assets (DTAs) to the extent that it believes that the assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. The Company generally expects to fully utilize its DTAs; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. Concentration of Credit Risks The Company’s credit risks primarily relate to cash and cash equivalents, restricted cash, and accounts receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. Restricted cash is primarily invested in commercial paper and certificates of deposit with financial institutions and other interest-bearing accounts. Accounts receivable consist primarily of amounts due from patients (funded through Medicare, Medicaid, other contractual programs and through private payors) and from other health care companies for management, accounting and other services. The collectability of account receivable balances is dependent on the availability of funds from certain programs that rely on governmental funding, primarily Medicare and Medicaid. The Company’s receivables from Medicare and Medicaid programs accounted for 18 % and 39 % of total accounts receivable, respectively, at December 31, 2024 and 20 % and 36 % of total accounts receivable, respectively, at December 31, 2023. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company’s operating subsidiaries, excluding the subsidiaries that exclusively operate assisted living and independent living facilities, have all of their skilled nursing beds designated for care of patients under federal Medicare and/or state Medicaid programs. Approximately 49 % of skilled nursing beds are located in California. Stock-based Compensation The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values, ratably over the requisite service period of the award. Net income reflects the recognition of the fair value of all restricted stock unit awards issued, the amount of which is based upon the number of grants and other variables. The Company accounts for award forfeitures as they occur. Comprehensive Income Comprehensive income consists of gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income. For the year ended December 31, 2024, comprehensive income includes unrealized gains and losses on the Company’s available-for-sale debt securities, offsetting to $ 0 in the period. There were no components of comprehensive income for the years ended December 31, 2023 and 2022. The Company does not have any components of 108 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) other comprehensive income recorded within its combined/consolidated financial statements to present and, therefore, does not separately present a statement of comprehensive income in its combined/consolidated financial statements. Commitments and Contingencies The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of business, some of which may involve material amounts. The defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense. Loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore, the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation. Recent Accounting Standards Adopted by the Company In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The standard improved reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit (referred to as the “significant expense principle”) and enhanced disclosure requirements for companies with a single reportable segment. Additionally, the standard requires the annual disclosures on an interim basis. This guidance was effective for annual periods beginning with the Company’s fiscal year 2024, and in interim periods within the Company’s fiscal year 2025. The Company adopted this standard in Note 3, “Business Segments” of this annual report on Form 10-K. Recent Accounting Standards Issued But Not Yet Adopted by the Company In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires the Company to disclose disaggregated jurisdictional and categorical information for the tax rate reconciliation, income taxes paid and other income tax related amounts. This guidance is effective for annual periods beginning after December 15, 2024, which will be the Company’s fiscal year 2025, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the disclosures included in the Notes to the combined/consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses , which requires the Company to disaggregate key expense categories such as employee compensation, depreciation, and intangible asset amortization within its financial statements. This guidance is effective for annual periods beginning after December 15, 2026, which will be the Company’s fiscal year 2027, and interim reporting periods beginning after December 15, 2027, which will be the Company’s fiscal year 2028. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on the disclosures included in the Notes to the combined/consolidated financial statements. NOTE 3. BUSINESS SEGMENTS The Company has one reportable segment. The Company’s chief operating decision maker (CODM), the Chief Operating Officer, reviews the consolidated results of operations when making decisions about allocating resources and assessing the performance of the Company as a whole. The Company does not distinguish between markets or regions for the purpose of allocating resources. This structure reflects its current operational and financial management and provides the best structure to maximize the quality of care and investment strategy provided, while maintaining financial discipline. The segment’s measure of profit or loss is net income which is also reported on the combined/consolidated statements of income. Net income is also used to monitor budget versus actual results. 109 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) As the Company’s single reportable segment is at the consolidated level, the accounting policies of the reportable segment are the same as those disclosed in Note 2, “Summary of Significant Accounting Policies”. The Company's CODM does not review segment assets at a different asset level or category than that disclosed in its combined/consolidated balance sheets and therefore assets by segment are not disclosed below. The following table sets forth financial information for the segment: Year ended December 31, 2024 2023 2022 Revenue $ 4,089,734 $ 3,111,492 $ 2,421,994 Less: Labor expense (1) 2,207,875 1,664,163 1,292,774 Depreciation and amortization 40,809 25,632 22,311 Interest expense, net 44,341 49,919 25,538 Equity in the net loss of investees accounted for under the equity method 4,565 391 346 Provision for income taxes 46,210 44,435 56,549 Other segment items (2) 1,690,590 1,214,070 873,980 Segment net income $ 55,344 $ 112,882 $ 150,496 (1) Labor expense includes nursing and departmental salaries and wages, payroll taxes and benefits, and agency staffing expenses. (2) Other segment items included in segment net income include cost of services except for labor cost of services, rent - cost of services, general and administrative expense except for labor general and administrative expense, gain on lease termination, and other (expense) income except for interest expense, net, and equity in the net income of investees accounted for under the equity method. NOTE 4. REVENUE AND ACCOUNTS RECEIVABLE Patient and Resident Service Revenue The Company’s patient and resident service revenue is derived primarily from the Company’s applicable subsidiaries providing healthcare services to their respective patients and residents. Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled. These amounts are due from residents, third-party payors (including health insurers and government payors), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits and other reviews by the payor. Generally, the licensed healthcare provider entity providing the applicable services bills the applicable payors monthly. The healthcare services in skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Revenue is recognized as the performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided by the applicable licensed healthcare provider entity. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to residents receiving services in the facility and, when applicable, residents receiving services in their homes (independent care or assisted living). The Company measures the performance obligation from admission into the facility, or the commencement of the service, to the point when the applicable licensed healthcare provider entity is no longer required to provide services to that resident, which is generally at the time that the resident discharges from the applicable facility or passes away. Revenue recognized from healthcare services is adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration. Variable consideration includes estimates of implicit price concessions so that the estimated transaction price is reflective of the amount to which the Company expects to be entitled in exchange for providing the healthcare services to customers. Variable consideration is estimated using the expected value method based on the Company’s historical reimbursement experience. The amount of variable consideration constrains the transaction price, such that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur 110 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) in a future period. If actual amounts of consideration ultimately received differ from the Company’s estimates, it adjusts these estimates, which would affect net service revenue in the period such variances become known. The Company maintains a refund liability for consideration collected related to revenue that is not probable that a significant revenue reversal will not occur. The Company expects to refund some or all of that consideration back to the payor. The balance of the refund liability was $ 145,795 and $ 0 as of December 31, 2024 and 2023, respectively, and is presented within current liabilities on the Company's combined/consolidated balance sheets. Agreements with third-party payors typically provide for payments at amounts less than established charges. A summary of the payment arrangements with major third-party payors is as follows: Medicare : Payments for skilled nursing facility services rendered to Medicare program beneficiaries are based on prospectively determined daily rates which vary according to a patient diagnostic classification system. The applicable licensed healthcare provider entity is paid for certain reimbursable services at the approved rate with final settlement determined after submission of the annual cost report and audit thereof by the designated Medicare fiscal intermediary. Revenue from the Medicare program amounted to 33.8 %, 38.6 %, and 47.6 % of the Company’s combined/consolidated net patient and resident revenue for the years ended December 31, 2024, 2023, and 2022, respectively. Medicaid : Payments for skilled nursing facility services rendered to Medicaid (including Medi-Cal, which is the name of the state Medicaid program in California) program beneficiaries are based on an established daily reimbursement rate for eligible stays. The rate is adjusted periodically. The final settlement is determined after submission of an annual cost report and audits thereof by Medicaid. Revenue from the Medicaid program amounted to 40.4 %, 37.6 %, and 30.2 % of the Company’s combined/consolidated net patient and resident revenue for the years ended December 31, 2024, 2023, and 2022, respectively. Managed Care, Private and Other : Payments for services rendered to private payors and other primary payors included in the table below are based on established rates or on agreements with certain commercial insurance companies, health maintenance organizations, and preferred provider organizations, which provide for various discounts from the established rates. Revenue from these sources collectively amounted to 25.8 %, 23.8 %, and 22.2 % of the Company’s combined/consolidated net patient and resident revenue for the years ended December 31, 2024, 2023, and 2022, respectively. The Company’s contracts are short term in nature with a duration of one year or less. The Company has minimal unsatisfied performance obligations at the end of the reporting period as patients are typically under no obligation to remain admitted in the Company’s facilities or under the Company’s care. As the period between the time of service and time of payment is typically one year or less, the Company does not adjust for the effects of a significant financing component. Included in the Company’s combined/consolidated balance sheets are contract balances, comprised of billed accounts receivable and unbilled receivables, which are the result of differences between the timing of revenue recognition and billings and cash collections, as well as contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company has no material contract liabilities and contract assets as of December 31, 2024 and 2023. Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of audits and other reviews by governmental agencies or payor sources, health care providers from time to time receive requests for information and notices regarding billing audits and potential noncompliance with applicable laws and regulations, which, in some instances, can ultimately result in substantial monetary recoupments or other remedies being imposed on the healthcare provider. Compliance with such laws and regulations may also be subject to future government review and interpretation, as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. The Company believes that it is in compliance with all applicable laws and regulations. The contracts the Company has with commercial payors also provide for retrospective audit and review of claims. 111 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Settlements with third-party payors for retroactive adjustments due to audits or other reviews are considered variable consideration and are included in the determination of the estimated transaction price for providing resident services. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor, and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as information becomes available, or as years are settled or are no longer subject to such audits or other reviews. Historically, differences between estimated settlements and actual settlements have been immaterial. The Company disaggregates revenue from contracts with its patients by payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The composition of patient and resident service revenue by primary payors for the years ended December 31, 2024, 2023, and 2022 are as follows: 2024 % of Revenue 2023 % of Revenue 2022 % of Revenue Medicare $ 1,381,236 33.8 % $ 1,200,801 38.6 % $ 1,142,863 47.6 % Medicaid 1,651,401 40.4 % 1,168,455 37.6 % 723,896 30.2 % Managed care 813,865 19.9 % 586,850 18.9 % 416,089 17.3 % Private and other 240,153 5.9 % 154,008 4.9 % 116,307 4.9 % Total patient and resident service revenue $ 4,086,655 100.0 % $ 3,110,114 100.0 % $ 2,399,155 100.0 % Additional Funding and CARES Act Through the CARES Act, the Company received $ 14,962 in funding from the U.S. Department of Health and Human Services (HHS) through the Provider Relief Fund (PRF) during the year ended December 31, 2022. These funds were provided to healthcare providers who diagnosed, tested, or cared for individuals with cases of COVID-19 and had health-care-related expenses and lost revenues attributable to COVID-19. The Company recorded these funds as deferred revenue upon receipt and revenue was recognized only to the extent that health-care-related expenses or lost revenues had been incurred and were not reimbursed from other funding sources. The Company recognized an immaterial amount of revenue within additional funding on its combined/consolidated statements of income in 2023 for funds received prior to 2023. The Company did not receive any funds related to this program during 2023 or 2024. The CARES Act also provided for refundable payroll tax credits known as the Employee Retention Tax Credit (ERTC), which allowed qualified employers to receive a credit of 70% of the employee qualified wages and related payroll costs paid after December 31, 2020 through September 30, 2021, up to a maximum credit of $7 per employee, per quarter, for a maximum of $21 per employee in 2021. The Company treated these credits under the accrual basis of accounting in conformity with U.S. GAAP. The Company interpreted the condition of partial suspension through governmental orders during all quarters of 2020 and the first three quarters of 2021, as defined by the CARES Act and to incur qualified payroll and related costs during the applicable quarters. The Company claimed a total of $ 32,428 under the ERTC for qualified wages related to periods prior to the year ended December 31, 2022. The Company utilized outside consultants to calculate the qualified wages and the ERTC amounts, and to prepare and submit the applications. Subsequently, due to uncertainty related to meeting the necessary qualifications, the Company recorded a reserve against the entire amount claimed. In the year ended December 31, 2024, the Company recognized $ 14,599 of the ERTC as an offset to labor in cost of services, as the statute of limitations surrounding the uncertainty of the qualifications, for certain of the funds received, expired. As of December 31, 2024 and 2023, the Company has recorded $ 21,917 and $ 36,477 , respectively, in other liabilities to reflect the cash already received related to these credits which may need to be returned and potential penalties. Additionally, under the CARES Act, employers could elect to defer the deposit and payment of the employer’s share of Social Security taxes through the end of 2020. One half of the deferral was required to be repaid on or before December 31, 2021 with the remaining half due on or before December 31, 2022. The Company paid $ 7,793 during the year ended December 31, 2022 and there are no remaining short-term or long-term balances as of December 31, 2024 and 2023. 112 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 5. ESCROW FUNDS Certain subsidiaries of the Company have obtained Department of Housing and Urban Development (HUD)-insured mortgages on properties that they lease to affiliated operating subsidiaries of the Company, while various other subsidiaries of the Company lease properties from unrelated third-party landlords that have obtained HUD-insured mortgages on the applicable properties. Under the terms of the HUD-insured mortgages, borrowers and/or their tenants are required to make certain deposits into escrow funds to be used for payment of property insurance, mortgage insurance premiums, and taxes. The deposits are generally maintained in an interest-bearing account with a federally insured financial institution. Additionally, some HUD-insured mortgages require a reserve for replacement account and a non-critical repair reserve. Under the terms of the HUD-insured mortgages and the related regulatory agreements required by HUD, the tenants are required to make regular monthly deposits into a reserve for replacement account to assure the availability of funds to replace building components, furniture and equipment over time. All disbursements from this account require prior written approval by HUD and the mortgage lender. The non-critical repair reserve is used to cover estimated repairs on the properties typically within 12 months of closing on the HUD loans. During 2021, the Company obtained a construction loan from an unaffiliated third-party lender. During the year ended December 31, 2024, the Company converted this construction loan to a HUD-insured mortgage. As of December 31, 2024 and 2023, this subsidiary had escrows related to debt service reserves, working capital escrows, and various other construction related escrows, in accordance with the terms of the loan agreement. These reserve and escrow accounts are maintained under the control of the mortgage lender for the benefit of the applicable tenant and are generally held in an interest-bearing account with a federally insured financial institution. NOTE 6. PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: December 31, 2024 2023 Buildings and improvements $ 654,975 $ 372,554 Leasehold improvements 79,440 58,958 Furniture, fixtures, and other 107,896 64,750 Construction in process 23,952 50,937 Land 84,774 55,593 Finance lease right-of-use assets 145,262 40,536 $ 1,096,299 $ 643,328 Less: accumulated depreciation and amortization ( 105,719 ) ( 65,800 ) Property and equipment, net $ 990,580 $ 577,528 The Company evaluated its long-lived assets and did not record any impairment charges for the years ended December 31, 2024, 2023, and 2022. See Note 16, “Operation Expansions”, for information on expansions during the years ended December 31, 2024, 2023, and 2022. 113 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 7. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS Goodwill consisted of the following: Goodwill Balance as of January 1, 2023 $ 55,221 Acquisitions 3,800 Balance as of December 31, 2023 $ 59,021 Acquisitions 1,770 Balance as of December 31, 2024 $ 60,791 There are no prior period accumulated goodwill impairment losses nor any goodwill impairment losses for the years ended December 31, 2024, 2023, and 2022. As of the years ended December 31, 2024 and 2023, the Company's indefinite-lived intangible assets consisted of the following: December 31, 2024 2023 Licenses $ 6,270 $ 6,270 Total other indefinite-lived intangible assets $ 6,270 $ 6,270 There are no prior period accumulated indefinite-lived intangible asset impairment losses nor any indefinite-lived intangible asset impairment losses for the years ended December 31, 2024, 2023, and 2022. NOTE 8. FAIR VALUE MEASUREMENT The Company's financial assets include insurance subsidiary deposits and highly liquid investments which are held by the consolidated captive insurance entity and are designated to support long-term insurance subsidiary liabilities and are recorded at fair value of $ 66,258 and $ 0 as of December 31, 2024 and 2023, respectively. As of December 31, 2024, the insurance subsidiary deposits and investments include net unrealized gains of $ 384 . Gains and losses on investments are recorded within other expense, net. Insurance subsidiary deposits and investments consist of holdings in investment grade bond mutual funds and are derived using Level 2 inputs. These assets are recorded in insurance subsidiary deposits and investments in our combined/consolidated balance sheets and are classified as available-for-sale equity securities. These mutual funds are primarily valued utilizing calculations which incorporate observable inputs such as yield, maturity and credit quality. NOTE 9. INVESTMENT IN PARTNERSHIPS As of December 31, 2024 and 2023, the Company held $ 37,167 and $ 12,362 , respectively, in multiple equity investments, referred to as partnerships. These entities were formed to develop, own, and lease health care facilities. Some of the partnerships hold options to purchase the related real estate property holdings. Each of the entities is governed by a managing member who makes the significant decisions that impact the economic performance of the entity. The Company is not the managing member of any of the entities in which it is invested. On July 1, 2024 the Company invested $ 15,345 in the entity BRFS SNF Ventures V, LLC (BRFS) for a 50.0 % ownership. As of December 31, 2024 this investment held three post-acute care facilities that were operated by non-affiliated operating entities. BRFS is a VIE, however the Company does not consolidate the entity as it does not have the power to direct the activities that most significantly impact its economic performance. Therefore, the Company only accounts for its specific interest in the investment. The investment was $ 15,528 on the Company’s combined/consolidated balance sheet as of December 31, 2024. On August 1, 2025, the Company took over the operations of these three post-acute care facilities. 114 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) In connection with the Prestige acquisition described in Note 16, “Operation Expansions”, the Company invested $ 10,000 in the entity Next Saddle Investors, LLC (Saddle) for a 25.8 % ownership interest. Saddle acquired the operations for all 53 facilities included in the acquisition, and subsequently assigned them to the Company. Saddle also acquired the underlying real estate for 37 of the facilities from the Prestige acquisition, which it leases to the Company. The Company determined the Saddle manager to be a de facto agent to the Company under FASB ASC Topic 810, Consolidation (ASC 810). Saddle is a VIE; however, the Saddle manager is the primary beneficiary and therefore the Company does not consolidate the entity and only accounts for its specific interest in the investment. As of December 31, 2024, the investment was $ 8,536 on the Company’s balance sheet. All of the Company’s other equity investments are individually immaterial with the largest investment of $ 7,678 in an entity representing an ownership of 49.0 %. Loss from the investment in all partnerships was $ 4,565 , $ 391 , and $ 346 , for the years ended December 31, 2024, 2023, and 2022, respectively. NOTE 10. CREDIT FACILITIES On February 28, 2023, the Company entered into a working capital loan agreement (the Working Capital Loan) in connection with the acquisition of various new facilities. The Working Capital Loan allowed the Company to borrow up to $ 17,500 at an annual interest rate of 9 %. On May 8, 2023, the Company drew on the Working Capital Loan in the amount of $ 15,000 . As described below, the Working Capital Loan was repaid during the year and, as such, had a zero balance as of December 31, 2024 and 2023. On June 30, 2023, the Company and certain of its subsidiaries entered into a credit agreement with Truist Bank (Truist) as administrative agent (Administrative Agent), and a syndicate of lenders (the 2023 Credit Agreement), that extended credit in the form of the revolving credit facility thereunder, (the 2023 Revolving Credit Facility), including letter of credit and swingline sub facilities and a term loan facility (Truist Term Loan), together referred to as the 2023 Credit Facility. The 2023 Credit Agreement provided for: (i) 2023 Revolving Credit Facility with revolving commitments in an aggregate principal amount of $ 150,000 , including a letter of credit sub facility in an amount representing that portion of the aggregate revolving commitments that may be used by the borrower for the issuance of letters of credit in an aggregate face amount not to exceed $ 30,000 and a swingline loan sub facility in an aggregate principal amount at any time outstanding not to exceed $ 20,000 and (ii) the Truist Term Loan in an aggregate principal amount of $ 275,000 . Outstanding borrowings under the 2023 Credit Facility accrued interest at either: (a) the Secured Overnight Financing Rate (SOFR) (plus a 0.10 % credit spread adjustment) plus a margin ranging from 2.50 % to 3.50 % per annum; or (b) Base Rate (which was defined in a customary manner for credit facilities of this type) plus a margin ranging from 1.50 % to 2.50 % per annum. The applicable margin was based on the Company’s debt to income ratio as calculated in accordance with the terms of the 2023 Credit Agreement. In addition, the Company agreed to pay a commitment fee on the unused portion of the 2023 Revolving Credit Facility, which ranged from 0.30 % to 0.50 % per annum, depending on the same debt to income ratio. In connection with executing the 2023 Credit Agreement, deferred financing costs associated with lines-of-credit and long-term debt, of $ 3,109 , were written off, and additional deferred financing costs of $ 9,662 were capitalized during the year ended December 31, 2023. In addition, on the closing date of the 2023 Credit Agreement, the Company drew $ 75,000 on the 2023 Revolving Credit Facility and borrowed the entirety of the $ 275,000 Truist Term Loan. See Note 11, “Long-Term Debt”, for more details. The Company used approximately $ 142,000 of the net proceeds to repay certain outstanding indebtedness on prior lines of credit and the Working Capital Loan. On December 7, 2023, the Company amended and restated the 2023 Credit Facility (Amended and Restated 2023 Credit Facility). The Amended and Restated 