PACS Group, Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PACS GROUP, INC. AND SUBSIDIARIES INDEX TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm PCAOB ID No. 42 90 Combined/Consolidated Financial Statements Combined/Consolidated Balance Sheets as of December 31, 2025 and 2024 92 Combined/Consolidated Statements of Income for the Years Ended December 31, 2025, 2024, and 2023 93 Combined/Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2025, 2024, and 2023 94 Combined/Consolidated Statements of Cash Flows for the Years Ended December 31, 2025, 2024, and 2023 95 Notes to Combined/Consolidated Financial Statements 96 89 Table of Content s 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, 2025 and 2024, the related combined/consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2026 expressed an adverse opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of 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. 90 Table of Content s Professional liability and general liability claims reserve Description of the Matter At December 31, 2025, the Company’s professional liability and general liability self-insurance liabilities were $296 million. As further described in Note 18 to the combined/consolidated financial statements, the professional liability and general liability self-insurance liabilities include 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 self-insurance liabilities involved significant judgment in estimating the projected settlement value of reported and unreported claims. This assessment required a high degree of auditor judgment and an increased audit effort, including the involvement of our actuarial specialists, to evaluate whether the reserves were appropriately recorded. How We Addressed the Matter in Our Audit To test the professional liability and general liability self-insurance liabilities, 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 self-insurance liabilities, 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 self-insurance liabilities 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 February 26, 2026 91 Table of Content s PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share and per share values) December 31, 2025 2024 ASSETS Current Assets: Cash and cash equivalents $ 197,016 $ 157,674 Accounts receivable, net 628,128 641,775 Other receivables 73,965 74,746 Prepaid expenses and other current assets 170,630 64,066 Total Current Assets 1,069,739 938,261 Property and equipment, net 1,201,096 990,580 Operating lease right-of-use assets 2,968,176 2,994,519 Insurance subsidiary deposits and investments 87,192 66,258 Escrow funds 18,404 25,122 Goodwill and other indefinite-lived assets 68,061 67,061 Other assets 171,366 161,108 Total Assets $ 5,584,034 $ 5,242,909 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 192,232 $ 175,062 Accrued payroll and benefits 187,516 146,177 Current operating lease liabilities 153,066 136,232 Current maturities of long-term debt 4,463 14,852 Current portion of accrued self-insurance liabilities 128,994 75,966 Current line of credit — 142,000 Refund liability 181,129 145,795 Other accrued expenses 154,030 142,348 Total Current Liabilities 1,001,430 978,432 Long-term operating lease liabilities 2,939,854 2,935,773 Line of credit 100,000 — Long-term debt, less current maturities, net of deferred financing fees 244,803 250,984 Accrued self-insurance liabilities, less current portion 192,561 164,979 Other liabilities 152,937 197,050 Total Liabilities $ 4,631,585 $ 4,527,218 Commitments and contingencies (Note 17) Equity: PACS Group, Inc. stockholders' equity: Common stock: $ 0.001 par value; 1,250,000,000 shares authorized; 156,615,144 shares issued and outstanding as of December 31, 2025, and 155,177,511 shares issued and outstanding as of December 31, 2024 157 155 Additional paid-in capital 637,035 591,363 Retained earnings 309,579 118,036 Total PACS Group, Inc. stockholders' equity 946,771 709,554 Noncontrolling interest in subsidiary 5,678 6,137 Total Equity $ 952,449 $ 715,691 Total Liabilities and Equity $ 5,584,034 $ 5,242,909 See accompanying notes to combined/consolidated financial statements. 92 Table of Content s PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except for share and per share values) Year Ended December 31, 2025 2024 2023 Revenue Patient and resident service revenue $ 5,287,885 $ 4,086,655 $ 3,110,114 Additional funding — — 375 Other revenues 1,047 3,079 1,003 Total Revenue $ 5,288,932 $ 4,089,734 $ 3,111,492 Operating Expenses Cost of services 4,129,696 3,297,091 2,447,713 Rent - cost of services 378,908 284,953 216,711 General and administrative expense 415,070 343,808 213,664 Depreciation and amortization 55,663 40,809 25,632 Total Operating Expenses $ 4,979,337 $ 3,966,661 $ 2,903,720 Operating income 309,595 123,073 207,772 Other (Expense) Income Interest expense ( 28,363 ) ( 44,341 ) ( 49,919 ) Gain on lease termination — 8,046 — Other income (expense), net 3,218 14,776 ( 536 ) Total Other Expense, Net $ ( 25,145 ) $ ( 21,519 ) $ ( 50,455 ) Income before provision for income taxes 284,450 101,554 157,317 Provision for income taxes 92,989 46,210 44,435 Net Income $ 191,461 $ 55,344 $ 112,882 Less: Net (loss) income attributable to noncontrolling interest ( 82 ) ( 416 ) 8 Net Income Attributable To PACS Group, Inc. $ 191,543 $ 55,760 $ 112,874 Net Income Per Share Attributable To PACS Group, Inc. Basic $ 1.23 $ 0.38 $ 0.88 Diluted $ 1.22 $ 0.38 $ 0.88 Weighted-Average Common Shares Outstanding Basic 156,180,786 146,663,371 128,723,386 Diluted 156,700,339 148,574,606 128,723,386 See accompanying notes to combined/consolidated financial statements. 93 Table of Content s PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands, except for share values) Common Stock Additional Paid-in Capital Retained Earnings Noncontrolling Interest Total Shares Amount Balance January 1, 2023 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 Employee stock-based compensation — — 54,069 — — 54,069 Issuance of common stock to employees and directors resulting from the vesting of restricted stock unit awards 2,325,126 3 ( 3 ) — — — Tax withholdings related to net share settlement of equity awards ( 887,493 ) ( 1 ) ( 8,394 ) — — ( 8,395 ) Noncontrolling interest distribution — — — — ( 377 ) ( 377 ) Net loss attributable to noncontrolling interest — — — — ( 82 ) ( 82 ) Net income attributable to PACS Group, Inc. — — — 191,543 — 191,543 Balance December 31, 2025 156,615,144 $ 157 $ 637,035 $ 309,579 $ 5,678 $ 952,449 See accompanying notes to combined/consolidated financial statements. 