August 12, 2024 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)


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

For the quarterly period ended June 30, 2024


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

For the transition period from _____ to ______.

Commission file number 001-42011

_________________________

PACS Group, Inc.

(Exact name of registrant as specified in its charter)

_________________________


Delaware		92-3144268
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	262 N. University Ave. Farmington, Utah 84025
	(Address of Principal Executive Offices) (Zip Code)

(801) 447-9829

Registrant's telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PACS	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

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


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o
		Emerging growth company	o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

As of August 9, 2024, there were 152,399,733 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

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	PACS GROUP, INC. AND SUBSIDIARIES
	QUARTERLY REPORT ON FORM 10-Q
	FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024
	TABLE OF CONTENTS

Part I - Financial Information		Pg.
Item 1. Financial Statements (unaudited)
	Condensed Combined/Consolidated Balance Sheets as of J une 30 , 2024 and December 31, 2023	3
	Condensed Combined/Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the three and six months ended June 30 , 2024 and 2023	4
	Condensed Combined/Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30 , 2024 and 2023	5
	Condensed Combined/Consolidated Statements of Cash Flows for the six months ended June 30 , 2024 and 2023	6
	Notes to the Unaudited Condensed Combined/Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosure About Market Risk		51
Item 4. Controls and Procedures		51

Part II - Other Information
Item 1. Legal Proceedings		53
Item 1A. Risk Factors		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		92
Item 3. Defaults Upon Senior Securities		92
Item 4. Mine Safety Disclosures		92
Item 5. Other Information		92
Item 6. Exhibits		93
Signatures		94

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

As used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context requires otherwise, the terms “PACS Group,” the “Company,” “we,” “us,” and “our” refer to PACS Group, Inc. and its consolidated subsidiaries.

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. If any of these risks actually occur, it could have a material adverse effect on our business, financial condition, and results of operations. In such case, the trading price of our common stock would likely decline, and you could lose all or part of your investment. The principal risks affecting our business include, but are not limited to:

•We depend upon reimbursement from third‑party payors, and our revenue, financial condition and results of operations could be negatively impacted by any changes in the acuity mix of patients in our facilities as well as changes in payor mix and payment methodologies and new cost containment initiatives by third-party payors;

•We may not be fully reimbursed for all services for which each facility bills through consolidated billing or bundled payments, which could have an adverse effect on our revenue, financial condition and results of operations;

•Increased competition for, or a shortage of, nurses, nurse assistants and other skilled personnel could increase our staffing and labor costs and subject us to monetary fines;

•State efforts to regulate or deregulate the healthcare services industry or the construction expansion, or acquisition of healthcare facilities could impair our ability to expand our operations, or could result in increased competition;

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•We face numerous risks related to expiration of the COVID‑19 public health emergency (PHE) expiration and surrounding wind‑down and uncertainty, which could, individually or in the aggregate, have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects;

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

•We review and audit the care delivery, recordkeeping and billing processes of our operating subsidiaries. These reviews from time to time detect instances of noncompliance that we attempt to correct, which in some instances requires reduced or repayment of billed amounts or other costs;

•We are subject to litigation, which is commonplace in our industry, which could result in significant legal costs and large settlement amounts or damage awards, and our self-insurance programs may expose us to significant and unexpected costs and losses;

•We rely significantly on information technology, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business;

•We may be unable to complete future facility or business acquisitions at attractive prices or at all, which may adversely affect our revenue; we may also elect to dispose of underperforming or non‑strategic operating subsidiaries, which would decrease our revenue;

•In undertaking acquisitions, we may be adversely impacted by costs, liabilities and regulatory issues that may adversely affect our operations, and we may not be able to successfully integrate acquired facilities and properties into our operations, or achieve the benefits we expect from any of our facility acquisitions;

•Because we lease the majority of our facilities, we are subject to risks associated with leased real property, including risks relating to lease termination, lease extensions and special charges, any of which could have an adverse effect on our business, financial condition and results of operations;

•We rely on payments from third-party payors, including Medicare, Medicaid and other governmental healthcare programs and private insurance organizations. If coverage or reimbursement for services are changed, reduced or eliminated, including through cost-containment efforts, spending requirements are changed, data reporting, measurement and evaluation standards are enhanced and changed, our operations, revenue and profitability could be materially and adversely affected;

•Reforms to the U.S. healthcare system, including new regulations under the Affordable Care Act (ACA), continue to impose new requirements upon us that could materially impact our business;

•We are subject to various government and third-party payor reviews, audits and investigations that could adversely affect our business, including an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of our right to participate in Medicare and Medicaid programs or other third-party payor programs;

•Our founders, Jason Murray and Mark Hancock, may enter into one or more margin loans and pledge a portion of their shares of our common stock as collateral to secure such margin loans. If either Mr. Murray or Mr. Hancock were to enter into a margin loan and subsequently default on their respective obligations under any such margin loan, the lender may be entitled to foreclose on their shares pledged as collateral and sell them to the public, which could cause our stock price to decline and result in a significant change in beneficial ownership; and

•We are a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. We intend to rely on exemptions from certain corporate governance standards. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

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Part I

Item 1. Financial Statements


PACS GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED/CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share and per share values)