2023 Credit Facility provided for an increase of the 2023 Revolving Credit Facility to an aggregate principal amount of $ 600,000 , which Revolving Commitments (as defined in the Amended and Restated 2023 Credit Facility) may also be utilized for (x) the issuance of letters of credit in an aggregate face amount not to exceed $ 50,000 and/or (y) the borrowing of swingline loans in aggregate principal amount not to exceed $ 20,000 at any time outstanding. Outstanding borrowings under the Amended and Restated 2023 Credit Facility bear interest at the option of the Company equal to either (a) SOFR (plus a 0.10 % credit spread adjustment) plus a margin ranging from 2.25 % to 3.25 % per 115 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) annum; or (b) the Base Rate (which is defined consistent with the 2023 Credit Facility) plus a margin ranging from 1.25 % to 2.25 % per annum. The applicable margin is based on the Company’s debt to income ratio as calculated consistent with the 2023 Credit Facility. In addition, the Company will pay a commitment fee ranging from 0.25 % to 0.45 % per annum on the unused portion of the Revolving Commitments, depending on the same debt to income ratio. Upon the closing of the Amended and Restated 2023 Credit Facility, the Company borrowed $ 460,000 of revolving loans, the proceeds of which were used to repay and refinance all term loans and revolving loans under the 2023 Credit Facility, to repay certain other outstanding indebtedness, and to pay transaction costs in connection with the Amended and Restated 2023 Credit Facility. Deferred financing costs associated with both lines-of-credit and long-term debt of $ 519 were written off as part of the refinancing transactions during the year ended December 31, 2023. The Amended and Restated 2023 Credit Facility contains certain financial and non-financial covenants and restrictions. Default by the applicable credit party on any covenant or restriction could affect the lender’s commitment to lend, and, if not waived or corrected, could make the outstanding balances due on demand. Under the Amended and Restated 2023 Credit Facility, the Company must maintain a debt-to-income ratio of not greater than 3.00 :1.00. The Amended and Restated 2023 Credit Facility also requires that the Company maintain a minimum interest/rent coverage ratio of not less than 1.10 :1.00. On May 16, 2024, the Company entered into an amendment to the Amended and Restated 2023 Credit Facility that, among other things, waived an event of default that had occurred and was then continuing under the Amended and Restated 2023 Credit Facility and modified the affirmative covenants thereunder requiring the joinder of certain subsidiaries of the Company to the Amended and Restated 2023 Credit Facility, as further set forth therein. On November 14, 2024, the Company entered into another amendment to the Amended and Restated 2023 Credit Facility that, among other things, extended the deadline for the delivery of unaudited quarterly financial statements for the fiscal quarter ended September 30, 2024. On March 27, 2025, and May 29, 2025, the Company entered into further amendments to the Amended and Restated 2023 Credit Facility that, among other things, extended the deadline for delivery of audited annual financial statements for the fiscal year ended December 31, 2024. The May 29, 2025 amendment supplemented teh Amended and Restated Credit Agreement’s the financial covenants requiring the Company to maintain unrestricted cash and certain permitted investments of at least $ 100,000 until the Company delivers audited financial statements for the fiscal year ended December 31, 2024 (the “Liquidity Requirement”). On July 24, 2025 and August 13, 2025 the Company entered into two separate forbearance agreements with the Administrative Agent and the lenders, pursuant to which the lenders agreed to temporarily forbear from exercising remedies under the Amended and Restated 2023 Credit Facility with respect to certain technical events of default, including without limitation matters relating to inaccuracies in certain representations and warranties made, which inaccuracies also triggered an event of default under the Third Consolidated Master Lease, dated June 30, 2023 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Omega Master Lease”), which in turn triggered an additional event of default under the Amended and Restated 2023 Credit Facility. In addition, a separate representation and warranty event of default occurred under the Omega Master Lease, which triggered an event of default under the Amended and Restated Credit Agreement (all such technical events of default under the Amended and Restated 2023 Credit Facility, the “Initial Technical Events of Default”). The August 13, 2025 Forbearance Agreement and Fifth Amendment to the Credit Agreement required that the Liquidity Requirement remain in place for the entirety of the forbearance period and further extended the delivery period with respect to the fiscal year 2024 financial statements. The forbearance period was scheduled to run until October 31, 2025, subject to extension by the Administrative Agent through November 30, 2025, or by the Required Lenders (as defined in the Amended and Restated Credit Agreement) thereafter, or earlier termination upon the occurrence of certain specified events of default. On October 21, 2025, the Company entered into a third forbearance agreement (the “October Forbearance Agreement”). Under the October Forbearance Agreement, the lenders again agreed to temporarily forbear from exercising rights and remedies under the Amended and Restated Credit Agreement with respect to the Initial Technical Events of Default, as well as certain additional technical events of default including without limitation matters relating to the designation of certain immaterial conflicted subsidiaries; failure to join certain subsidiaries to the loan documents; noncompliance with cash management requirements; and inaccuracies in certain representations and warranties made as a result of the foregoing (collectively, with the Initial Technical Events of Default, the “Technical Events of Default”). The 116 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Technical Events of Default also triggered an event of default under the Omega Master Lease, which in turn triggered an additional event of default under the Amended and Restated Credit Agreement. The October Forbearance Agreement provides for the same forbearance period as the prior forbearance agreements. Following the October Forbearance Agreement, the Administrative Agent agreed to extend the forbearance period thereunder through November 30, 2025. During the forbearance period, the Company is required to comply with certain additional specified conditions, including the continued maintenance of minimum liquidity of $ 100,000 , limitations on certain investments and acquisitions, and a prohibition on the borrowing of new loans under the Amended and Restated 2023 Credit Facility. The October Forbearance Agreement is intended to provide the Company with temporary relief while addressing the Technical Events of Default and does not constitute a waiver of the Technical Events of Default or amendment to the Amended and Restated Credit Agreement beyond the amended terms specified therein. The Company was in compliance with all such covenants and restrictions, as amended and allowable by forbearance, as of December 31, 2024. The Company maintains the Amended and Restated 2023 Credit Facility as its single line-of-credit. At December 31, 2024, the total commitment limit continues to be $ 600,000 and was secured by Company assets. The agreements mature on December 7, 2028. Due to the covenants and restrictions outlined above, the Amended and Restated 2023 Credit Facility has been classified as current on the Company’s balance sheet as of December 31, 2024. The balance outstanding on all applicable lines was $ 142,000 and $ 520,000 at December 31, 2024 and 2023, respectively. The Company had $ 13,923 in letters of credit outstanding as of December 31, 2024 and had no letters of credit outstanding as of December 31, 2023. Net deferred financing fees on lines-of-credit were $ 11,886 and $ 14,906 as of December 31, 2024 and 2023, respectively. Expense recognized relating to deferred financing fees on lines-of-credit is included in interest expense and amounted to $ 3,020 and $ 889 for the years ended December 31, 2024 and 2023, respectively, and was immaterial for the year ended December 31, 2022. On April 15, 2024, the Company completed an Initial Public Offering (IPO), as described in Note 19, “Capital Stock”, receiving initial net proceeds of $ 423,000 . The Company used $ 370,000 of the net proceeds from the IPO, which represented 87.5 % of the net proceeds from the IPO, to repay amounts outstanding under the Amended and Restated 2023 Credit Facility, and used the remaining amount for general corporate purposes to support the growth of the business. On September 9, 2024, the Company completed an underwritten public offering, as described in Note 19, “Capital Stock”, receiving initial net proceeds of $ 96,414 . The Company used 100 % of the net proceeds from the offering to repay amounts outstanding under the Amended and Restated 2023 Credit Facility. NOTE 11. LONG-TERM DEBT During the years ended December 31, 2024 and 2023, certain of the Company's subsidiaries entered into HUD-insured mortgage loans in the aggregate amount of $ 68,345 and $ 88,809 , respectively. Additionally, the Company converted a $ 22,463 construction loan to a HUD-insured mortgage loan as disclosed in Note 5, “Escrow Funds” during the year ended December 31, 2024. As a result, 13 of the Company's subsidiaries had mortgage loans insured with HUD in the aggregate amount of $ 252,913 as of December 31, 2024, of which $ 4,007 is classified as current and the remaining $ 248,906 is classified as non-current. As of December 31, 2023, the Company’s subsidiaries had HUD-insured mortgage loans in the aggregate amount of $ 166,181 of which $ 2,346 was classified as current and the remaining $ 163,835 was classified as non-current. These subsidiaries are subject to HUD-mortgage oversight and periodic inspections. As of December 31, 2024, the Company’s HUD-insured mortgage loans bear fixed interest rates ranging from 2.4 % to 6.3 % per annum and have various maturity dates through October 1, 2061. In addition to the interest rate, the Company incurs other fees for HUD placement, including but not limited to audit fees. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees based on the principal balance on the date of prepayment. The original terms for all the HUD-insured mortgage loans are 24 to 37 years. In addition to the HUD-insured mortgage loans above, the Company’s subsidiaries had eight other mortgage loans or promissory notes. The non-HUD insured mortgage loans and notes bear interest rates that range from 2.0 % to 7.5 % per annum with various maturity dates through June 1, 2027. As of December 31, 2024, the Company had $ 16,997 of debt principal outstanding under the non-HUD mortgage loans and promissory notes, of which $ 10,845 is classified as current 117 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) and the remaining $ 6,152 is classified as non-current. As of December 31, 2023, the Company had $ 48,829 of debt principal outstanding under the non-HUD mortgage loans and promissory notes, of which $ 14,476 is classified as current and the remaining $ 34,353 is classified as non-current. The Company was in compliance with all applicable loan covenants with respect to the foregoing as of December 31, 2024 and 2023. The notes and loans above are secured through guarantees by the Company and certain stockholders. Additionally, various loans are secured by facility assets and real property with a carrying value amounting to $ 263,219 , and $ 438,645 at December 31, 2024 and 2023, respectively. Long-term debt consists of the following: December 31, 2024 2023 HUD-insured mortgage loans $ 252,913 $ 166,181 Other non-HUD mortgage loans and promissory notes 16,997 48,829 Less: current maturities ( 14,852 ) ( 16,822 ) Less: deferred financing fees, net ( 4,074 ) ( 2,480 ) Total $ 250,984 $ 195,708 Long-term debt and line-of-credit maturities, excluding deferred financing fees, for the next five years and in the aggregate are as follows as of December 31, 2024: Long-Term Debt Credit Facility Total 2025 $ 14,852 $ 142,000 $ 156,852 2026 5,249 — 5,249 2027 9,356 — 9,356 2028 4,516 — 4,516 2029 4,702 — 4,702 Thereafter 231,235 — 231,235 Total $ 269,910 $ 142,000 $ 411,910 Deferred financing fees on long-term debt are being amortized over the life of the respective loans. Expense recognized related to deferred financing fees on long-term debt is included in interest expense and amounted to $ 95 , $ 1,551 , and $ 978 for the years ended December 31, 2024, 2023, and 2022, respectively. As discussed in Note 10, “Credit Facilities”, on June 30, 2023, the Company borrowed under the Truist Term Loan in connection with the execution of the 2023 Credit Agreement. Under the Truist Term Loan, the Company borrowed $ 275,000 . The Truist Term Loan had a maturity date of June 30, 2028. Upon closing of the Truist Term Loan, the Company paid off certain other mortgage loans and promissory notes in the aggregate amount of $ 224,802 . The Truist Term Loan was repaid on December 7, 2023 in connection with the closing of the Amended and Restated 2023 Credit Facility and as such, had a zero balance as of December 31, 2024 and 2023. 