94 Table of Content s PACS GROUP, INC. AND SUBSIDIARIES COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 2025 2024 2023 Cash flows from operating activities Net income $ 191,461 $ 55,344 $ 112,882 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 55,663 40,809 25,632 Amortization and write-off of deferred financing fees 3,148 3,115 6,068 Stock-based compensation 54,069 115,544 — Loss on investment in partnership 773 4,565 391 Gain on insurance subsidiary deposits and investments ( 4,896 ) ( 1,258 ) — Deferred taxes ( 17,733 ) ( 44,484 ) ( 9,923 ) Noncash lease expense 48,454 34,647 22,727 Other noncash operating activities 573 843 581 Change in operating assets and liabilities Accounts receivable, net 13,647 ( 93,968 ) ( 176,883 ) Other receivables 781 ( 22,487 ) ( 3,059 ) Prepaid expenses and other current assets ( 69,523 ) ( 17,210 ) ( 18,765 ) Other assets ( 2,660 ) ( 13,338 ) ( 3,338 ) Escrow funds 6,718 ( 9,473 ) 568 Operating lease liabilities ( 1,196 ) ( 20,784 ) ( 2,011 ) Accounts payable 14,856 33,398 33,371 Accrued payroll and benefits 40,992 52,041 6,325 Accrued self-insurance liabilities 80,610 67,242 35,576 Refund liability 35,334 145,795 — Other accrued expenses 13,227 73,210 ( 55,501 ) Other liabilities ( 60,074 ) ( 36,210 ) 89,056 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 404,224 $ 367,341 $ 63,697 Cash flows from investing activities Investment in partnerships $ — $ ( 32,891 ) $ ( 2,597 ) Non-operating distributions from investment in partnership 5,593 3,521 1,862 Purchase of available-for-sale securities ( 21,212 ) ( 90,874 ) — Sale of available-for-sale securities — 25,874 — Acquisition of facilities ( 143,751 ) ( 283,344 ) ( 127,024 ) Purchase of property and equipment ( 105,405 ) ( 66,465 ) ( 45,782 ) Proceeds from the sale of assets 750 1,500 750 NET CASH USED IN INVESTING ACTIVITIES $ ( 264,025 ) $ ( 442,679 ) $ ( 172,791 ) Cash flows from financing activities Borrowing on lines of credit, net of deferred financing fees $ — $ 676,000 $ 855,704 Payments on lines of credit ( 42,000 ) ( 1,054,000 ) ( 497,986 ) Borrowings of long-term debt, net of deferred financing fees — 72,305 411,313 Payments on long-term debt ( 18,218 ) ( 19,455 ) ( 559,632 ) Noncontrolling interest distribution ( 377 ) — — Contributions from noncontrolling interest — 502 587 Dividends on common stock — ( 33,721 ) ( 80,394 ) 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 equity awards ( 8,395 ) ( 33,597 ) — NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES $ ( 68,990 ) $ 117,476 $ 129,592 Net change in cash 71,209 42,138 20,498 Cash, cash equivalents, and restricted cash - beginning of period 160,842 118,704 98,206 Cash, cash equivalents, and restricted cash - end of period $ 232,051 $ 160,842 $ 118,704 Cash and cash equivalents $ 197,016 $ 157,674 $ 73,416 Restricted cash (included in prepaid expenses and other current assets) 35,035 3,168 4,977 Restricted cash (included in other assets) — — 40,311 Cash, cash equivalents, and restricted cash $ 232,051 $ 160,842 $ 118,704 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 40,509 $ 48,248 $ 50,558 Income taxes $ 84,047 $ 107,831 $ 60,009 Non-cash financing and investing activity Accrued capital expenditures $ 6,031 $ 3,716 $ 3,000 Assets acquired in operation expansions in exchange for notes payable $ — $ — $ 2,150 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. 95 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, 2025 PACS Group subsidiaries operated 321 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 32,854 skilled nursing beds and 2,525 assisted living beds as of that date. As of December 31, 2025, PACS Group subsidiaries operated 268 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. PACS Group’s real estate portfolio includes 53 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. 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 credit agreement, as amended and restated over time, 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 96 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. 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 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. 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 current and non-current assets based on the timing of expected future payments of the Company's captive insurance liabilities. 97 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) 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. 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. 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. 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. 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. 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 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. 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. Medicaid: Payments for skilled nursing facility services rendered to Medicaid 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. 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. 98 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 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, 2025 and 2024. 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. 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. Historically, differences between estimated settlements and actual settlements have been immaterial. 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, 2025 and 2024, the allowance for credit losses was immaterial to the combined/consolidated financial statements. 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 99 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 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 five 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 100 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 and investments, 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, 2025, 2024, and 2023. 