	(unaudited)
	June 30,		December 31,
	2024		2023
ASSETS
Current Assets:
Cash and cash equivalents	$	73,374	$	73,416
Accounts receivable, net	610,577		547,807
Other receivables	50,396		52,259
Prepaid expenses and other current assets	66,301		48,665
Total Current Assets	800,648		722,147
Property and equipment, net	763,904		577,528
Operating lease right-of-use assets	2,112,914		2,007,812
Insurance subsidiary deposits and investments	35,476		—
Escrow funds	19,531		15,649
Goodwill and other indefinite-lived assets	65,291		65,291
Other assets	98,584		124,312
Total Assets	$	3,896,348	$	3,512,739


LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	125,746	$	140,947
Accrued payroll and benefits	107,077		92,234
Current operating lease liabilities	113,278		109,438
Current maturities of long term debt	15,745		16,822
Current portion of accrued self-insurance liabilities	31,252		27,536
Other accrued expenses	75,003		69,949
Total Current Liabilities	468,101		456,926
Long-term operating lease liabilities	2,068,585		1,961,997
Accrued benefits, less current portion	6,738		6,738
Lines of credit	248,000		520,000
Long-term debt, less current maturities, net of deferred financing fees	227,107		195,708
Accrued self-insurance liabilities, less current portion	172,111		146,167
Other liabilities	127,472		123,477
Total Liabilities	$	3,318,114	$	3,411,013
Commitments and contingencies (Note 11)
Equity:
PACS Group, Inc. stockholders’ equity:
Common stock: $0.001 par value; 1,250,000,000 shares authorized, 152,399,733 shares issued and outstanding as of June 30, 2024, and 64,361,693,000 shares authorized, 128,723,386 shares issued and outstanding as of December 31, 2023	152		129
Additional paid-in capital	471,472		—

Retained earnings	100,504		95,997
Total stockholders' equity	572,128		96,126
Non-controlling interest in subsidiary	6,106		5,600
Total Equity	$	578,234	$	101,726
Total Liabilities and Equity	$	3,896,348	$	3,512,739

See accompanying notes to unaudited condensed combined/consolidated financial statements.

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PACS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(dollars in thousands, except for share and per share values)
	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenue
Patient and resident service revenue	$	981,398	$	760,424	$	1,915,696	$	1,468,250
Additional funding	—		—		—		375
Other revenues	448		240		871		481
Total Revenue	$	981,846	$	760,664	$	1,916,567	$	1,469,106

Operating Expenses
Cost of services	762,147		590,815		1,498,139		1,129,587
Rent - cost of services	65,833		51,456		129,794		96,560
General and administrative expense	144,380		62,695		191,286		122,137
Depreciation and amortization	8,776		6,159		16,678		11,988
Total Operating Expenses	$	981,136	$	711,125	$	1,835,897	$	1,360,272

Operating Income	$	710	$	49,539	$	80,670	$	108,834

Other (Expense) Income
Interest expense	(9,187)		(15,306)		(24,578)		(25,942)
Gain on lease termination	—		—		8,046		—
Other expense, net	(3,905)		(2,643)		(3,465)		(2,203)
Total Other Expense, net	$	(13,092)	$	(17,949)	$	(19,997)	$	(28,145)

(Loss) income before provision for income taxes	(12,382)		31,590		60,673		80,689
Benefit (provision) for income taxes	1,474		(10,370)		(22,441)		(21,871)

Net (Loss) Income	$	(10,908)	$	21,220	$	38,232	$	58,818
Less:
Net income attributable to noncontrolling interest	2		2		4		3
Net (loss) income attributable to PACS Group, Inc.	$	(10,910)	$	21,218	$	38,228	$	58,815

Net (loss) income per share attributable to PACS Group, Inc.
Basic	$	(0.07)	$	0.16	$	0.27	$	0.46
Diluted	$	(0.07)	$	0.16	$	0.27	$	0.46
Weighted-average common shares outstanding
Basic	149,463,655		128,723,386		139,093,520		128,723,386
Diluted	149,463,655		128,723,386		139,684,618		128,723,386

Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale debt securities, net of tax	$	(201)	$	—	$	—	$	—
Total other comprehensive loss	(201)		—		—		—
Comprehensive (loss) income	$	(11,109)	$	21,220	$	38,232	$	58,818
Less:
Comprehensive income attributable to noncontrolling interest	2		2		4		3
Comprehensive (loss) income attributable to PACS Group, Inc.	$	(11,111)	$	21,218	$	38,228	$	58,815

See accompanying notes to unaudited condensed combined/consolidated financial statements.

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PACS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands, except for share and per share values)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Non-Controlling Interest		Accumulated Other Comprehensive Income		Total
	Shares	Amount
Balance January 1, 2024	128,723,386	$	129	$	—	$	95,997	$	5,600	$	—	$	101,726
Dividends on common stock ($0.1358 per share)	—	—		—		(17,474)		—		—		(17,474)
Other comprehensive income	—	—		—		—		—		201		201
Net income attributable to noncontrolling interest	—	—		—		—		2		—		2
Net income attributable to PACS Group, Inc.	—	—		—		49,138		—		—		49,138
Balance March 31, 2024	128,723,386	$	129	$	—	$	127,661	$	5,602	$	201	$	133,593
Contributions	—	—		—		—		502		—		502
Issuance of common stock	21,428,572	21		414,136		—		—		—		414,157
Employee stock-based compensation	3,847,652	4		90,932		—		—		—		90,936
Tax withholdings related to net share settlement of equity awards	(1,599,877)	(2)		(33,596)		—		—		—		(33,598)
Dividends on common stock ($0.1066 per share)	—	—		—		(16,247)		—		—		(16,247)
Other comprehensive loss	—	—		—		—		—		(201)		(201)
Net income attributable to noncontrolling interest	—	—		—		—		2		—		2
Net loss attributable to PACS Group, Inc.	—	—		—		(10,910)		—		—		(10,910)
Balance June 30, 2024	152,399,733	$	152	$	471,472	$	100,504	$	6,106	$	—	$	578,234