118 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 12. INCOME TAXES The provision for income taxes for the years ended December 31, 2024, 2023, and 2022 is summarized as follows: December 31, 2024 2023 2022 Current Federal $ 66,292 $ 38,242 $ 37,044 State 30,729 16,116 15,932 Total current provision $ 97,021 $ 54,358 $ 52,976 Deferred Federal $ ( 34,582 ) $ ( 6,641 ) $ 3,345 State ( 16,229 ) ( 3,282 ) 228 Total deferred provision $ ( 50,811 ) $ ( 9,923 ) $ 3,573 Total income tax provision $ 46,210 $ 44,435 $ 56,549 A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 2024, 2023 and 2022, respectively, is as follows: December 31, 2024 2023 2022 Income tax expense at statutory rate 21.0 % 21.0 % 21.0 % State income taxes – net of federal benefit 7.0 6.5 6.3 Non-deductible expenses 18.5 0.9 0.4 Change in valuation allowance ( 0.6 ) 1.3 — Change to deferred taxes 1.0 ( 1.6 ) — Other Adjustments ( 1.4 ) — ( 0.4 ) Total effective tax rate 45.5 % 28.1 % 27.3 % The Company’s effective tax rate was 45.5 % for the year ended December 31, 2024, compared to 28.1 % for the same period in 2023 and 27.3 % in 2022. The change in effective tax rate was primarily due to an increase non-deductible expenses, including non-deductible compensation in 2024. 119 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) The Company’s deferred tax assets and liabilities as of December 31, 2024 and 2023 are summarized as follows: December 31, 2024 2023 Deferred tax assets (liabilities) Accrued expenses $ 28,275 $ 17,523 Allowance for doubtful accounts 21,737 8,247 Insurance 36,577 15,428 Intangible assets 4,931 4,073 Deferred compensation 2,097 1,202 Lease liability 826,397 573,227 Stock-based compensation 5,166 — Total deferred tax assets $ 925,180 $ 619,700 Valuation allowance ( 991 ) ( 2,107 ) Total net deferred tax assets $ 924,189 $ 617,593 Cash to accrual method change — ( 6,125 ) Fixed assets ( 53,106 ) ( 36,838 ) Prepaid expenses ( 10,307 ) ( 10,802 ) Investment in partnership ( 8,030 ) ( 4,904 ) Right of use asset ( 805,552 ) ( 555,766 ) Other ( 963 ) ( 1,411 ) Total deferred tax liabilities $ ( 877,958 ) $ ( 615,846 ) Net deferred tax assets $ 46,231 $ 1,747 As of December 31, 2024 and 2023 , the Company recorded a valuation allowance of $ 991 and $ 2,107 , respectively, against its c aptive insurance dual consolidated loss deferred tax asset. This valuation allowance was established because it was more likely than not that the deferred tax asset will not be realized. The Company is subject to U.S. federal income tax, as well as income tax in certain states in which it operates. The Company’s federal returns for tax years 2021 and forward are subject to examination, and state returns for tax years 2020 and forward are subject to examination. The Company is not, to its knowledge, under examination by any federal or state income tax authority. The Company’s balance of net deferred tax assets is included within other assets on the combined/consolidated balance sheets as of December 31, 2024 and 2023. As of December 31, 2024 and 2023, the Company did not have any unrecognized tax benefits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company does not anticipate the uncertain tax position to change materially within the next 12 months. The Inflation Reduction Act 2022 (IRA), which incorporates a Corporate Alternative Minimum Tax (CAMT), was signed on August 16, 2022. The changes were effective for tax years beginning after December 31, 2022. The new tax requires companies to compute two separate calculations for federal income tax purposes and pay the greater of the new minimum tax or their regular tax liability. The IRA does not have a material impact for the Company. NOTE 13. LEASES Operating Leases The Company leases most of its skilled nursing and assisted living facilities, as well as its office space and certain vehicles and equipment, under various non-cancelable operating lease agreements. These operating leases expire at various dates throughout 2049. 120 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Substantially all operating leases for skilled nursing and assisted living facilities are on a “triple-net” basis, which require lessees to pay for all insurance, repairs, utilities, and real property taxes assessed on the leased property, and most of the leases are guaranteed by the Company and/or its stockholders. For 35 of the facility operating leases, the Company holds an option to purchase the real estate which can be exercised at varying times until March 31, 2038. At lease inception it was determined that the exercise of each of the purchase options was not reasonably certain. Options on three of the leases have become subject to disagreement with the landlord regarding whether the option exercise window has closed, and the Company is working with the landlord to resolve the disagreement. All facility leases provide for an additional percentage rent based upon specified rates per the terms of the agreements. This additional percentage rent is variable and is expensed as incurred. Finance Leases The Company leases certain skilled nursing and assisted living facilities under finance lease agreements. The lease terms of two of the facility finance leases allow for purchase options to be exercised at varying times until May 22, 2027. The Company has determined that it is reasonably certain to exercise the purchase option at the end of each purchase option window. Therefore the Company has calculated the lease term through the end of the purchase option window for each such lease. In addition, for six of the facility finance leases, the lessor holds an option which could require the Company to purchase the associated real estate. The total obligation to purchase such real estate is approximately $ 86,751 and can be exercised by the lessor through June 14, 2026 (the “Lessor Options”). For other finance leases, the duration of the lease term represented the major part of the remaining economic life of the facility at inception. Finance lease right-of-use assets are included in property and equipment and have a balance of $ 139,472 and $ 37,850 as of December 31, 2024 and 2023, respectively. The current portion of finance lease liabilities is included in other accrued expenses and has a balance of $ 21,177 and $ 942 as of December 31, 2024 and 2023, respectively. The non-current portion of finance lease liabilities is included in other liabilities and has a balance of $ 125,470 and $ 40,766 as of December 31, 2024 and 2023, respectively. 121 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) The components of lease expense were as follows: Year Ended December 31, 2024 2023 2022 Operating lease expense Rent - cost of services (1) $ 284,953 $ 216,711 $ 160,003 General and administrative expense 2,435 941 542 Other variable lease costs (2) 31,480 26,399 21,252 Total operating lease expense $ 318,868 $ 244,051 $ 181,797 Finance lease expense Amortization of right-of-use assets $ 3,327 $ 1,264 $ 1,230 Interest on lease liabilities 7,370 1,113 546 Total financing lease expense $ 10,697 $ 2,377 $ 1,776 Total lease expense $ 329,565 $ 246,428 $ 183,573 __________________ (1) Rent - cost of services includes variable lease costs such as Consumer Price Index (CPI) increases and other rent adjustments of $ 2,383 , $ 2,745 and $ 964 for the years ended December 31, 2024, 2023, and 2022, respectively. (2) Other variable lease costs of facilities, including property taxes and insurance, are classified in cost of services in the Company’s combined/consolidated statements of income. The following table summarizes supplemental cash flow information related to leases: Year Ended December 31, 2024 2023 2022 Operating cash paid for amounts included in the measurement of operating lease liabilities $ 252,742 $ 194,925 $ 143,683 Operating cash paid for amounts included in the measurement of finance lease liabilities 7,370 1,113 546 Financing cash paid for amounts included in the measurement of finance lease liabilities 811 1,708 2,088 Operating lease right-of-use assets obtained in exchange for lease liabilities 1,326,598 805,866 99,843 Decrease in operating lease right-of-use assets and liabilities due to lease termination/modification ( 141,382 ) — — Finance lease right-of-use assets obtained in exchange for lease liabilities 18,298 5,521 — Decrease in finance lease right-of-use assets and liabilities due to lease termination/modification ( 2,272 ) — — Information relating to the lease term and discount rate is as follows: Year Ended December 31, 2024 2023 2022 Weighted-average remaining lease term (years) Operating leases 14 13 13 Finance leases 6 3 1 Weighted-average discount rate Operating leases 6.4 % 5.7 % 5.1 % Finance leases 6.1 % 7.2 % 1.4 % 122 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) Maturities of lease liabilities as of December 31, 2024 were as follows: Finance Leases Operating Leases Total 2025 $ 29,891 $ 321,827 $ 351,718 2026 92,513 325,826 418,339 2027 19,132 326,796 345,928 2028 1,949 330,348 332,297 2029 1,588 332,696 334,284 Thereafter 54,734 3,123,492 3,178,226 Total lease payments $ 199,807 $ 4,760,985 $ 4,960,792 Less: present value discount ( 53,160 ) ( 1,688,980 ) ( 1,742,140 ) Present value of lease liabilities $ 146,647 $ 3,072,005 $ 3,218,652 Maturities of finance leases include amounts the Company would pay in the earliest period in which the lessor can exercise the Lessor Options. In addition to its lessee activity, the Company generates an immaterial amount of revenue from arrangements where it is a lessor of certain facilities. Revenue from those arrangements is included in other revenue on the combined/consolidated statements of income. NOTE 14. RETIREMENT PLANS The Company has two 401(k) defined contribution plans for the benefit of all eligible union and non-union employees. Employees over the age of 18 may begin elective deferrals and become eligible for matching contributions after two months of service. Employer discretionary matching contributions may be up to 25 % of the employee’s elective deferrals that do not exceed 4 % of the employee’s compensation. Employees vest in matching contributions over four years in accordance with the vesting schedule set out in the plan documents. On July 19, 2019, the Company adopted a non-qualified deferred compensation plan. The deferred compensation plan allows certain employees to receive supplemental retirement income payments through the deferral of base salary and bonus compensation. Eligible employees may elect to defer receipt of no less than twenty thousand dollars of base salary and bonus compensation for any plan year. Additionally, the Company may elect to make a discretionary matching contribution on behalf of the participant. Participants become fully vested in discretionary matching contributions after five years of continued employment from the date of the applicable matching contribution. Payment of vested balances will occur at future dates, as defined by the plan documents. Deferred compensation plan balances are recorded in other long-term liabilities on the combined/consolidated balance sheets and amounted to $ 7,794 and $ 4,379 at December 31, 2024 and 2023, respectively. NOTE 15. RELATED PARTY TRANSACTIONS On July 1, 2021, the Company entered into a Consulting and Strategic Advisory Services Agreement with Helios Consulting, LLC (Helios), a limited liability company owned by Jason Murray, the Company’s Chief Executive Officer and Chairman of its board of directors, and Mark Hancock, Executive Vice Chairman of its board of directors, (Helios Consulting Agreement) which automatically renewed for successive one-year terms. The Helios Consulting Agreement provided for a cash consulting fee of $ 4,000 annually, paid in monthly installments, for consulting and strategic advisory services provided to the Company by Helios. As of December 31, 2023, the Company terminated the Helios Consulting Agreement. For the years ended December 31, 2024, 2023, and 2022, the Company paid $ 0 , $ 4,000 , and $ 4,000 (inclusive of $ 150 paid to a subsidiary of Helios in 2023 and 2022), respectively. On March 24, 2023, the Company entered into subscription agreements with Mr. Murray and Mr. Hancock, pursuant to which Mr. Murray and Mr. Hancock each purchased 10,000 shares of the Company’s common stock for a purchase price of $ 0.001 per share, in a private placement concurrent with the Company’s incorporation in the State of Delaware and in anticipation of effecting the reorganization on June 30, 2023. 123 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 16. OPERATION EXPANSIONS 2024 Expansions On September 1, 2024, for nominal consideration, the Company finalized the acquisition of operations for 32 skilled nursing and 21 assisted living and independent living facilities inclusive of 2,511 and 1,334 skilled nursing and assisted living beds, respectively. This acquisition from the former operator Prestige (Prestige acquisition), expanded the Company’s operations in eight states, five of which were new operating states. In connection with the Prestige acquisition, the Company invested $ 10,000 for a 25.8 % interest in a newly formed entity, Saddle. This investment is recorded as an investment in partnership within other assets on the Company’s combined/consolidated balance sheets. Saddle acquired the operations for all 53 facilities included in the Prestige acquisition, and subsequently assigned them to the Company. Saddle acquired 37 properties from the sellers of the skilled nursing and assisted living and independent living facilities. The Company then leased these 37 properties from Saddle. The Company also assumed eight leases from the prior operator and negotiated new leases for the remaining eight facilities with unaffiliated third-party landlords. The Company has recorded the associated right-of-use assets and right-of-use liabilities for all 53 leases. This transaction was classified as a business combination in accordance with ASC 805. The table below represents the purchase price allocation to total identifiable assets acquired and net liabilities assumed using the acquisition method, based on their respective fair values as of September 1, 2024. Amount Prepaid expenses and other current assets $ 832 Operating lease right-of-use assets 76,351 Other assets 9,600 Current operating lease liabilities ( 4,970 ) Long-term operating lease liabilities ( 58,301 ) Deferred tax liability ( 6,327 ) Bargain purchase gain ( 17,185 ) Total purchase price $ — Prepaid expenses and other current assets acquired consist of on-hand supplies at the facilities. Other assets acquired consist of contracts assumed with local hospitals, wherein the Company agrees to hold a specified number of beds available for potential hospital discharge, for a set date range. The fair value of these hospital contracts was determined using the income approach. This approach utilized significant assumptions including management’s best estimates of the expected future cash flows and renewal rates of the contracts. Right-of-use assets specified in the table above are related specifically to the eight leases assumed as part of the transaction excluding the new lease agreements for 37 properties leased from Saddle and eight properties leased from unaffiliated third-party landlords. The value of the right-of-use assets was determined under a market approach. The market approach utilized significant assumptions based on estimated market rent assessments for the acquired lease contracts. The deferred tax liability recognized is due to the Company having no tax basis in the assets acquired and liabilities assumed. The Company did not assume any liabilities other than those associated with the post-assumption obligations under the assumed leases. Total fair value of the net assets acquired exceeds consideration transferred, resulting in a bargain purchase gain. The Company reassessed whether it correctly identified all of the assets acquired and all of the liabilities assumed prior to recognition of the gain, in accordance with ASC 805. This bargain purchase gain is recorded within other income (expense), net on the Company’s combined/consolidated statements of income. The unaudited pro-forma results presented below include the effects of the Prestige acquisition as if it had been consummated as of January 1, 2022, with adjustments to give effect to pro forma events that are directly attributable to the Prestige acquisition which includes adjustments related to the Rent - cost of services expense. The unaudited pro forma 124 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) results do not reflect any operating efficiency or potential cost savings which may result from the consolidation of the acquired operations of the facilities. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have been if the Prestige acquisition had occurred at the beginning of the period presented nor are they indicative of future results of operations and are not necessarily indicative of results that might have been achieved had the Prestige acquisition been consummated as of January 1, 2022. Year Ended December 31, 2024 2023 2022 Revenue $ 4,367,701 $ 3,531,211 $ 2,798,435 Income before provision for income taxes $ 106,809 $ 157,585 $ 210,783 For the year ended December 31, 2024, the acquired facilities contributed revenue of $ 180,905 . For the year ended December 31, 2024, income before provision for income taxes related to the facilities was $ 5,681 . In addition to the Prestige acquisition, during the year ended December 31, 2024, the Company’s consolidated operations and real estate portfolio grew through a combination of long-term leases and real estate purchases. The Company acquired operations at 53 stand-alone skilled nursing, assisted living, and subacute facilities and 15 real estate purchases. Of the 15 real estate purchases, eight of the properties were acquired in conjunction with the operations of the associated facility. For the other seven acquired properties, the Company previously operated the respective facilities and has now acquired the real estate associated with those operations. These new operations added 6,414 and 174 operational skilled nursing beds and assisted living beds, respectively. The purpose of any such expansion, may include, without limitation, to expand the scope of the Company's operations, add additional team members with important skill sets, and/or realize synergies. The aggregate purchase price for these expansions during the year ended December 31, 2024 was $ 283,844 . The fair value of assets for the entities where real estate was acquired was concentrated in property and equipment amounting to $ 282,074 . As such, these transactions were classified as asset acquisitions. The remaining aggregate purchase price for transactions during the year ended December 31, 2024 was concentrated in goodwill in the amount of $ 1,770 . Such transactions were classified as business combinations. The Company expects 100 % of the goodwill to be deductible for income tax purposes. In connection with the new operations made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenants’ post-assumption rights and obligations under the long-term leases. The Company entered into separate agreements with the applicable prior operators as part of each transaction. 2023 Expansions During the year ended December 31, 2023, the Company’s consolidated operations and real estate portfolio grew through a combination of long-term leases and real estate purchases. The Company acquired operations at 58 stand-alone skilled nursing, assisted living, and subacute facilities and six real estate purchases. Of the six real estate purchases, two of the properties were acquired in conjunction with the operations of the associated facility. For the other four acquired properties, the Company previously operated the respective facilities and has now acquired the real estate associated with those operations. These new operations added 6,744 and 484 operational skilled nursing and assisted living beds, respectively. The purpose of any such expansion, may include, without limitation, to expand the scope of the Company's operations, add team members with important skill sets, and/or realize synergies. The aggregate purchase price for these expansions during the year ended December 31, 2023 was $ 129,174 . The fair value of assets for the entities where real estate was acquired were concentrated in property and equipment amounting to $ 124,874 . As such, these transactions were classified as asset acquisitions. The remaining aggregate purchase price for transactions during the year ended December 31, 2023 was concentrated in goodwill and other assets in the amount of $ 3,800 and $ 500 , respectively. Such transactions were classified as business combinations. The Company expects 100 % of the goodwill to be deductible for income tax purposes. 125 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) In connection with the new operations made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenants’ post-assumption rights and obligations under the long-term leases. The Company entered into separate agreements with the applicable prior operators as part of each transaction. 2022 Expansions During the year ended December 31, 2022, the Company’s consolidated operations and real estate portfolio grew through a combination of long-term leases and real estate purchases. The Company acquired operations at nine stand-alone skilled nursing, assisted living, and subacute facilities and four real estate purchases. Of the four real estate purchases, two of the properties were acquired in conjunction with the operations of the associated facility. For the other two acquired properties, the Company previously operated the respective facilities and has now acquired the real estate associated with those operations. These new operations added 1,180 operational skilled nursing beds. The purpose of any such expansion, may include, without limitation, to expand the scope of the Company's operations, add team members with important skill sets, and/or realize synergies. The aggregate purchase price for these expansions during the year ended December 31, 2022 was $ 55,374 . The fair value of assets for the entities where real estate was acquired were concentrated in property and equipment and other assets, amounting to $ 46,500 and $ 378 , respectively. As such, these transactions were classified as asset acquisitions. The remaining aggregate purchase price for transactions during the year ended December 31, 2022 was concentrated in goodwill in the amount of $ 8,496 and as such, the transactions were classified as business combinations. The Company expects 100 % of the goodwill to be deductible for income tax purposes. In connection with the new operations made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenants’ post-assumption rights and obligations under the long-term leases. The Company entered into separate agreements with the applicable prior operators as part of each transaction. The Company’s expansion strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities to improve both clinical and financial performance of the acquired facility. The operations added by the Company are frequently underperforming financially and have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operations, is often inadequate, inaccurate or unavailable. The Company believes that prior operating results are not typically a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. The assets added during the years ended December 31, 2024, 2023, and 2022 and through the issuance of the combined/consolidated financial statements were not material operations to the Company individually or in the aggregate. Accordingly, other than as disclosed above, pro forma financial information is not presented. The additions have been included in the December 31, 2024 and 2023 combined/consolidated balance sheets of the Company, and the operating results have been included in the combined/consolidated statements of income of the Company since the date the Company gained effective control. 2025 Expansions and Divestitures Subsequent to December 31, 2024, the Company’s operations and real estate portfolio expanded in four existing states with the addition of seven stand-alone facilities, five of which were acquired through long-term leases and two of which the Company had previously owned the real estate. These new facilities added 495 skilled nursing beds and 271 assisted living beds operated by the Company's affiliated operating subsidiaries. The aggregate purchase price for these facilities was $ 1,243 . Additionally, during the same period the Company expanded its portfolio of owned properties by acquiring five properties associated with the Lessor Options for an aggregate purchase price of $ 79,351 . Subsequent to December 31, 2024, the Company also divested of one leased facility which included 120 skilled nursing beds. 126 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) NOTE 17. OTHER ACCRUED EXPENSES Other accrued expenses consisted of the following: December 31, 2024 2023 Current portion of finance lease liabilities $ 21,177 $ 942 Other 121,171 69,007 Total other accrued expenses $ 142,348 $ 69,949 NOTE 18. COMMITMENTS AND CONTINGENCIES Regulatory Matters Laws and regulations governing Medicare and Medicaid programs are complex and subject to review and interpretation. Compliance with such laws and regulations is evaluated regularly, the results of which can be subject to future governmental review and interpretation, and can include significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is monitoring performed by the Office of Civil Rights which covers the Health Insurance Portability and Accountability Act of 1996, the terms of which require healthcare providers (among other things) to safeguard the privacy and security of certain patient protected health information. Regulatory Investigations The Company is subject to various governmental inspections, audits, and investigations that arise in the ordinary course of its business. The following governmental investigations are ongoing, although the government entities conducting these investigations have not asserted claims against the Company in connection with these investigations. On April 8, 2024, Providence Administrative Consulting Services (“Providence”) and Paradise Valley Healthcare Center (“Paradise Valley”) received a Civil Investigative Demand (“CID”) from the U.S. Department of Justice (“DOJ”) requesting information and documents relating to an investigation of Paradise Valley and Providence to determine whether Paradise Valley and Providence violated the False Claims Act by submitting false claims to Medicare. The investigation relates to whether Providence and Paradise Valley improperly induced patient referrals through remuneration in violation of the Anti-Kickback Statute. The CID includes requests for information relating to referral source relationships, including relationships with medical directors and other individuals. The Company is cooperating with the investigation, which is ongoing. On September 11, 2024, the Company received a CID from the DOJ requesting information and documents relating to an investigation of the Company’s California-based skilled nursing facilities to determine whether the Company violated the False Claims Act by submitting false claims to Medicare for reimbursement under the patient-driven payment model (PDPM) for skilled nursing and rehabilitation services. The CID includes requests for information relating to the Company’s practices and incentives pertaining to the completion and submission of Minimum Data Set Assessments and the resulting PDPM rates. The Company is cooperating with the investigation, which is ongoing. On September 30, 2024, Providence Group, Inc. (“Providence Group”) received a CID from the DOJ requesting information and documents relating to an investigation of its skilled nursing facilities, specifically including Bishop Care Center (“Bishop”) to determine whether Providence Group violated the False Claims Act by submitting false claims to Medicare for reimbursement under the COVID-19 related Hospital Stay Waiver (otherwise known as the 1135 waiver). The CID includes requests for information relating to 1135 COVID Waiver practices at Bishop. The Company is cooperating with the investigation, which is ongoing. On February 26, 2025, the Company received a subpoena from the DOJ per the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) relating to an investigation into possible violations of various sections of 18 U.S.C. that prohibit the making of fraudulent or false statements to any branch of the government of the United States. The 127 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) subpoena includes requests for information relating to PACS’ 1135 COVID Waiver practices, billing of Medicare Part B for respiratory and sensory integration therapy services, change of insurance enrollment, cost waivers for co-pays, deductibles, and co-insurance, and claim reimbursement from Medicare for bad debt. The Company is cooperating with the investigation, which is ongoing. SEC Investigation The SEC’s Division of Enforcement is conducting an investigation into matters that relate to the Company’s accounting and financial reporting and disclosure, and the Company’s internal controls over financial reporting and disclosure controls. The Company is cooperating with each of the regulatory investigations identified above and the SEC investigation to produce the requested information and documentation. At this time, the Company cannot predict the outcome of any of these investigations and there can be no assurance that one or more of these investigations will not result in suits or actions alleging, or findings of, violations of federal or state laws that could lead to the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to our business practices or operations that could have a material adverse effect on our business, financial condition or results of operations. The legal costs associated with responding to the regulatory investigations and SEC investigations can be substantial, regardless of the outcome. The Company is unable at this time to estimate a loss or range of loss that may arise in the event that a claim is asserted against it in connection with any of these investigations for reasons including that these matters are in early stages, no factual issues have been resolved in these matters, and there is uncertainty as to the outcome of these matters, which can result in large settlement amounts or damage awards. Litigation The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by the Company’s independent operating subsidiaries. The Company, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. In addition, the Company, its independent operating subsidiaries, and others in the industry are subject to claims and lawsuits in connection with COVID-19 and a facility’s preparation for and/or response to COVID-19. Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories. The Company and other companies in its industry are routinely subjected to varying types of claims and suits, including class-actions. Class-action suits have the potential to result in large jury verdicts and settlements, and may result in significant legal costs. The Company expects the plaintiffs’ bar to continue to be aggressive in their pursuit of claims. The Company has been, and continues to be, subject to other claims and legal actions that arise in the normal course of business, including potential claims filed by patients or others on their behalf related to patient care and treatment (professional negligence claims), as well as employment related claims filed by current or former employees. For example, the Company has been subjected to, and is currently involved in, litigation alleging violations of state and federal wage and hour laws resulting from the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes of action. In addition to the litigations described above, the Company is also subject to the following litigation: Litigation – Securities Class Action and Shareholder Derivative Actions On November 13, 2024, a putative securities class action captioned Manchin v. PACS Group, Inc., et al. , Case No. 1:24-cv-08636-LJL (S.D.N.Y.) (“ Manchin Action”) was filed against the Company, individual defendants Jason Murray, Derick Apt, Mark Hancock, Jacqueline Millard, and Taylor Leavitt; and underwriter defendants Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Truist Securities, Inc., RBC Capital Markets, LLC, Goldman Sachs & Co. LLC, Stephens Inc., KeyBanc Capital Markets Inc., Oppenheimer & Co. Inc., and Regions Securities LLC. The complaint brings claims under Sections 11 and 15 of the Securities Act, and Section 10(b), and 20(a) of the Exchange Act, and alleges 128 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) the Company and its leadership engaged in a multi-year scheme to inflate revenue and profitability by (i) exploiting a COVID-era Medicare waiver to “flip” long-term Medicaid patients to higher-paying Medicare coverage, (ii) billing unnecessary Medicare Part B respiratory and sensory integration therapies, and (iii) falsifying licensure and staffing documentation. On January 7, 2025, the court consolidated the Manchin action with a similar action brought by plaintiff New Orleans Employees’ Retirement System, and on February 11, 2025 the court appointed 1199SEIU Health Care Employees Pension Fund as lead plaintiff, and its counsel, Labaton Keller Sucharow LLP, as lead counsel. Pursuant to the parties’ stipulation and as ordered by the court on May 29, 2025, the Lead Plaintiff’s consolidated complaint is not due until 14 days after the Company files its Quarterly Report on Form 10-Q for the period ended September 30, 2024 and its Annual Report on Form 10-K for the year ended December 31, 2024. Defendants’ motion to dismiss the consolidated complaint is due 60 days after the complaint is filed, Plaintiffs’ opposition is due 60 days after the filing of the motion to dismiss, and Defendants’ reply is due 45 days after the filing of the opposition. On February 14, 2025, a derivative action originally filed by plaintiff Theresa Howard-Hines (“ Howard-Hines Action”) captioned IN RE PACS GROUP, INC. DERIVATIVE LITIGATION Lead Case No. 1:25-cv-01343-LJL (S.D.N.Y.) was filed against defendants Jason Murray, Derick Apt, Mark Hancock, Michelle Lewis, Jacqueline Millard, Taylor Leavitt, and Evelyn Dilsaver, with the Company named as nominal defendant. The complaint brings claims of breach of fiduciary duties, unjust enrichment, waste of corporate assets, and contribution, based on substantially similar allegations as in the Manchin Action. On April 8, 2025, the court consolidated the Howard-Hines action with a similar derivative action filed by plaintiff Adam Beckman, under the name In re PACS Group, Inc. Derivative Litigation . On June 9, 2025, the parties filed a joint stipulation staying the action until the earlier of the dismissal of the Manchin Action, the denial of any motion to dismiss in the Manchin Action, or the termination of the stay. On August 19, 2025, a derivative action captioned Boers v. Murray, et. al. , Case No. 1:25-cv-00119-DAK-DBP (D. Utah) was filed against the same defendants and alleging substantially the same claims and theories as IN RE PACS GROUP, INC. DERIVATIVE LITIGATION . The defendants have not yet been served in this action. The parties have tentatively agreed to stay the Utah Derivative Action pending resolution of the anticipated motion to dismiss the securities class action. No dispositive rulings have issued, discovery is not proceeding, and there are no settlement ranges or agreements in principle. Future developments may include motions to dismiss and other dispositive motions, and potential coordination with the securities class action if the stays are lifted. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although the Company will vigorously defend itself in each of the actions described above and any other legal proceedings, their ultimate resolution and potential financial and other impacts on the Company are uncertain but could be material. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and employees and be costly to defend, with unfavorable preliminary, interim or final rulings. The Company accrues a liability amount when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. The Company is unable to estimate a loss or range of loss in connection with the Securities Class Action and Shareholder Derivative Actions at this time for reasons including that these matters are in early stages, no factual issues have been resolved in these matters, and there is uncertainty as to the outcome of these matters. The defense of any of the litigations described above may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company, taken as a whole. However, the Company’s assessment may evolve based upon further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. Insurance Claims The Company purchased PLGL claims made insurance policies to cover applicable claims through an unrelated insurer. The PLGL policies are claims-made high deductible self-insured policies whereby the Company is responsible for 129 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) the first layer of coverage, generally ranging from $ 350 to $ 500 per claim, as well as an aggregate one-time deductible generally ranging from $ 4,975 to $ 6,000 per policy, with the unrelated insurer typically covering up to $ 10,000 in aggregate claims paid per policy year. For certain subsidiaries located in Colorado, Kansas and Pennsylvania, the Company has purchased third-party insurance coverage generally ranging from $ 500 to $ 1,000 per claim, as well as an aggregate policy limit generally ranging from $ 1,500 to $ 3,000 . The Company uses its wholly-owned captive insurance company for the purpose of insuring certain portions of its risk retained under its PLGL programs. Accordingly, the Company is in essence self-insured for claims that are less than policy deductible amounts, claims not covered by such policies, and claims that exceed policy limits. It is the Company’s policy to use an external actuary to assist management in estimating the expense and related self-insurance liabilities for PLGL claims, both asserted and unasserted, on an undiscounted basis. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. The Company uses actuarial valuations to estimate the liability based on historical experience and industry information. Included as part of accrued self-insurance liabilities in the accompanying combined/consolidated balance sheets are PLGL self-insurance liabilities amounting to $ 216,534 , and $ 162,976 as of December 31, 2024 and 2023, respectively, which includes $ 28,593 and $ 34,676 , respectively, of estimated obligations that will be covered by the unrelated insurer. PLGL self-insurance liabilities as of December 31, 2024 and 2023 include $ 76,650 and $ 43,083 , respectively, that were related to unasserted claims. As of December 31, 2024, the Company recorded an asset for the estimated PLGL claims that will be covered by the unrelated insurer amounting to $ 4,861 and $ 23,732 within other receivables and other assets, respectively, and as of December 31, 2023, the Company recorded an asset for the estimated PLGL claims that will be covered by the unrelated insurer amounting to $ 5,895 and $ 28,781 within other receivables and other assets, respectively, as the PLGL claims and the anticipated insurance recoveries are recorded on a gross rather than net basis in accordance with U.S. GAAP. As part of the Plum acquisition in 2021, the Company assumed Plum’s workers’ compensation plan. Plum purchased an occurrence-based high deductible self-insured workers’ compensation policy whereby the Company is responsible for the first layer of coverage, generally ranging from $ 250 to $ 500 per claim. The estimated obligation recorded at December 31, 2024 and 2023 was $ 6,172 , and $ 8,323 , respectively. The Plum facilities were transferred onto the Company’s retrospective-rated premium workers’ compensation policy as of the acquisition date. The following table represents activity in the Company’s PLGL self- insurance liabilities as of and for the years ended December 31, 2024 and 2023: Amount Balance January 1, 2023 $ 138,127 Current year expense 106,107 Claims paid ( 73,385 ) Change in obligations covered by unrelated insurer ( 7,873 ) Balance December 31, 2023 $ 162,976 Current year expense 147,061 Claims paid ( 87,421 ) Change in obligations covered by unrelated insurer ( 6,082 ) Balance December 31, 2024 $ 216,534 Indemnities From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company officers, directors and others, under which the Company may be required to indemnify such persons for liabilities arising out of the nature of their relationship to the Company. The terms of such 130 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the combined/consolidated balance sheets for any of the periods presented. NOTE 19. CAPITAL STOCK The Reorganization on June 30, 2023 referred to in Note 1, “Organization and Nature of Business”, resulted in the Common Shares outstanding being converted from 600 shares of PGI to 20,000 shares of PACS Group (a 1 to 33.33 conversion ratio). On March 31, 2024, the Company’s board of directors approved a 1 to 6,436.1693 stock split of its issued and outstanding common stock, which was effective by amendment to the Company’s charter on April 1, 2024. As part of the amendment, the number of authorized shares of common stock was revised to 1,250,000,000 with the par value remaining at $ 0.001 per share, and the number of authorized shares of preferred stock was approved to be 50,000,000 with a par value of $ 0.001 . All issued and outstanding common stock and per share amounts contained in the combined/consolidated financial statements have been retrospectively adjusted to give effect to the stock split for all periods presented. On April 15, 2024, the Company completed an IPO in which the Company issued and sold 21,428,572 shares of common stock at a public offering price of $ 21.00 per share, generating aggregate gross proceeds of $ 450,000 before underwriter discounts and commissions, fees, and other expenses of $ 35,843 . In addition, the underwriters exercised their 30 -day option to purchase an additional 3,214,284 shares of the Company’s common stock at the initial public offering price from the selling stockholders, less underwriting discounts and commissions. The Company did not receive any proceeds from any sale of shares by the selling stockholders. On September 9, 2024, the Company completed an underwritten public offering in which the Company issued and sold 2,777,778 shares of common stock at a public offering price of $ 36.25 per share, generating gross proceeds of $ 100,694 before underwriter discounts and commissions, fees, and other expenses of $ 5,409 . As part of the offering, selling stockholders sold 13,773,946 shares at the public offering price less underwriter discounts and commissions. In addition, the underwriters exercised their 30-day option to purchase an additional 2,482,758 shares of the Company’s common stock at the offering price from the selling stockholders, less underwriting discounts and commissions. The Company did not receive any proceeds from any sale of shares by the selling stockholders. As of December 31, 2024, the amount of issued and outstanding shares of common stock was 155,177,511 . The Company has no t issued any shares of preferred stock. NOTE 20. COMPUTATION OF NET INCOME PER COMMON SHARE Basic net income per share is calculated by dividing net income attributable to the common stockholders by the weighted-average shares of Common Stock outstanding for the period. The computation of diluted net income per share is similar to the computation of basic net income per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued, which are comprised of restricted stock units using the treasury stock method. 