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 workers’ compensation (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. 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) 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, 2025 and 2024. 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, 2025, 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, 2025, 2024, and 2023, advertising expenses included in the Company’s combined/consolidated statements of income were $ 11,231 , $ 7,633 , and $ 7,127 , respectively. 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) 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 23 % and 30 % of total accounts receivable, respectively, at December 31, 2025 and 18 % and 39 % of total accounts receivable, respectively, at December 31, 2024. 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 48 % 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. Stock-based compensation expense within 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. There were no components of comprehensive income for the years ended December 31, 2025 and 2023. 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. The Company does not have any components 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) of 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, which could be zero. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as necessary when additional information becomes known and expectations change. Recent Accounting Standards Adopted by the Company In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The standard 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 was effective for annual periods beginning after December 15, 2024. The Company adopted the standard on a retrospective basis in Note 12, “Income Taxes”, of this annual report on Form 10-K. Recent Accounting Standards Issued But Not Yet Adopted by the Company 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. In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements , which clarifies interim disclosure requirements and the applicability of Topic 270. The guidance will be effective for interim periods beginning January 1, 2028. Early adoption is permitted. Upon adoption, the guidance can be applied prospectively or retrospectively. The Company is currently evaluating the impact this guidance will have and does not expect the adoption of this guidance to have a material impact on the interim condensed 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. 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. 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) The following table sets forth financial information for the segment: Year ended December 31, 2025 2024 2023 Revenue $ 5,288,932 $ 4,089,734 $ 3,111,492 Less: Labor expense (1) 2,772,006 2,207,875 1,664,163 Depreciation and amortization 55,663 40,809 25,632 Interest expense, net 28,363 44,341 49,919 Equity in the net loss of investees accounted for under the equity method 773 4,565 391 Provision for income taxes 92,989 46,210 44,435 Other segment items (2) 2,147,677 1,690,590 1,214,070 Segment net income $ 191,461 $ 55,344 $ 112,882 __________ (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 is derived from services rendered, under short-term contracts, to patients for skilled 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. Disaggregation of Revenue 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, 2025, 2024, and 2023 are as follows: 2025 % of Revenue 2024 % of Revenue 2023 % of Revenue Medicare $ 1,783,686 33.7 % $ 1,381,236 33.8 % $ 1,200,801 38.6 % Medicaid 2,139,613 40.5 % 1,651,401 40.4 % 1,168,455 37.6 % Managed care 989,072 18.7 % 813,865 19.9 % 586,850 18.9 % Private and other 375,514 7.1 % 240,153 5.9 % 154,008 4.9 % Total patient and resident service revenue $ 5,287,885 100.0 % $ 4,086,655 100.0 % $ 3,110,114 100.0 % Refund Liability The balance of the refund liability was $ 181,129 and $ 145,795 as of December 31, 2025 and 2024, respectively, and is presented within current liabilities on the Company's combined/consolidated balance sheets. Additional Funding and CARES Act Through the CARES Act of 2020, 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 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) 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 for the ended December 31, 2023 for funds received prior to 2023. The Company did not receive any funds related to this program during the years ended December 31, 2025, 2024 or 2023. 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. Due to uncertainty related to meeting the necessary qualifications, the Company recorded a reserve against the entire amount claimed. In the years ended December 31, 2025 and 2024, the Company recognized $ 14,946 and $ 14,599 , respectively, 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, 2025 and 2024, the Company has recorded $ 9,674 and $ 21,917 , respectively, in other liabilities to reflect the cash already received related to these credits which may need to be returned and potential penalties. 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. 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, 2025 and 2024, 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. 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) NOTE 6. PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: December 31, 2025 2024 Buildings and improvements $ 823,490 $ 654,975 Leasehold improvements 125,832 79,440 Furniture, fixtures, and other 131,812 107,896 Construction in process 24,565 23,952 Land 94,024 84,774 Finance lease right-of-use assets 155,539 145,262 $ 1,355,262 $ 1,096,299 Less: accumulated depreciation and amortization 154,166 105,719 Property and equipment, net $ 1,201,096 $ 990,580 The Company evaluated its long-lived assets and did not record any impairment charges for the years ended December 31, 2025, 2024, and 2023. During the year ended December 31, 2025, the Company acquired a building used as its primary office space in Salt Lake City, Utah for a purchase price of $ 31,344 . See Note 16, “Operation Expansions”, for additional information on expansions during the years ended December 31, 2025, 2024, and 2023 impacting property and equipment, net. NOTE 7. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS Goodwill consisted of the following: Goodwill Balance as of January 1, 2024 $ 59,021 Acquisitions 1,770 Balance as of December 31, 2024 $ 60,791 Acquisitions 1,000 Balance as of December 31, 2025 $ 61,791 There are no prior period accumulated goodwill impairment losses nor any goodwill impairment losses for the years ended December 31, 2025, 2024, and 2023. As of the years ended December 31, 2025 and 2024, the Company's indefinite-lived intangible assets consisted of the following: December 31, 2025 2024 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, 2025, 2024, and 2023. 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) 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 $ 87,192 and $ 66,258 as of December 31, 2025 and 2024, respectively. The insurance subsidiary deposits and investments include net unrealized gains of $ 5,280 and $ 384 as of December 31, 2025 and 2024, respectively. Gains and losses on investments are recorded within other income (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, 2025 and 2024, the Company held $ 30,801 and $ 37,167 , 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. The Company holds a 50.0 % ownership interest in the entity BRFS SNF Ventures V, LLC (BRFS). This investment holds three post-acute care facilities which it leases to the Company. 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 $ 14,948 and $ 15,528 on the Company’s combined/consolidated balance sheets as of December 31, 2025 and 2024, respectively. The Company holds a 25.8 % ownership interest in the entity Next Saddle Investors, LLC (Saddle). Saddle acquired the operations for all 53 facilities included in the 2024 Prestige 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 held a de facto agency relationship with the Company under FASB ASC Topic 810, Consolidation (ASC 810). Saddle is a VIE; however, because the Company is not the primary beneficiary, it does not consolidate the entity. The investment was $ 4,986 and $ 8,536 on the Company’s balance sheets as of December 31, 2025 and 2024, respectively. All of the Company’s other equity investments are individually immaterial with the largest investment of $ 7,727 in an entity representing an ownership of 49.0 %. Loss from the investment in all partnerships was $ 773 , $ 4,565 , and $ 391 , for the years ended December 31, 2025, 2024, and 2023, respectively. NOTE 10. CREDIT FACILITIES The Company maintains a revolving credit facility between the Company and certain of its subsidiaries, and Truist Bank (Truist) as administrative agent (Administrative Agent) and a syndicate of lenders (the Amended and Restated Credit Facility). The Amended and Restated Credit Facility provides for a Revolving Commitment (as defined in the Amended and Restated Credit Facility) of up to $ 600,000 which revolving commitments 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 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 annum; or (b) the Base Rate (which is defined in a customary manner for credit facilities of this type) plus the applicable 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 terms of the credit agreement. 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 Commitment, depending on the same debt to income ratio. 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) The credit agreement 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 Credit Facility, the Company must maintain a debt-to-income ratio of not greater than 3.00 :1.00. The Amended and Restated Credit Facility also requires that the Company maintain a minimum interest/rent coverage ratio of not less than 1.10 :1.00. Additionally, the Amended and Restated Credit Facility, as amended by the Sixth Amendment and Waiver, contains a Liquidity Requirement, as described in further detail below, which will apply until the Liquidity Requirement Termination Date. On May 16, 2024, the Company entered into an amendment to the Amended and Restated Credit Facility that, among other things, waived an event of default that had occurred and was then continuing under the Amended and Restated Credit Facility and modified the affirmative covenants thereunder requiring the joinder of certain subsidiaries of the Company to the Amended and Restated Credit Facility, as further set forth therein. On November 14, 2024, the Company entered into another amendment to the Amended and Restated 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 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 the 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 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 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 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. 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 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. On November 26, 2025, the Company entered into another amendment to and waiver (Sixth Amendment and Waiver) under the Amended and Restated Credit Facility that, among other things, waived all Technical Events of Default. The Sixth Amendment and Waiver also amended the Amended and Restated Credit Agreement to, among other things, require that the Liquidity Requirement remain in place until the Company delivers to the Administrative Agent financial statements and a corresponding compliance certificate for the fiscal quarter ended June 30, 2026 (the “Liquidity Requirement Termination Date”). The Company was in compliance with all such covenants and restrictions as of December 31, 2025. The Company maintains the Amended and Restated Credit Facility as its single line of credit. At December 31, 2025, the total commitment limit continues to be $ 600,000 and was secured by Company assets. The agreement matures on 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) December 7, 2028. Due to the covenants and restrictions outlined above, the Amended and Restated Credit Facility was classified as current on the Company’s balance sheet as of December 31, 2024. The balance outstanding on the credit facility was $ 100,000 and $ 142,000 at December 31, 2025 and 2024, respectively. The Company had $ 7,850 and $ 13,923 in letters of credit outstanding as of December 31, 2025 and 2024, respectively. Net deferred financing fees on lines of credit were $ 8,867 and $ 11,886 as of December 31, 2025 and 2024, respectively, and are recorded in other assets on the Company’s balance sheets. Expense recognized relating to deferred financing fees on lines of credit is included in interest expense and amounted to $ 3,019 , $ 3,020 , and $ 889 for the years ended December 31, 2025, 2024, and 2023, respectively. NOTE 11. LONG-TERM DEBT During the year ended December 31, 2025 the Company and its subsidiaries did not enter into any HUD-insured mortgage loans, whereas in the year ended December 31, 2024, certain of the Company's subsidiaries entered into HUD-insured mortgage loans in the aggregate amount of $ 68,345 . 