	Common Stock			Additional Paid-In Capital		Retained Earnings		Non-Controlling Interest		Accumulated Other Comprehensive Income		Total
	Shares	Amount
Balance January 1, 2023	128,723,386	$	129	—		$	63,517	$	5,005	$	—	$	68,651
Dividends on common stock ($0.1438 per share)	—	—		—		(18,513)		—		—		(18,513)
Net income attributable to noncontrolling interest	—	—		—		—		1		—		1
Net income attributable to PACS Group, Inc.	—	—		—		37,597		—		—		37,597
Balance March 31, 2023	128,723,386	$	129	$	—	$	82,601	$	5,006	$	—	$	87,736
Dividends on common stock ($0.1959 per share)	—	—		—		(25,215)		—		—		(25,215)
Net income attributable to noncontrolling interest	—	—		—		—		2		—		2
Net income attributable to PACS Group, Inc.	—	—		—		21,218		—		—		21,218
Balance June 30, 2023	128,723,386	$	129	$	—	$	78,604	$	5,008	$	—	$	83,741

See accompanying notes to unaudited condensed combined/consolidated financial statements.

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PACS GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities
Net income	$	38,232	$	58,818
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	16,678		11,988
Amortization and write-off of deferred financing fees	1,551		4,279
Stock-based compensation	90,936		—
Loss on disposition of property and equipment	343		516
Loss on investment in partnership	4,288		—
Gain on other investments	(476)		—
Deferred taxes	(15,969)		(7,253)
Noncash lease expense	15,185		9,093
Change in operating assets and liabilities
Accounts receivable, net	(62,770)		(76,563)
Other receivables	1,863		(9,925)
Prepaid expenses and other current assets	(18,286)		378
Other assets	(1,021)		(12,009)
Escrow funds	(3,882)		2,130
Operating lease obligations	(9,859)		(1,320)
Accounts payable	(17,203)		33,467
Accrued payroll and benefits	14,843		7,092
Accrued self-insurance liabilities	29,660		40,413
Other accrued expenses	5,492		(36,367)
Other liabilities	3,995		33,475
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	93,600	$	58,212

Cash flows from investing activities
Investment in partnership	$	(5,081)	$	—
Non-operating distributions from investment in partnership	1,190		945
Purchase of investments	(35,000)		—
Acquisition of facilities	(174,650)		(52,365)
Purchase of property and equipment	(26,093)		(16,591)
Cash proceeds from the sale of assets	—		750
NET CASH USED IN INVESTING ACTIVITIES	$	(239,634)	$	(67,261)






Cash flows from financing activities
Borrowing on lines-of-credit, net of deferred financing fees	$	288,000	$	178,905
Payments on lines-of-credit	(560,000)		(222,002)
Dividends on common stock	(33,721)		(43,728)
Contributions from non-controlling interest	502		—
Borrowings of long-term debt, net of deferred financing fees	39,757		315,167
Payments on long-term debt	(9,913)		(236,969)
Proceeds from initial public offering, net of issuance costs	414,157		—
Taxes paid related to net share settlement of stock-based compensation awards	(33,598)		—
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES	$	105,184	$	(8,627)

Net change in cash	(40,850)		(17,676)
Cash, cash equivalents, and restricted cash - beginning of period	118,704		98,206
Cash, cash equivalents, and restricted cash - end of period	$	77,854	$	80,530

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	25,550	$	28,004
Income taxes	43,455		16,540

Non-cash financing and investing activity
Accrued capital expenditures	$	5,154	$	2,552
Assets acquired in operation expansions in exchange for notes payable	—		3,635
Assets acquired in operation expansions through settlement of notes receivable	500		—

See accompanying notes to unaudited condensed combined/consolidated financial statements.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED 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 June 30, 2024, PACS Group subsidiaries operated 220 health care facilities in the states of Arizona, California, Colorado, Kentucky, Missouri, Nevada, Ohio, South Carolina, and Texas. PACS Group subsidiaries operated approximately 24,480 skilled nursing beds and 880 assisted living beds as of that date. As of June 30, 2024, PACS Group subsidiaries operated 182 facilities under long-term lease arrangements and had options to purchase 13 of those facilities.

PACS Group subsidiaries have investments in joint ventures that own the underlying real estate and related improvements of 12 post-acute care facilities that are operated by other PACS Group subsidiaries. PACS Group also owns subsidiaries that own real estate and related improvements that are leased to applicable affiliated SNF operating entities and one non-affiliated ALF operating entity. PACS Group’s real estate portfolio includes 38 properties which are operated and managed by applicable PACS Group subsidiaries.

Providence Administrative Consulting Services, Inc., 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 (the New Credit Agreement), between certain lenders party thereto, Truist Bank (Truist), as administrative agent, PACS Group, and PACS Holdings, LLC (PACS Holdings) as borrower thereunder. PACS Group and its wholly owned subsidiary PACS Holdings were created on March 24, 2023, and April 10, 2023, respectively, in anticipation of the Reorganization. The equity interests of certain other direct or indirect wholly-owned subsidiaries of PGI at the time of the Reorganization were also contributed to other new direct or indirect wholly-owned subsidiaries of PACS Group to facilitate the New Credit Agreement. PACS Group and its consolidated subsidiaries subsequent to the Reorganization are collectively referred to herein as the Company. The New Credit Agreement is described in Note 6, “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 represent combined financial statements and the financial statements after the Reorganization represent consolidated financial statements. The contribution of shares of PGI and receipt of shares of PACS Group were accounted for on a retrospective basis. Accordingly, all share and per share amounts in these condensed 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.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

NOTE 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed combined/consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The condensed 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 consolidation. The Company presents noncontrolling interests within the equity section of its condensed combined/consolidated balance sheets and the amount of condensed combined/consolidated (loss) income that is attributable to the Company and the noncontrolling interest in its condensed combined/consolidated statements of (loss) income and comprehensive (loss) income.