131 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows: Year Ended December 31, 2024 2023 2022 Numerator: Net income $ 55,344 $ 112,882 $ 150,496 Less: net (loss) income attributable to noncontrolling interest ( 416 ) 8 — Net income attributable to PACS Group, Inc. $ 55,760 $ 112,874 $ 150,496 Denominator: Weighted average common shares outstanding 146,663,371 128,723,386 128,723,386 Basic net income per common share $ 0.38 $ 0.88 $ 1.17 A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows: Year Ended December 31, 2024 2023 2022 Numerator: Net income $ 55,344 $ 112,882 $ 150,496 Less: net (loss) income attributable to noncontrolling interest ( 416 ) 8 — Net income attributable to PACS Group, Inc. $ 55,760 $ 112,874 $ 150,496 Denominator: Weighted average common shares outstanding 146,663,371 128,723,386 128,723,386 Plus: effect of diluted shares 1,911,235 — — Adjusted weighted average common shares outstanding 148,574,606 128,723,386 128,723,386 Diluted net income per common share $ 0.38 $ 0.88 $ 1.17 NOTE 21. STOCK AWARDS Stock-based compensation expense consists of stock-based payment awards made to employees and directors, comprised of restricted stock units, based on their estimated fair values. Stock-based compensation expense recognized in the Company’s combined/consolidated statements of income for the years ended December 31, 2024, 2023, and 2022 was based on the vesting of awards granted to date. 2024 Incentive Award Plan (2024 Plan) On March 31, 2024, the Company’s board of directors and stockholders approved the 2024 Plan, which became effective on April 9, 2024. The 2024 Plan allows the Company to make equity-based and cash-based incentive awards to its officers, employees, directors and consultants. The number of shares initially available for issuance under awards granted pursuant to the 2024 Plan (which number includes 15,390,579 shares of common stock issuable upon the vesting of restricted stock unit (RSU) awards granted in connection with the IPO) was equal to 10.25 % of the number of shares of common stock outstanding immediately following the completion of the IPO (disregarding the shares issuable under the 2024 Plan). The number of shares available for issuance under the 2024 Plan increases annually on the first day of the year by an amount equal to up to 2 % of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year. As of December 31, 2024, the total number of shares available for issuance under the 2024 Plan was 1,580,986 . 132 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) 2024 Employee Stock Purchase Plan (2024 ESPP) On March 31, 2024, the Company’s board of directors and stockholders approved the 2024 ESPP, which became effective on April 9, 2024. The number of shares initially available for issuance pursuant to the 2024 ESPP was equal to the number of shares equal to 1 % of the number of shares of common stock outstanding as of immediately following the completion of the IPO (disregarding the shares issuable under the 2024 Plan). The number of shares available for issuance under the 2024 ESPP increases annually on the first day of the year by an amount equal to up to 1 % of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year. As of December 31, 2024 the total number of shares available for issuance under the 2024 ESPP was 1,501,520 as there have been no shares issued under this plan. Restricted Stock Unit Awards Pursuant to the 2024 Plan, the Company granted RSU awards to key executives and directors of 15,409,470 during the year ended December 31, 2024, and 0 shares during preceding years. For certain awards granted to key executives, the stock price used to determine the award fair value was the initial public offering price of $ 21.00 per share. Subsequent grants to non-employee directors used the market price on the date of respective grant to determine the award fair value. Awards granted to key executives at the time of the IPO vested 25 % upon issuance with the remaining shares scheduled to vest in equal increments on an annual basis over the next five years as the grantee meets the requisite service condition. Other awards granted vest over one year . The fair value per share of RSU awards granted during the year ended December 31, 2024 ranged from $ 21.00 to $ 24.85 . The fair value per share includes awards to non-employee directors. A summary of the status of the Company’s non-vested RSU awards for the year ended December 31, 2024 is presented below (there was no such activity prior to the approval of the 2024 Plan, including in 2023 and 2022): Non-Vested Restricted Stock Unit Awards Weighted Average Grant Date Fair Value Non-vested at January 1, 2024 — $ — Granted 15,409,470 21.00 Vested ( 3,847,652 ) 21.00 Forfeited — — Non-vested at December 31, 2024 11,561,818 $ 21.01 During the year ended December 31, 2024, the Company granted 18,891 RSU awards to non-employee directors for their service on the Company’s board of directors from the 2024 Plan. The fair value per share of these awards were $ 24.85 based on the market price on the grant date. Subsequent to December 31, 2024, the Company granted 1,962,425 RSU awards to employees from the 2024 Plan. The fair value per share of these awards were $ 13.72 based on the market price on the grant date. Stock-based compensation expense Stock-based compensation expense recognized during the year ended December 31, 2024 for the Company’s equity incentive plans was $ 115,544 . In future periods, the Company expects to recognize $ 208,127 in stock-based compensation expense for unvested RSU awards that were outstanding as of December 31, 2024. Future stock-based compensation expense will be recognized over 4.3 weighted average years for unvested RSU awards. NOTE 22. RESTATEMENT OF PREVIOUSLY ISSUED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED) Subsequent to the issuance of the Company’s Quarterly Report on Form 10-Q filed on August 12, 2024, the Company received information that indicated certain ancillary services, including respiratory, sensory integration and wound care ultrasound mist therapy, may not be eligible for reimbursement under Medicare Part B. The Company determined that due 133 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) to the underlying regulatory ambiguity those certain ancillary services revenue may be subject to significant reversal in the future. As such, the Company has concluded that such revenue should not be recognized until definitive conclusions regarding the eligibility of billing those certain ancillary services under Medicare Part B is permissible. In accordance with ASC 250 - Accounting Changes and Error Corrections , SEC Staff Accounting Bulletin ("SAB") No. 99 - Materiality , and SAB No. 108 - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , management concluded the unaudited Condensed Combined/Consolidated financial statements for the three months ended March 31, 2024, and the three and six months ended June 30, 2024 (the "Restatement Periods") required restatement. The error has been corrected in the unaudited restated condensed combined/consolidated financial statements for the Restatement Periods, whereby the amount of ancillary services billable under Medicare Part B revenue at each relevant reporting date for those certain services has been recognized as a reduction to accounts receivable outstanding or as a refund liability, for cash received, with the corresponding impact of the resulting change as a decrease in the amount of revenue in the unaudited condensed combined/consolidated statements of income (loss) and comprehensive income (loss). As a result of the adjustments to revenue, additional financial statement lines were impacted by the restatement on the unaudited condensed combined/consolidated balance sheets and statements of income (loss) and comprehensive income (loss) for the Restatement Periods related to the associated claw-back of certain bonuses and any related tax impact of the adjustments. The financial statement line items impacted include the following: • Accounts receivable, net • Other assets • Accrued payroll and benefits • Refund liability • Other liabilities • Patient and resident service revenue • General and administrative expense In addition to matters that were the subject of the Audit Committee’s independent investigation, the Company determined that certain of its leases were incorrectly classified as operating leases instead of finance leases. The Company corrected this classification as part of the restatement. The following tables present the unaudited condensed combined/consolidated balance sheets, statements of income (loss) and comprehensive income (loss), statements of stockholders’ equity, and statements of cash flows as previously reported, the restatement adjustments and the unaudited condensed combined/consolidated balance sheets for the quarters ended March 31, 2024 and June 30, 2024 and the unaudited statements of income (loss) and comprehensive income (loss), statements of stockholders’ equity, and statements of cash flows as adjusted for the quarter and year to date periods ended March 31, 2024 and June 30, 2024. Restatement adjustments are reflected as follows: • Related to Medicare Part B revenue are labeled “MPB” • Related to lease classification are labeled “LEA” In those cases where a financial statement line has been adjusted due to more than one category, a footnote reference detailing the categories has been added. 134 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share and per share values) March 31, 2024 As Previously Reported Restatement Adjustments Category Reference As Restated ASSETS Current Assets: Cash and cash equivalents $ 81,213 $ — $ 81,213 Accounts receivable, net 622,737 ( 10,938 ) MPB 611,799 Other receivables 66,014 — 66,014 Prepaid expenses and other current assets 61,761 — 61,761 Total Current Assets 831,725 ( 10,938 ) 820,787 Property and equipment, net 660,157 6,745 LEA 666,902 Operating lease right-of-use assets 2,175,169 ( 1,614 ) LEA 2,173,555 Insurance subsidiary deposits and investments 25,201 — 25,201 Escrow funds 21,456 — 21,456 Goodwill and other indefinite-lived assets 65,291 — 65,291 Other assets 87,329 — 87,329 Total Assets $ 3,866,328 $ ( 5,807 ) $ 3,860,521 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 157,000 $ — $ 157,000 Accrued payroll and benefits 143,811 — 143,811 Current operating lease liabilities 113,617 ( 113 ) LEA 113,504 Current maturities of long-term debt 16,837 — 16,837 Current portion of accrued self-insurance liabilities 29,210 — 29,210 Refund liability — 3,947 MPB 3,947 Other accrued expenses 71,073 — 71,073 Total Current Liabilities 531,548 3,834 535,382 Long-term operating lease liabilities 2,123,865 ( 1,562 ) LEA 2,122,303 Accrued benefits, less current portion 6,738 — 6,738 Lines of credit 537,000 — 537,000 Long-term debt, less current maturities, net of deferred financing fees 230,855 — 230,855 Accrued self-insurance liabilities, less current portion 154,892 — 154,892 Other liabilities 147,837 6,242 MPB, LEA (1) 154,079 Total Liabilities $ 3,732,735 $ 8,514 $ 3,741,249 Commitments and contingencies Equity: PACS Group, Inc. stockholders’ equity: Common stock - 64,361,693,000 shares authorized, $ 0.001 par value, 128,723,386 shares issued and outstanding as of March 31, 2024 129 — 129 Accumulated other comprehensive income 201 — 201 Retained earnings 127,661 ( 14,321 ) 113,340 Total stockholders' equity 127,991 ( 14,321 ) 113,670 Noncontrolling interest in subsidiary 5,602 — 5,602 Total Equity $ 133,593 $ ( 14,321 ) $ 119,272 Total Liabilities and Equity $ 3,866,328 $ ( 5,807 ) $ 3,860,521 (1) MPB: $( 1,035 ), LEA: $ 7,277 135 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share and per share values) June 30, 2024 As Previously Reported Restatement Adjustments Category Reference As Restated ASSETS Current Assets: Cash and cash equivalents $ 73,374 $ — $ 73,374 Accounts receivable, net 610,577 ( 30,440 ) MPB 580,137 Other receivables 50,396 — 50,396 Prepaid expenses and other current assets 66,301 ( 6,539 ) LEA 59,762 Total Current Assets 800,648 ( 36,979 ) 763,669 Property and equipment, net 763,904 92,919 LEA 856,823 Operating lease right-of-use assets 2,112,914 ( 38,160 ) LEA 2,074,754 Insurance subsidiary deposits and investments 35,476 — 35,476 Escrow funds 19,531 — 19,531 Goodwill and other indefinite-lived assets 65,291 — 65,291 Other assets 98,584 18,684 MPB, LEA (1) 117,268 Total Assets $ 3,896,348 $ 36,464 $ 3,932,812 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 125,746 $ — $ 125,746 Accrued payroll and benefits 107,077 ( 7,706 ) MPB 99,371 Current operating lease liabilities 113,278 ( 2,848 ) LEA 110,430 Current maturities of long-term debt 15,745 — 15,745 Current portion of accrued self-insurance liabilities 31,252 — 31,252 Refund liability — 30,586 MPB 30,586 Other accrued expenses 75,003 64 LEA 75,067 Total Current Liabilities 468,101 20,096 488,197 Long-term operating lease liabilities 2,068,585 ( 36,229 ) LEA 2,032,356 Accrued benefits, less current portion 6,738 — 6,738 Lines of credit 248,000 — 248,000 Long-term debt, less current maturities, net of deferred financing fees 227,107 — 227,107 Accrued self-insurance