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 of December 31, 2025, 13 of the Company’s subsidiaries had mortgage loans insured with HUD in the aggregate amount of $ 248,906 , of which $ 4,169 was classified as current and the remaining $ 244,737 was classified as non-current. As of December 31, 2024, 13 of the Company’s subsidiaries had mortgage loans insured with HUD in the aggregate amount of $ 252,913 of which $ 4,007 was classified as current and the remaining $ 248,906 was classified as non-current. These subsidiaries are subject to HUD-mortgage oversight and periodic inspections. As of December 31, 2025, 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 four 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, 2025, the Company had $ 4,305 of debt principal outstanding under the non-HUD-insured mortgage loans and promissory notes, of which $ 294 is classified as current and the remaining $ 4,011 is classified as non-current. As of December 31, 2024, the Company had $ 16,997 of debt principal outstanding under the non-HUD-insured mortgage loans and promissory notes, of which $ 10,845 is classified as current and the remaining $ 6,152 is classified as non-current. The Company was in compliance with all applicable loan covenants with respect to the foregoing as of December 31, 2025 and 2024. 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 $ 254,540 , and $ 263,219 at December 31, 2025 and 2024, respectively. Long-term debt consists of the following: December 31, 2025 2024 HUD-insured mortgage loans $ 248,906 $ 252,913 Other non-HUD mortgage loans and promissory notes 4,305 16,997 Less: current maturities ( 4,463 ) ( 14,852 ) Less: deferred financing fees, net ( 3,945 ) ( 4,074 ) Total $ 244,803 $ 250,984 110 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) 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, 2025: Long-Term Debt Credit Facility Total 2026 $ 4,463 $ — $ 4,463 2027 8,350 — 8,350 2028 4,516 100,000 104,516 2029 4,702 — 4,702 2030 4,896 — 4,896 Thereafter 226,284 — 226,284 Total $ 253,211 $ 100,000 $ 353,211 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 $ 129 , $ 95 , and $ 1,551 for the years ended December 31, 2025, 2024, and 2023, respectively. NOTE 12. INCOME TAXES The provision for income taxes for the years ended December 31, 2025, 2024, and 2023 is summarized as follows: Year Ended December 31, 2025 2024 2023 Current Federal $ 79,031 $ 66,292 $ 38,242 State 31,691 30,729 16,116 Total current provision $ 110,722 $ 97,021 $ 54,358 Deferred Federal $ ( 12,461 ) $ ( 34,582 ) $ ( 6,641 ) State ( 5,272 ) ( 16,229 ) ( 3,282 ) Total deferred provision $ ( 17,733 ) $ ( 50,811 ) $ ( 9,923 ) Total income tax provision $ 92,989 $ 46,210 $ 44,435 111 Table of Contents PACS GROUP, INC. AND SUBSIDIARIES NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for share and per share values) A reconciliation of the income tax expense at the federal statutory rate to income tax expense for the years ended December 31, 2025, 2024 and 2023, respectively, is as follows: Year Ended December 31, 2025 2024 2023 Total % Total % Total % Income tax expense at federal statutory rate $ 59,735 21.0 % $ 21,326 21.0 % $ 33,037 21.0 % State income taxes – net of federal benefit (1) 20,045 7.0 7,106 7.0 10,283 6.5 Tax credits ( 5,000 ) ( 1.8 ) ( 947 ) ( 0.9 ) ( 336 ) ( 0.2 ) Change in valuation allowance 272 0.1 ( 622 ) ( 0.6 ) 2,107 1.3 Nontaxable or nondeductible items Nondeductible compensation 9,413 3.3 16,780 16.5 71 0.0 Other nontaxable or nondeductible items 2,262 0.8 2,053 2.0 1,368 0.9 Other Stock-based compensation 5,498 1.9 — — — — Change to deferred taxes 733 0.3 1,031 1.0 ( 2,486 ) ( 1.6 ) Other adjustments 31 — ( 517 ) ( 0.5 ) 391 0.2 Income tax expense $ 92,989 32.6 % $ 46,210 45.5 % $ 44,435 28.1 % __________________ (1) State taxes in California comprise the majority (greater than 50 percent) of the tax effect of this category for the years ended December 31, 2025, 2024, and 2023, respectively. Income taxes paid are as follows: Year Ended December 31, 2025 2024 2023 Federal (1) $ 50,415 $ 75,741 $ 42,447 California 26,104 25,396 17,387 Other 7,528 6,694 175 Total state and local $ 33,632 $ 32,090 $ 17,562 Total income taxes paid $ 84,047 $ 107,831 $ 60,009 __________________ (1) Excludes amounts paid to purchase transferable tax credits of $ 28,372 during the year ended December 31, 2025. 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) The Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 are summarized as follows: December 31, 2025 2024 Deferred tax assets (liabilities) Accrued expenses $ 30,474 $ 28,275 Allowance for doubtful accounts 27,298 21,737 Insurance 42,098 36,577 Intangible assets 6,892 4,931 Deferred compensation 3,006 2,097 Lease liability 823,131 826,397 Stock-based compensation 6,404 5,166 Total deferred tax assets $ 939,303 $ 925,180 Valuation allowance ( 1,263 ) ( 991 ) Total net deferred tax assets $ 938,040 $ 924,189 Fixed assets ( 65,661 ) ( 53,106 ) Prepaid expenses ( 11,005 ) ( 10,307 ) Investment in partnership ( 7,124 ) ( 8,030 ) Right of use asset ( 789,932 ) ( 805,552 ) Other ( 354 ) ( 963 ) Total deferred tax liabilities $ ( 874,076 ) $ ( 877,958 ) Net deferred tax assets $ 63,964 $ 46,231 As of December 31, 2025 and 2024 , the Company recorded a valuation allowance of $ 1,263 and $ 991 , 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 2022 and forward are subject to examination, and state returns for tax years 2021 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, 2025 and 2024. As of December 31, 2025 and 2024, 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. NOTE 13. LEASES Operating Leases The Company leases most of its skilled nursing and assisted living facilities, as well as its office space, under various non-cancelable operating lease agreements. These operating leases expire at various dates through 2050. 