The accompanying condensed combined/consolidated financial statements as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023 are unaudited. The December 31, 2023 balance sheet data was derived from audited financial statements; however, the accompanying notes to the condensed combined/consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the audited combined/consolidated financial statements included in the Company’s final prospectus filed with the SEC on April 12, 2024. Management believes that the condensed combined/consolidated financial statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the condensed combined/consolidated financial statements are not necessarily representative of operations for the entire year.

Use of Estimates

The preparation of the condensed 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 condensed combined/consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the Company’s financial statements relate to revenue, acquired property, 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 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 claims. Funds held in restricted cash are contractually obligated to be segregated from the Company’s other cash accounts and are legally restricted for the use of funding PLGL claims. See Note 5, “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.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

The following presents all cash and cash equivalents and restricted cash on the condensed combined/consolidated balance sheets and reconcile to total cash included the condensed combined/consolidated statements of cash flows as of June 30, 2024, December 31, 2023, June 30, 2023:


	June 30, 2024		December 31, 2023		June 30, 2023
Cash and cash equivalents	$	73,374	$	73,416	$	38,164
Restricted cash (included in prepaid expenses and other current assets)	4,480		4,977		7,907
Restricted cash (included in other assets)	—		40,311		34,459
Total cash, cash equivalents, and restricted cash	$	77,854	$	118,704	$	80,530

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 amounts.

Insurance Subsidiary Deposits and Investments

The Company's captive insurance subsidiary cash and cash equivalents, deposits and investments are designated to support long-term insurance subsidiary liabilities and have been classified as short-term and long-term assets based on the timing of expected future payments of the Company's captive insurance liabilities.

Patient and Resident Service Revenue

Patient and resident service revenue is derived from services rendered, under short-term contracts, to patients for skilled and intermediate nursing, rehabilitation therapy, and assisted living services. Patient and resident service revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.

The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable consist primarily of amounts due from Medicare and Medicaid, managed care health plans and private payor sources, net of estimates for variable consideration. At June 30, 2024 and December 31, 2023, the allowance for credit losses was immaterial to the condensed combined/consolidated financial statements.

The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors. Contractual adjustments are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission and records an implicit price concession based on historical patient collection experience. The allowance for implicit price concession is routinely evaluated and any subsequent changes are recorded as an adjustment to patient and resident service revenue in the condensed combined/consolidated statements of (loss) income and comprehensive (loss) income. The implicit price concession recorded as a reduction to patient and resident service revenue was $21,980 and $11,336 for the three months ended June 30, 2024 and 2023, respectively, and was $42,936, and $22,411 for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024 and December 31, 2023, the Company has recorded estimated implicit price concessions as a reduction to accounts receivable of $59,201 and $42,171, respectively.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

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 computed using the straight-line method over the estimated useful life of the property and equipment. The following is a summary of the depreciable 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 to 15 years

Furniture and equipment - minimum of 3 to a maximum of 15 years

Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the term of the lease. 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 included in current income.

Leases

The Company leases skilled nursing facilities, assisted living facilities, and commercial office space. The Company determines if an arrangement is a lease (for accounting purposes) at the inception of each lease.

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 used for straight-line rent expense 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 assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements. 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 (loss) income and comprehensive (loss) 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 as the non-lease components are not significant to the overall lease costs.

The Company’s real estate leases generally have initial lease terms of ten years or more and typically include one or more options to renew, with renewal terms that generally extend the lease term for an additional three to twenty years. Exercise of renewal options is generally subject to the satisfaction of certain conditions which vary by contract and generally follow payment terms that are consistent with those in place during the initial term.

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) 805, Business Combinations (ASC 805). Acquisitions are accounted for as purchases and 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. Goodwill generated from acquisitions is recognized for the excess of the purchase price over tangible and identifiable intangible assets. 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.

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 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.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

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 licenses. The Company reviews indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

The Company may elect to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If the Company does not perform the qualitative assessment, or if the qualitative assessment indicates it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the Company calculates the estimated fair value of the indefinite-lived intangible asset. If the estimated fair value of the indefinite-lived intangible asset is lower than its carrying amount, an impairment loss is recognized for the difference.

Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings.

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. The three-tiers include: Level 1: observable inputs such as quoted market prices in active markets; Level 2: inputs other than quoted market prices included in Level 1 that are directly or indirectly observable for the asset or liability and Level 3: unobservable inputs for which little or no market data exists, thereby requiring management to develop their own estimates and assumptions.

Impairment of Long-Lived Assets

In accordance with 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 six months ended June 30, 2024 and 2023.

Accrued Risk Reserves

The Company is principally self-insured for risks related to PLGL claims. Accrued risk reserves primarily represent the accrual for risks associated with 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 actuary to assist management in estimating the Company’s exposure for claims obligation (for both asserted and unasserted claims).