liabilities, less current portion 172,111 — 172,111 Other liabilities 127,472 87,886 LEA 215,358 Total Liabilities $ 3,318,114 $ 71,753 $ 3,389,867 Commitments and contingencies Equity: PACS Group, Inc. stockholders’ equity: Common stock: $ 0.001 par value; 1,250,000,000 shares authorized, 152,399,733 shares issued and outstanding as of June 30, 2024 152 — 152 Additional paid-in capital 471,472 — 471,472 Retained earnings 100,504 ( 35,289 ) 65,215 Total stockholders' equity 572,128 ( 35,289 ) 536,839 Noncontrolling interest in subsidiary 6,106 — 6,106 Total Equity $ 578,234 $ ( 35,289 ) $ 542,945 Total Liabilities and Equity $ 3,896,348 $ 36,464 $ 3,932,812 (1) MPB: $ 18,635 , LEA: $ 49 136 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (dollars in thousands, except for share and per share values) Three Months Ended March 31, 2024 As Previously Reported Restatement Adjustments Category Reference As Restated Revenue Patient and resident service revenue $ 934,298 $ ( 14,885 ) MPB $ 919,413 Additional funding — — — Other revenues 423 — 423 Total Revenue $ 934,721 $ ( 14,885 ) $ 919,836 Operating Expenses Cost of services 735,992 — 735,992 Rent - cost of services 63,961 ( 448 ) LEA 63,513 General and administrative expense 46,906 — 46,906 Depreciation and amortization 7,902 214 LEA 8,116 Total Operating Expenses $ 854,761 $ ( 234 ) $ 854,527 Operating Income $ 79,960 $ ( 14,651 ) $ 65,309 Other (Expense) Income Interest expense ( 15,391 ) ( 705 ) LEA ( 16,096 ) Gain on lease termination 8,046 — 8,046 Other income, net 440 — 440 Total Other Expense, net $ ( 6,905 ) $ ( 705 ) $ ( 7,610 ) Income before provision for income taxes 73,055 ( 15,356 ) 57,699 Provision for income taxes ( 23,915 ) 1,035 ( 22,880 ) Net Income $ 49,140 $ ( 14,321 ) $ 34,819 Less: Net income attributable to noncontrolling interest 2 — 2 Net income attributable to PACS Group, Inc. $ 49,138 $ ( 14,321 ) $ 34,817 Net income per common share attributable to PACS Group, Inc. Basic and diluted $ 0.38 $ ( 0.11 ) $ 0.27 Weighted-average shares outstanding Basic and diluted 128,723,386 — 128,723,386 Other comprehensive income, net of tax: Unrealized gain on available-for-sale debt securities, net of tax $ 201 $ — $ 201 Total other comprehensive income 201 — 201 Comprehensive income $ 49,341 $ ( 14,321 ) $ 35,020 Less: Comprehensive income attributable to noncontrolling interest 2 — 2 Comprehensive income attributable to PACS Group, Inc. $ 49,339 $ ( 14,321 ) $ 35,018 137 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (dollars in thousands, except for share and per share values) Three Months Ended June 30, 2024 As Previously Reported Restatement Adjustments Category Reference As Restated Revenue Patient and resident service revenue $ 981,398 $ ( 46,141 ) MPB $ 935,257 Additional funding — — — Other revenues 448 — 448 Total Revenue $ 981,846 $ ( 46,141 ) $ 935,705 Operating Expenses Cost of services 762,147 — 762,147 Rent - cost of services 65,833 ( 1,024 ) LEA 64,809 General and administrative expense 144,380 ( 7,706 ) MPB 136,674 Depreciation and amortization 8,776 478 LEA 9,254 Total Operating Expenses $ 981,136 $ ( 8,252 ) $ 972,884 Operating Income (Loss) $ 710 $ ( 37,889 ) $ ( 37,179 ) Other (Expense) Income Interest expense ( 9,187 ) ( 728 ) LEA ( 9,915 ) Gain on lease termination — — — Other expense, net ( 3,905 ) — ( 3,905 ) Total Other Expense, net $ ( 13,092 ) $ ( 728 ) $ ( 13,820 ) (Loss) income before provision for income taxes ( 12,382 ) ( 38,617 ) ( 50,999 ) Benefit (provision) for income taxes 1,474 17,649 19,123 Net (Loss) Income $ ( 10,908 ) $ ( 20,968 ) $ ( 31,876 ) Less: Net income attributable to noncontrolling interest 2 — 2 Net (loss) income attributable to PACS Group, Inc. $ ( 10,910 ) $ ( 20,968 ) $ ( 31,878 ) Net (loss) income per share attributable to PACS Group, Inc. Basic $ ( 0.07 ) $ ( 0.14 ) $ ( 0.21 ) Diluted $ ( 0.07 ) $ ( 0.14 ) $ ( 0.21 ) Weighted-average common shares outstanding Basic 149,463,655 — 149,463,655 Diluted 149,463,655 — 149,463,655 Other comprehensive loss, net of tax: Unrealized loss on available-for-sale debt securities, net of tax $ ( 201 ) $ — $ ( 201 ) Total other comprehensive loss ( 201 ) — ( 201 ) Comprehensive (loss) income $ ( 11,109 ) $ ( 20,968 ) $ ( 32,077 ) Less: Comprehensive income attributable to noncontrolling interest 2 — 2 Comprehensive (loss) income attributable to PACS Group, Inc. $ ( 11,111 ) $ ( 20,968 ) $ ( 32,079 ) 138 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (dollars in thousands, except for share and per share values) Six Months Ended June 30, 2024 As Previously Reported Restatement Adjustments Category Reference As Restated Revenue Patient and resident service revenue $ 1,915,696 $ ( 61,026 ) MPB $ 1,854,670 Additional funding — — — Other revenues 871 — 871 Total Revenue $ 1,916,567 $ ( 61,026 ) $ 1,855,541 Operating Expenses Cost of services 1,498,139 — 1,498,139 Rent - cost of services 129,794 ( 1,472 ) LEA 128,322 General and administrative expense 191,286 ( 7,706 ) MPB 183,580 Depreciation and amortization 16,678 692 LEA 17,370 Total Operating Expenses $ 1,835,897 $ ( 8,486 ) $ 1,827,411 Operating Income (Loss) $ 80,670 $ ( 52,540 ) $ 28,130 Other (Expense) Income Interest expense ( 24,578 ) ( 1,433 ) LEA ( 26,011 ) Gain on lease termination 8,046 — 8,046 Other expense, net ( 3,465 ) — ( 3,465 ) Total Other Expense, net $ ( 19,997 ) $ ( 1,433 ) $ ( 21,430 ) (Loss) income before provision for income taxes 60,673 ( 53,973 ) 6,700 Benefit (provision) for income taxes ( 22,441 ) 18,684 ( 3,757 ) Net (Loss) Income $ 38,232 $ ( 35,289 ) $ 2,943 Less: Net income attributable to noncontrolling interest 4 — 4 Net (loss) income attributable to PACS Group, Inc. $ 38,228 $ ( 35,289 ) $ 2,939 Net (loss) income per share attributable to PACS Group, Inc. Basic $ 0.27 $ ( 0.25 ) $ 0.02 Diluted $ 0.27 $ ( 0.25 ) $ 0.02 Weighted-average common shares outstanding Basic 139,093,520 — 139,093,520 Diluted 139,684,618 — 139,684,618 Other comprehensive loss, net of tax: Unrealized loss on available-for-sale debt securities, net of tax $ — $ — $ — Total other comprehensive loss — — — Comprehensive (loss) income $ 38,232 $ ( 35,289 ) $ 2,943 Less: Comprehensive income attributable to noncontrolling interest 4 — 4 Comprehensive (loss) income attributable to PACS Group, Inc. $ 38,228 $ ( 35,289 ) $ 2,939 139 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands, except for share and per share values) Common Stock Additional Paid-In Capital Retained Earnings Noncontrolling Interest Accumulated Other Comprehensive Income Total Shares Amount Balance January 1, 2024 128,723,386 $ 129 $ — $ 95,997 $ 5,600 $ — $ 101,726 Dividends on common stock ($ 0.1358 per share) — — — ( 17,474 ) — — ( 17,474 ) Other comprehensive income — — — — — 201 201 Net income attributable to noncontrolling interest — — — — 2 — 2 Net income attributable to PACS Group, Inc. (1) — — — 49,138 — — 49,138 Restatement Adjustments: Net income attributable to PACS Group, Inc. (1) — — — ( 14,321 ) — — ( 14,321 ) Balance March 31, 2024 (as restated) 128,723,386 $ 129 $ — $ 113,340 $ 5,602 $ 201 $ 119,272 Contributions — — — — 502 — 502 Issuance of common stock 21,428,572 21 414,136 — — — 414,157 Employee stock-based compensation 3,847,652 4 90,932 — — — 90,936 Tax withholdings related to net share settlement of equity awards ( 1,599,877 ) ( 2 ) ( 33,596 ) — — — ( 33,598 ) Dividends on common stock ($ 0.1066 per share) — — — ( 16,247 ) — — ( 16,247 ) Other comprehensive loss — — — — — ( 201 ) ( 201 ) Net income attributable to noncontrolling interest — — — — 2 — 2 Net loss attributable to PACS Group, Inc. (2) — — — ( 10,910 ) — — ( 10,910 ) Restatement Adjustments: Net loss attributable to PACS Group, Inc. (2) — — — ( 20,968 ) — — ( 20,968 ) Balance June 30, 2024 (as restated) 152,399,733 $ 152 $ 471,472 $ 65,215 $ 6,106 $ — $ 542,945 (1) Restated net income attributable to PACS Group, Inc. for the three months ended March 31, 2024 is the sum of the previously reported $ 49,138 and the restatement adjustment of $( 14,321 ): $ 34,817 (2) Restated net loss attributable to PACS Group, Inc. for the three months ended June 30, 2024 is the sum of the previously reported $( 10,910 ) and the restatement adjustment of $( 20,968 ): $( 31,878 ) 140 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Three Months Ended March 31, 2024 As Previously Reported Restatement Adjustments As Restated Cash flows from operating activities: Net income $ 49,140 $ ( 14,321 ) $ 34,819 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 7,902 214 8,116 Amortization and write-off of deferred financing fees 775 — 775 Loss on disposition of property and equipment 343 — 343 Gain on investment in partnership ( 120 ) — ( 120 ) Deferred taxes 4,985 ( 1,035 ) 3,950 Noncash lease expense 7,262 ( 399 ) 6,863 Change in operating assets and liabilities Accounts receivable, net ( 74,930 ) 10,938 ( 63,992 ) Other receivables ( 13,755 ) — ( 13,755 ) Prepaid expenses and other current assets ( 5,009 ) — ( 5,009 ) Other assets ( 1,802 ) — ( 1,802 ) Escrow funds ( 5,807 ) — ( 5,807 ) Operating lease obligations ( 8,572 ) 338 ( 8,234 ) Accounts payable 13,938 — 13,938 Accrued payroll and benefits 51,577 — 51,577 Accrued self-insurance liabilities 10,399 — 10,399 Refund liability — 3,947 3,947 Other accrued expenses 1,340 ( 36 ) 1,304 Other liabilities 21,121 318 21,439 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 58,787 $ ( 36 ) $ 58,751 Cash flows from investing activities Investment in partnership $ ( 5,081 ) $ — $ ( 5,081 ) Non-operating distributions from investment in partnership 673 — 673 Purchase of investments ( 25,000 ) — ( 25,000 ) Acquisition of facilities ( 78,500 ) — ( 78,500 ) Purchase of property and equipment ( 10,761 ) — ( 10,761 ) NET CASH USED IN INVESTING ACTIVITIES $ ( 118,669 ) $ — $ ( 118,669 ) Cash flows from financing activities Borrowing on lines-of-credit, net of deferred financing fees 117,000 — 117,000 Payments on lines-of-credit ( 100,000 ) — ( 100,000 ) Dividends on common stock ( 17,474 ) — ( 17,474 ) Borrowings of long-term debt, net of deferred financing fees 39,786 — 39,786 Payments on long-term debt ( 4,859 ) 36 ( 4,823 ) NET CASH PROVIDED BY FINANCING ACTIVITIES $ 34,453 $ 36 $ 34,489 Net change in cash ( 25,429 ) — ( 25,429 ) Cash, cash equivalents, and restricted cash - beginning of period 118,704 — 118,704 Cash, cash equivalents, and restricted cash - end of period $ 93,275 $ — $ 93,275 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 15,638 $ 705 $ 16,343 Income taxes $ — $ — $ — Non-cash financing and investing activity Accrued capital expenditures $ 4,112 $ — $ 4,112 Assets acquired in operation expansions in exchange for notes payable $ — $ — $ — Assets acquired in operation expansions through settlement of notes receivable $ 500 $ — $ 500 141 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) PACS GROUP, INC. AND SUBSIDIARIES RESTATED UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Six Months Ended June 30, 2024 As Previously Reported Restatement Adjustments As Restated Cash flows from operating activities Net income $ 38,232 $ ( 35,289 ) $ 2,943 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 16,678 692 17,370 Amortization and write-off of deferred financing fees 1,551 — 1,551 Stock-based compensation 90,936 — 90,936 Loss on disposition of property and equipment 343 — 343 Loss on investment in partnership 4,288 — 4,288 Gain on other investments ( 476 ) — ( 476 ) Deferred taxes ( 15,969 ) ( 18,684 ) ( 34,653 ) Noncash lease expense 15,185 ( 582 ) 14,603 Change in operating assets and liabilities Accounts receivable, net ( 62,770 ) 30,440 ( 32,330 ) Other receivables 1,863 — 1,863 Prepaid expenses and other current assets ( 18,286 ) 6,539 ( 11,747 ) Other assets ( 1,021 ) — ( 1,021 ) Escrow funds ( 3,882 ) — ( 3,882 ) Operating lease obligations ( 9,859 ) ( 335 ) ( 10,194 ) Accounts payable ( 17,203 ) — ( 17,203 ) Accrued payroll and benefits 14,843 ( 7,706 ) 7,137 Accrued self-insurance liabilities 29,660 — 29,660 Refund liability — 30,586 30,586 Other accrued expenses 5,492 ( 12 ) 5,480 Other liabilities 3,995 ( 5,726 ) ( 1,731 ) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 93,600 $ ( 77 ) $ 93,523 Cash flows from investing activities Investment in partnership $ ( 5,081 ) $ — $ ( 5,081 ) Non-operating distributions from investment in partnership 1,190 — 1,190 Purchase of investments ( 35,000 ) — ( 35,000 ) Acquisition of facilities ( 174,650 ) — ( 174,650 ) Purchase of property and equipment ( 26,093 ) — ( 26,093 ) Cash proceeds from the sale of assets — — — NET CASH USED IN INVESTING ACTIVITIES $ ( 239,634 ) $ — $ ( 239,634 ) Cash flows from financing activities Borrowing on lines-of-credit, net of deferred financing fees $ 288,000 $ — $ 288,000 Payments on lines-of-credit ( 560,000 ) — ( 560,000 ) Dividends on common stock ( 33,721 ) — ( 33,721 ) Contributions from noncontrolling interest 502 — 502 Borrowings of long-term debt, net of deferred financing fees 39,757 — 39,757 Payments on long-term debt ( 9,913 ) 77 ( 9,836 ) Proceeds from initial public offering, net of issuance costs 414,157 — 414,157 Taxes paid related to net share settlement of stock-based compensation awards ( 33,598 ) — ( 33,598 ) NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES $ 105,184 $ 77 $ 105,261 Net change in cash ( 40,850 ) — ( 40,850 ) Cash, cash equivalents, and restricted cash - beginning of period 118,704 — 118,704 Cash, cash equivalents, and restricted cash - end of period $ 77,854 $ — $ 77,854 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 25,550 $ 1,433 $ 26,983 Income taxes $ 43,455 $ — $ 43,455 Non-cash financing and investing activity Accrued capital expenditures $ 5,154 $ — $ 5,154 Assets acquired in operation expansions in exchange for notes payable $ — $ — $ — Assets acquired in operation expansions through settlement of notes receivable $ 500 $ — $ 500 NOTE 23. SUBSEQUENT EVENTS On November 19, 2025, the Audit Committee of the Company’s Board of Directors concluded an independent investigation that was initially disclosed in a press release issued on November 6, 2024, furnished as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2024. 142 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.