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 36 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 Company’s leases have become subject to disagreement with 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) 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 one of the facility finance leases allow for a purchase option to be exercised during a specified window closing May 22, 2027. The Company has determined that it is reasonably certain to exercise the purchase option at the end of the 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 one 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 $ 32,000 and can be exercised by the lessor through June 30, 2026 (the “Lessor Option”). 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 $ 150,595 and $ 139,472 as of December 31, 2025 and 2024, respectively. The current portion of finance lease liabilities is included in other accrued expenses and has a balance of $ 28,935 and $ 21,177 as of December 31, 2025 and 2024, respectively. The non-current portion of finance lease liabilities is included in other liabilities and has a balance of $ 126,960 and $ 125,470 as of December 31, 2025 and 2024, respectively. 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) The components of lease expense were as follows: Year Ended December 31, 2025 2024 2023 Operating lease expense Rent - cost of services (1) $ 378,908 $ 284,953 $ 216,711 General and administrative expense 2,599 2,435 941 Other variable lease costs (2) 38,620 31,480 26,399 Total operating lease expense $ 420,127 $ 318,868 $ 244,051 Finance lease expense Amortization of right-of-use assets $ 5,184 $ 3,327 $ 1,264 Interest on lease liabilities 11,142 7,370 1,113 Total financing lease expense $ 16,326 $ 10,697 $ 2,377 Total lease expense $ 436,453 $ 329,565 $ 246,428 __________________ (1) Rent - cost of services includes variable lease costs such as Consumer Price Index (CPI) increases and other rent adjustments of $ 1,958 , $ 2,383 , and $ 2,745 for the years ended December 31, 2025, 2024, and 2023, 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, 2025 2024 2023 Operating cash paid for amounts included in the measurement of operating lease liabilities $ 333,053 $ 252,742 $ 194,925 Operating cash paid for amounts included in the measurement of finance lease liabilities 11,142 7,370 1,113 Financing cash paid for amounts included in the measurement of finance lease liabilities 1,545 811 1,708 Operating lease right-of-use assets obtained in exchange for lease liabilities 173,355 1,326,598 805,866 Decrease in operating lease right-of-use assets and liabilities due to lease termination/modification ( 15,463 ) ( 141,382 ) — Finance lease right-of-use assets obtained in exchange for lease liabilities 118,947 18,298 5,521 Decrease in finance lease right-of-use assets and liabilities due to lease termination/modification ( 102,640 ) ( 2,272 ) — Information relating to the lease term and discount rate is as follows: Year Ended December 31, 2025 2024 2023 Weighted-average remaining lease term (years) Operating leases 13 14 13 Finance leases 22 6 3 Weighted-average discount rate Operating leases 6.5 % 6.4 % 5.7 % Finance leases 6.5 % 6.1 % 7.2 % 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) Maturities of lease liabilities as of December 31, 2025 were as follows: Finance Leases Operating Leases Total 2026 $ 37,321 $ 343,651 $ 380,972 2027 24,885 345,250 370,135 2028 7,902 349,372 357,274 2029 7,746 352,039 359,785 2030 7,509 355,924 363,433 Thereafter 254,388 2,986,215 3,240,603 Total lease payments $ 339,751 $ 4,732,451 $ 5,072,202 Less: present value discount ( 183,856 ) ( 1,639,531 ) ( 1,823,387 ) Present value of lease liabilities $ 155,895 $ 3,092,920 $ 3,248,815 Maturities of finance leases include amounts the Company would pay in the earliest period in which the lessor can exercise the Lessor Option. 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 50 % 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. The Company has 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 $ 20 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 $ 11,295 and $ 7,794 at December 31, 2025 and 2024, 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, 2024, the Company terminated the Helios Consulting Agreement. For both of the years ended December 31, 2025 and 2024, the Company paid $ 0 , respectively, and for the year ended December 31, 2023, the Company paid $ 4,000 (inclusive of $ 150 paid to a subsidiary of Helios). 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. 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) NOTE 16. OPERATION EXPANSIONS 2025 Expansions and Divestitures During the year ended December 31, 2025, 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 of eight skilled nursing, assisted living, and subacute facilities and executed seven real estate purchases. Of the seven real estate purchases, one of the properties was acquired in conjunction with the operations of the associated facility. For the other six real estate purchases, the Company previously operated the respective facilities and has now acquired the real estate associated with those operations. These new operations added 655 and 271 operational skilled nursing and assisted living beds, respectively. The aggregate purchase price for these expansions during the year ended December 31, 2025 was $ 143,751 . The fair value of assets for the entities where real estate was acquired were concentrated in property and equipment amounting to $ 142,751 . As such, these transactions were classified as asset acquisitions. The remaining aggregate purchase price for transactions during the year ended December 31, 2025 was concentrated in goodwill in the amount of $ 1,000 . Such transactions were classified as business combinations. The Company expects 100 % of the goodwill to be deductible for income tax purposes. During the year ended December 31, 2025, the Company also divested of one leased facility which included 120 skilled nursing beds. 