Investments in Joint Ventures

Investments in joint ventures, 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 and 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 evaluates its investment in joint ventures, including cost in excess of book value

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

(equity method goodwill) for impairment whenever indicators of impairment exist. No indicators of impairment existed during the six months ended June 30, 2024 and 2023.

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 a facility operated by the Company upon completion. The noncontrolling interest in subsidiary is initially recognized at estimated fair value on the contribution date and is presented within total equity in the Company’s condensed combined/consolidated balance sheets since these interests are not redeemable.

Advertising

Advertising costs are expensed as incurred. Advertising expenses included in the Company’s condensed combined/consolidated statements of (loss) income and comprehensive (loss) income were $1,710 and $1,758 for the three months ended June 30, 2024 and 2023, respectively, and were $3,740 and $3,573 for the six months ended June 30, 2024 and 2023, respectively.

Income Taxes

The Company utilizes 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 8, “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 37% of total accounts receivable, respectively, at June 30, 2024 and 20% and 36% of total accounts receivable, respectively, at December 31, 2023. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company performs continual credit evaluations of the Company’s clients and maintains appropriate allowances for credit losses on any accounts receivable proving uncollectible, and continually monitors and adjusts these allowances as necessary.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

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. 64% of the Company’s skilled nursing beds are located in California.

Stock-based Compensation

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values, ratably over the requisite service period of the award. Net (loss) income has been reduced as a result of 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 (Loss) Income

Comprehensive (loss) income consists of gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net (loss) income. For the six months ended June 30, 2024 and 2023, comprehensive (loss) income includes unrealized gains and losses on the Company’s available-for-sale debt securities.

Segment Presentation

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 and, hence, the Company has only one reportable segment. The Company does not distinguish between markets or regions for the purpose of allocating resources.

Recent Accounting Standards Issued But Not Yet Adopted by the Company

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The standard improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit (referred to as the “significant expense principle”). The standard will become effective for the Company for the fiscal year 2024 annual financial statements and interim financial statements thereafter and will be applied retrospectively for all prior periods presented in the financial statements, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the disclosures included in the Notes to the combined/consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires the Company to disclose disaggregated jurisdictional and categorical information for the tax rate reconciliation, income taxes paid and other income tax related amounts. The standard will become effective for the Company for the fiscal year 2024 annual financial statements and may be applied prospectively or retrospectively for all prior periods presented in the financial statements, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the disclosures included in the Notes to the combined/consolidated financial statements.

NOTE 3.REVENUE AND ACCOUNTS RECEIVABLE

Patient and Resident Service Revenue

The Company’s patient and resident service revenue is derived primarily from the Company’s applicable subsidiaries providing healthcare services to their respective patients and residents. Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled. These amounts are due from residents, third-party payors (including health insurers and government payors), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits and other reviews by the payor. Generally, the licensed healthcare provider entity providing the applicable services bills the applicable payors monthly.

The healthcare services in skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Revenue is recognized as the performance obligations are satisfied.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

Performance obligations are determined based on the nature of the services provided by the applicable licensed healthcare provider entity. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to residents receiving services in the facility and, when applicable, residents receiving services in their homes (independent care or assisted living). The Company measures the performance obligation from admission into the facility, or the commencement of the service, to the point when the applicable licensed healthcare provider entity is no longer required to provide services to that resident, which is generally at the time that the resident discharges from the applicable facility or passes away.

Revenue recognized from healthcare services is adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration. Variable consideration includes estimates of implicit price concessions so that the estimated transaction price is reflective of the amount to which the Company expects to be entitled in exchange for providing the healthcare services to customers. Variable consideration is estimated using the expected value method based on the Company’s historical reimbursement experience. The amount of variable consideration constrains the transaction price, such that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Historically the Company has not had material differences between its estimated transaction price and actual collections from payors. 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.

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:

Medicaid: Payments for skilled nursing facility services rendered to Medicaid (including Medi-Cal, which is the name of the state Medicaid program in California) program beneficiaries are based on an annually established daily reimbursement rate for eligible stays. The rate is adjusted annually. The final settlement is determined after submission of an annual cost report and audits thereof by Medicaid. Revenue from the Medicaid program amounted to 38.1% and 35.4% of the Company’s condensed combined/consolidated net patient and resident revenue for the three months ended June 30, 2024 and 2023, respectively, and 38.4% and 32.9% of the Company’s condensed combined/consolidated net patient and resident revenue for the six months ended June 30, 2024 and 2023, respectively.

Medicare: Payments for skilled nursing facility services rendered to Medicare program beneficiaries are based on prospectively determined daily rates which vary according to a patient diagnostic classification system. The applicable licensed healthcare provider entity is paid for certain reimbursable services at the approved rate with final settlement determined after submission of the annual cost report and audit thereof by the designated Medicare fiscal intermediary. Revenue from the Medicare program amounted to 37.5% and 41.7% of the Company’s condensed combined/consolidated net patient and resident revenue for the three months ended June 30, 2024 and 2023, respectively, and 36.6% and 44.8% of the Company’s condensed combined/consolidated net patient and resident revenue for the six months ended June 30, 2024 and 2023, respectively.

Managed Care, Private and Other: Payments for services rendered to private payors and other primary payors included in the table below are based on established rates or on agreements with certain commercial insurance companies, health maintenance organizations, and preferred provider organizations, which provide for various discounts from the established rates. Revenue from these sources collectively amounted to 24.4% and 22.9% of the Company’s condensed combined/consolidated net patient and resident revenue for the three months ended June 30, 2024 and 2023, respectively, and 25.0% and 22.3% of the Company’s condensed combined/consolidated net patient and resident revenue for the six months ended June 30, 2024 and 2023, respectively.

The Company’s contracts are short term in nature with a duration of one year or less. The Company has minimal unsatisfied performance obligations at the end of the reporting period as patients are typically under no obligation to remain admitted in the Company’s facilities or under the Company’s care. As the period between the time of service and time of payment is typically one year or less, the Company does not adjust for the effects of a significant financing component.

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

Included in the Company’s condensed combined/consolidated balance sheets are contract balances, comprising of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as contract liabilities, which primarily represent payments the Company receives in advance of services provided. The Company has no material contract liabilities or contract assets as of June 30, 2024 and December 31, 2023.

Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of audits and other reviews by governmental agencies or payor sources, health care providers from time to time receive requests for information and notices regarding billing audits and potential noncompliance with applicable laws and regulations, which, in some instances, can ultimately result in substantial monetary recoupments or other remedies being imposed on the healthcare provider. Compliance with such laws and regulations may also be subject to future government review and interpretation, as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. The Company believes that it is in compliance with all applicable laws and regulations.

The contracts the Company has with commercial payors also provide for retrospective audits 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 adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits or other reviews. These amounts are immaterial.

The Company disaggregates revenue from contracts with its patients by payors. The Company determined that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The composition of patient and resident service revenue by primary payors for the three and six months ended June 30, 2024 and 2023 are as follows:


	Three Months Ended June 30,
	2024		% of Revenue		2023		% of Revenue
Medicare	$	368,044	37.5	%	$	316,877	41.7	%
Medicaid	373,818		38.1	%	268,867		35.4	%
Managed care	191,273		19.5	%	138,440		18.2	%
Private and other	48,263		4.9	%	36,240		4.7	%
Total patient and resident service revenue	$	981,398	100.0	%	$	760,424	100.0	%


	Six Months Ended June 30,
	2024		% of Revenue		2023		% of Revenue
Medicare	$	701,387	36.6	%	$	657,287	44.8	%
Medicaid	736,170		38.4	%	483,026		32.9	%
Managed care	375,553		19.6	%	261,877		17.8	%
Private and other	102,586		5.4	%	66,060		4.5	%
Total patient and resident service revenue	$	1,915,696	100.0	%	$	1,468,250	100.0	%

Additional Funding and CARES Act

Through the CARES Act, the Company received funding from the U.S. Department of Health and Human Services (HHS) through the Provider Relief Fund (PRF) during the years ended December 31, 2022 and 2021. These funds were provided to healthcare providers who diagnose, test, or care for individuals with cases of COVID-19 and have health care related expenses and lost revenues attributable to COVID-19. The Company recorded these funds as deferred revenue upon

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

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 additional funding in the six months ended June 30, 2023 for funds received prior to 2023. The Company did not receive any additional funds related to this program during 2023 or 2024.

The CARES Act also provided for refundable payroll tax credits known as the Employee Retention Tax Credit, 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. As of June 30, 2024 and December 31, 2023, the Company has recorded $36,508 and $36,477, respectively, in other liabilities to reflect the cash already received related to these credits which may need to be returned and potential penalties.

NOTE 4.PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:


	June 30, 2024		December 31, 2023
Buildings and improvements	$	533,808	$	372,554
Leasehold improvements	68,298		58,958
Furniture, fixtures, and other	80,229		64,750
Construction in process	53,589		50,937
Land	69,678		55,593
Finance lease right-of-use assets	40,536		40,536
	846,138		643,328
Less: accumulated depreciation and amortization	(82,234)		(65,800)
Property and equipment, net	$	763,904	$	577,528

The Company did not record an impairment charge for the six months ended June 30, 2024, and 2023.

See Note 12, “Operation Expansions”, for information on expansions during the six months ended June 30, 2024.

NOTE 5.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 $35,476 and $0 as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, the components of the fair value of the insurance subsidiary deposits and investments include amortized costs of $35,000 and net unrealized gains of $476. Gains and losses on investments are recorded within other expense, net. Insurance subsidiary deposits and investments consist of holdings in investment grade bond mutual funds and are derived using Level 2 inputs. These assets are recorded in insurance subsidiary deposits and investments on our condensed combined/consolidated balance sheets and are classified as available-for-sale securities. These mutual funds are primarily valued utilizing calculations which incorporate observable inputs such as yield, maturity and credit quality.

The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value.

NOTE 6.CREDIT FACILITIES

On February 28, 2023, the Company entered into a working capital loan agreement (the Working Capital Loan) in connection with the acquisition of various new facilities. The Working Capital Loan allowed the Company to borrow up to

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

$17,500 at an annual interest rate of 9%. On May 8, 2023, the Company drew on the Working Capital Loan in the amount of $15,000. As described below, the Working Capital Loan was repaid during 2023 and, as such, has a zero balance as of June 30, 2024.

On June 30, 2023, the Company and certain of its subsidiaries entered into a credit agreement with Truist and a syndicate of lenders (the 2023 Credit Agreement), that extended credit in the form of the revolving credit facility thereunder, (the 2023 Revolving Credit Facility), including letter of credit and swing line sub facilities and a term loan facility (Truist Term Loan), together referred to as the 2023 Credit Facility. The 2023 Credit Agreement provided for: (i) the 2023 Revolving Credit Facility with revolving commitments in an aggregate principal amount of $150,000, including a letter of credit sub facility in an amount representing that portion of the aggregate revolving commitments that may be used by the borrower for the issuance of letters of credit in an aggregate face amount not to exceed $30,000 and a swingline loan sub facility in an aggregate principal amount at any time outstanding not to exceed $20,000 and (ii) the Truist Term Loan in an aggregate principal amount of $275,000.