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 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) 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 was recorded within other income (expense), net on the Company’s combined/consolidated statements of income. 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 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 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. 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) 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 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 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 year ended December 31, 2025 and through the issuance of the combined/consolidated financial statements were not material operations to the Company individually or in the aggregate. Accordingly, pro forma financial information is not presented. The additions have been included in the December 31, 2025 and 2024 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. 2026 Expansions and Divestitures Subsequent to December 31, 2025, the Company’s operations expanded in two existing states with the addition of three stand-alone facilities, two of which were acquired with the underlying real estate and one of which was acquired through a long-term lease. These new facilities added 207 assisted living beds operated by the Company's affiliated operating subsidiaries. The aggregate purchase price for these facilities was $ 50,500 . Additionally, during the same period the Company expanded its portfolio of owned properties by acquiring one property, for which it had previously operated the facility, for an aggregate purchase price of $ 35,750 . Subsequent to December 31, 2025, the Company also divested of one leased facility which included 110 skilled nursing beds. NOTE 17. 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. Since the receipt of the CID, the DOJ has made additional 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) requests for information from Providence, including marketing materials and certain expense data across all Providence facilities. 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 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, 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) 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 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. On December 19, 2025, after the Company filed 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, the lead plaintiff filed a consolidated complaint. The new complaint added Joshua Jergensen and P.J. Sanford as named defendants, and also brought additional claims pursuant to Section 12(a)(2) of the Securities Act and Section 20A of the Exchange Act. Defendants moved to dismiss the consolidated complaint on February 17, 2026. According to the current operative schedule, Plaintiffs’ opposition is due April 20, 2026, and Defendants’ reply will be due June 4, 2026. 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 plaintiff voluntarily dismissed this case on December 8, 2025, without prejudice to her ability to refile. 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. 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 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 is partially self-insured for general and professional liability claims up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. The combined self-insured retention is $ 750 per claim, subject to an additional one-time deductible of $ 9,500 for the Company’s independent subsidiaries in California. For a subset of the Company’s independent subsidiaries acquired as part of the Plum acquisition in 2021 across California and Nevada, the combined self-insured retention is $ 500 per claim, subject to an additional one-time deductible of $ 6,000 . For the independent subsidiaries not in California, the self-insured claim is $ 750 per claim, subject to an additional one-time deductible of $ 10,000 . For all independent subsidiaries, except those located in Colorado, Kansas, and Pennsylvania the third-party coverage above these limits is $ 1,000 per claim, $ 3,000 per operation, with a $ 10,000 aggregate limit and an additional state-specific aggregate where required by state law. In Colorado, Kansas, and Pennsylvania, the third-party coverage above these limits is $ 1,000 per claim and $ 3,000 per operation, which is independent of the aforementioned aggregate limits that apply outside of these states. Subsequent to December 31, 2025, the combined self-insured retention is $ 750 per claim ($ 650 if an enforceable arbitration agreement applies), subject to an additional one-time deductible of $ 9,500 for the Company’s independent subsidiaries in California. For the independent subsidiaries not in California, the self-insured claim is $ 750 per claim ($ 650 if an enforceable arbitration agreement applies), subject to an additional one-time deductible of $ 10,200 . The majority of the self-insured retention and deductible limits for professional and general liabilities are self-insured through the captive insurance subsidiary, the related assets and liabilities of which are included in the accompanying combined/consolidated balance sheets. The captive insurance subsidiary is subject to certain statutory requirements as an insurance provider. The Company’s policy is to accrue amounts equal to the actuarial estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. 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. 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, 2025 and 2024 was $ 5,611 , and $ 6,172 , respectively. The Plum facilities were transferred onto the Company’s retrospective-rated premium workers’ compensation policy as of the acquisition date. The Company believes that adequate provision has been made in the combined/consolidated financial statements for liabilities that may arise out of patient care, workers’ compensation and related services provided to date. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. It is the Company’s policy to use an external actuary to assist management in estimating the 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) 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. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liabilities exceed its estimates of losses, its future earnings, cash flows and financial condition would be adversely affected. The following table represents the Company’s self-insurance liabilities, on an undiscounted basis, inclusive of anticipated insurance recoveries, as of December 31, 2025 and 2024: December 31, 2025 2024 PLGL self- insurance liabilities $ 296,280 $ 216,534 Workers’ compensation liabilities 25,275 24,411 Total self-insurance liabilities $ 321,555 $ 240,945 Less: current self-insurance liabilities 128,994 75,966 Long-term self-insurance liabilities $ 192,561 $ 164,979 The following table represents activity in the Company’s PLGL self- insurance liabilities as of and for the years ended December 31, 2025 and 2024: Amount Balance January 1, 2024 $ 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 Current year expense 144,237 Claims paid ( 79,530 ) Change in obligations covered by unrelated insurer 15,039 Balance December 31, 2025 $ 296,280 PLGL self-insurance liabilities as of December 31, 2025 and 2024 include $ 102,882 and $ 76,650 , respectively, that were related to unasserted claims. The anticipated insurance recoveries included in the self-insurance liabilities are presented gross rather than net with the corresponding asset of $ 17,453 and $ 26,179 as of December 31, 2025 and $ 4,861 and $ 23,732 as of December 31, 2024, included in Other Receivables and Other Assets, respectively, on the consolidated balance sheets. 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 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) (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 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 18. 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. A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows: Year Ended December 31, 2025 2024 2023 Numerator: Net income $ 191,461 $ 55,344 $ 112,882 Less: net (loss) income attributable to noncontrolling interest ( 82 ) ( 416 ) 8 Net income attributable to PACS Group, Inc. $ 191,543 $ 55,760 $ 112,874 Denominator: Weighted average common shares outstanding 156,180,786 146,663,371 128,723,386 Basic net income per common share $ 1.23 $ 0.38 $ 0.88 A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows: Year Ended December 31, 2025 2024 2023 Numerator: Net income $ 191,461 $ 55,344 $ 112,882 Less: net (loss) income attributable to noncontrolling interest ( 82 ) ( 416 ) 8 Net income attributable to PACS Group, Inc. $ 191,543 $ 55,760 $ 112,874 Denominator: Weighted average common shares outstanding 156,180,786 146,663,371 128,723,386 Plus: effect of diluted shares (1) 519,553 1,911,235 — Adjusted weighted average common shares outstanding 156,700,339 148,574,606 128,723,386 Diluted net income per common share $ 1.22 $ 0.38 $ 0.88 __________________ (1) The diluted per share amounts do not reflect 2,289,103 common share equivalents from restricted stock units for the year ended December 31, 2025 because of their anti-dilutive effect. NOTE 19. 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 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) the Company’s combined/consolidated statements of income for the years ended December 31, 2025, 2024, and 2023 was based on the vesting of awards granted to date. 2024 Incentive Award Plan (2024 Plan) 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, 2025, the total number of shares available for issuance under the 2024 Plan was 4,552,426 . 2024 Employee Stock Purchase Plan (2024 ESPP) The number of shares initially available for issuance pursuant to the 2024 ESPP (which number included 1,501,520 shares of common stock issuable pursuant to rights granted under the plan) was equal to 1 % 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 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, 2025 the total number of shares available for issuance under the 2024 ESPP was 3,053,295 . Restricted Stock Unit Awards Pursuant to the 2024 Plan, the Company granted 3,362,538 and 15,409,470 RSU awards during the years ended December 31, 2025 and 2024, respectively. 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 . All other awards generally vest in equal increments on an annual basis over three years as the grantees meet the requisite service condition. These awards granted used the market price on the date of the respective grant date to determine the award fair value. The fair value per share of RSU awards granted during the years ended December 31, 2025 and 2024 ranged from $ 13.72 to $ 36.37 and from $ 21.00 to $ 24.85 , respectively. A summary of the status of the Company’s non-vested RSU awards for the years ended December 31, 2025 and 2024 is presented below (there was no such activity prior to the approval of the 2024 Plan, including in 2023): 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 Granted 3,362,538 21.79 Vested ( 2,325,126 ) 21.03 Forfeited ( 2,342,935 ) 20.38 Non-vested at December 31, 2025 10,256,295 $ 21.40 During the year ended December 31, 2025, the Company granted 13,197 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 $ 36.37 based on the market price on the grant date. 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) During the year ended December 31, 2025 and 2024, the aggregate fair value of RSU awards that vested was $ 21,642 and $ 92,882 , respectively. The number of RSU awards vested includes shares of common stock that the Company withheld on behalf of employees to satisfy statutory tax withholding requirements. Stock-based compensation expense Stock-based compensation expense recognized during the years ended December 31, 2025 and 2024 for the Company’s equity incentive plans was $ 54,069 and $ 115,544 , respectively. In future periods, the Company expects to recognize $ 176,719 in stock-based compensation expense for unvested RSU awards that were outstanding as of December 31, 2025. Future stock-based compensation expense will be recognized over 2.96 weighted average years for unvested RSU awards. 126 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.