Outstanding borrowings under the 2023 Credit Facility accrued interest at either: (a) the Secured Overnight Financing Rate (SOFR) (plus a 0.10% credit spread adjustment) plus a margin ranging from 2.50% to 3.50% per annum; or (b) Base Rate (which was defined in a customary manner for credit facilities of this type) plus a margin ranging from 1.50% to 2.50% per annum. The applicable margin was based on the Company’s debt to income ratio as calculated in accordance with the terms of the 2023 Credit Agreement. In addition, the Company agreed to pay a commitment fee on the unused portion of the 2023 Revolving Credit Facility, which ranged from 0.30% to 0.50% per annum, depending on the same debt to income ratio.

In connection with executing the 2023 Credit Agreement, deferred financing costs associated with both lines-of-credit and long-term debt of $3,109 were written off, and additional deferred financing costs of $9,662 were capitalized during the year ended December 31, 2023. In addition, on the closing date of the 2023 Credit Agreement, the Company drew $75,000 on the 2023 Revolving Credit Facility and borrowed the entirety of the $275,000 Truist Term Loan. The Company used approximately $142,000 of the net proceeds to repay certain outstanding indebtedness on prior lines of credit and the Working Capital Loan.

On December 7, 2023, the Company amended and restated the 2023 Credit Facility (the Amended and Restated 2023 Credit Facility). The Amended and Restated 2023 Credit Facility provided for an increase of the 2023 Revolving Credit Facility to an aggregate principal amount of $600,000, which revolving commitments may also be utilized for (x) the issuance of letters of credit in an aggregate face amount not to exceed $50,000 and/or (y) the borrowing of swingline loans in aggregate principal amount not to exceed $20,000 at any time outstanding.

Outstanding borrowings under the Amended and Restated 2023 Credit Facility bear interest at the option of the Company based on: (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 consistent with the 2023 Credit Facility) 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 2023 Credit Facility. In addition, the Company will pay a commitment fee on the unused portion of the commitments, which ranges from 0.25% to 0.45% per annum, depending on the same debt to income ratio.

Upon the closing of the Amended and Restated 2023 Credit Facility, the Company borrowed $460,000 of revolving loans, the proceeds of which were used to repay and refinance all term loans and revolving loans under the 2023 Credit Facility, to repay certain other outstanding indebtedness, and to pay transaction costs in connection with the Amended and Restated 2023 Credit Facility. Deferred financing costs associated with both lines-of-credit and long-term debt of $519 were written off as part of the refinance during the year ended December 31, 2023.

The agreement above contains certain financial and non-financial covenants and restrictions. Default by the applicable credit party on any covenant or restriction could affect the lender’s commitment to lend, and, if not waived or corrected, could make the outstanding balances due on demand. Under the Amended and Restated 2023 Credit Facility, the Company must maintain a debt-to-income ratio of not greater than 3.00:1.00. The Amended and Restated 2023 Credit Facility also requires that the Company maintain a minimum interest/rent coverage ratio of not less than 1.10:1.00. The Company was in compliance with all such covenants and restrictions as of June 30, 2024.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

The Company maintains the Amended and Restated 2023 Credit Facility as its single line-of-credit. At June 30, 2024, the total commitment limit continued to be $600,000 and was secured by Company assets. The agreements mature on December 7, 2028. The balance outstanding on all applicable lines was $248,000 and $520,000 at June 30, 2024 and December 31, 2023, resulting in available cash of $340,350 and $80,000, respectively, net of letter of credit usage.

Deferred financing fees on lines-of-credit were $15,099 as of June 30, 2024 and December 31, 2023. Amortization expense relating to deferred financing fees on lines-of-credit for the three months ended June 30, 2024 and 2023 was $755 and $165, respectively and for the six months ended June 30, 2024 and 2023 were $1,510 and $352, respectively. Accumulated amortization related to deferred financing fees on lines-of-credit was $1,703 and $193 as of June 30, 2024 and December 31, 2023, respectively.

On April 15, 2024, the Company completed an Initial Public Offering (IPO), as described in Note 13, “Capital Stock”, receiving initial net proceeds of $423,000. The Company used $370,000 of the net proceeds from the IPO, which represented 87.5% of the net proceeds from the IPO, to repay amounts outstanding under the Amended and Restated 2023 Credit Facility, and used the remaining amount for general corporate purposes to support the growth of the business.

NOTE 7.LONG-TERM DEBT

During the six months ended June 30, 2024 and the year ended December 31, 2023, some of the Company's subsidiaries entered into Department of Housing and Urban Development (HUD)-insured mortgage loans in the aggregate amount of $34,685 and $88,809, respectively. As a result, 11 of the Company's subsidiaries had mortgage loans insured with HUD in the aggregate amount of $199,404 as of June 30, 2024, of which $3,339 is classified as short-term and the remaining $196,058 is classified as long-term. As of December 31, 2023, the Company’s subsidiaries had HUD-insured mortgage loans in the aggregate amount of $166,181 of which $2,346 was classified as short-term and the remaining $163,835 was classified as long-term. These subsidiaries are subject to HUD-mortgage oversight and periodic inspections. As of June 30, 2024, the Company’s HUD-insured mortgage loans bear fixed interest rates ranging from 2.4% to 6.3% per annum and have various maturity dates through December 31, 2058. 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 35 years.

In addition to the HUD-insured mortgage loans above, the Company has 12 other mortgage loans or promissory notes. The non-HUD insured mortgage loans and notes bear interest rates in the range of 2.0% and 7.5% per annum with various maturity dates through June 1, 2027. The notes are secured by equipment and guarantees by the Company and certain stockholders. As of June 30, 2024 and December 31, 2023, the Company had $46,021 and $48,829, respectively, of debt principal outstanding under the mortgage loans and promissory notes, of which $12,407 is classified as short-term and the remaining $33,614 is classified as long-term as of June 30, 2024, and $14,476 is classified as short-term and the remaining $34,353 is classified as long-term as of December 31, 2023.

The Company was in compliance with all applicable loan covenants with respect to the foregoing as of June 30, 2024 and December 31, 2023. The loans above are guaranteed by the Company. Additionally, various loans are secured by real property with a carrying value amounting to $235,222 and $438,645 at June 30, 2024 and December 31, 2023, respectively.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

Long-term debt consists of the following at:


	June 30, 2024		December 31, 2023
HUD-insured mortgage loans	$	199,404	$	166,181
Other mortgage loans and promissory notes	46,021		48,829
Less: current maturities	(15,745)		(16,822)
Less: deferred financing fees, net	(2,573)		(2,480)
Total	$	227,107	$	195,708

Deferred financing fees incurred in conjunction with debt financing of $2,745 and $2,611 as of June 30, 2024 and December 31, 2023, respectively, are being amortized over the life of the respective loans. Total amortization related to deferred financing fees is included in interest expense and amounted to $21 and $390 for the three months ended June 30, 2024 and 2023, respectively, and $41 and $818 for the six months ended June 30, 2024 and 2023, respectively. Accumulated amortization related to those deferred financing fees was $172 and $131 at June 30, 2024 and December 31, 2023, respectively.

As discussed in Note 6, “Credit Facilities”, on June 30, 2023, the Company borrowed under the Truist Term Loan in connection with the execution of the 2023 Credit Agreement. Under the Truist Term Loan, the Company borrowed $275,000. The Truist Term Loan has a maturity date of June 30, 2028. Upon closing of the Truist Term Loan, the Company paid off certain other mortgage loans and promissory notes in the aggregate amount of $224,802. The Truist Term Loan was repaid on December 7, 2023 in connection with the closing of the Amended and Restated 2023 Credit Facility and as such, has a zero balance as of June 30, 2024.

NOTE 8.INCOME TAXES

The Company recorded income tax expense of $22,441 and $21,871 during the six months ended June 30, 2024, and 2023, respectively, or 37.0% of earnings before income taxes for the six months ended June 30, 2024, compared to 27.1% for the six months ended June 30, 2023. The change in effective tax rate in the six months ended June 30, 2024, compared to the six months ended June 30, 2023, was primarily due to an increase in non-deductible expenses, including non-deductible compensation in 2024.

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 2020 and forward are subject to examination, and state returns for tax years 2019 and forward are subject to examination. The Company’s balance of net deferred tax assets and net deferred tax liabilities are included within other assets and other liabilities on the condensed combined/consolidated balance sheets as of June 30, 2024 and 2023, respectively.

As of June 30, 2024 and 2023, the Company did not have any unrecognized tax benefits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company does not anticipate the uncertain tax position to change materially within the next twelve months.

NOTE 9.LEASES

Operating Leases

The Company leases most of its skilled nursing and assisted living facilities, as well as its office space and certain vehicles and equipment, under various non-cancelable operating lease agreements. These operating leases expire at various dates throughout 2049.

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.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

For 13 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 these purchase options was not reasonably assured.

The facility leases are generally renewable at the Company’s option for additional terms ranging from 3 to 20 years. All facility leases provide for an additional percentage rent based upon specified rates per the terms of the agreements.

Real estate lease payments are deemed to constitute the right to use the underlying facilities and operate as a skilled nursing facility as permitted by the accompanying license. As the license is deemed to be inseparable from the related real estate in determining value, the payments related to these components have been combined into a single lease obligation representing the right to use the facilities and to operate under the terms of the accompanying license, respectively.

Finance Leases

The Company leases certain skilled nursing and assisted living facilities under finance lease agreements. The economic substance of each lease is that the Company is financing the facilities through the lease. The lease terms of these finance leases allow for a purchase option during a specified window. The Company has determined that it is reasonably certain to exercise the purchase option at the end of each purchase option window. Therefore the Company has calculated the lease term through the end of the purchase option window for each lease. Accordingly, such leases are recorded in the Company’s condensed combined/consolidated financial statements as assets and liabilities.

Finance lease right-of-use assets are included in property and equipment and have a balance of $37,205 and $37,850 as of June 30, 2024 and December 31, 2023, respectively. The current portion of finance lease liabilities is included in other accrued expenses and has a balance of $991 and $942 as of June 30, 2024 and December 31, 2023, respectively. The long-term portion of finance lease liabilities is included in other liabilities and has a balance of $40,279 and $40,766 as of June 30, 2024 and December 31, 2023, respectively.

The components of lease expense were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Operating lease expense
Rent - cost of services (1)	$	65,833	$	51,456	$	129,794	$	96,560
General and administrative expense	607		353		1,417		708
Variable lease costs (2)	8,119		6,044		17,033		11,964
Total operating lease expense	$	74,559	$	57,853	$	148,244	$	109,232
Finance lease expense
Amortization of right-of-use assets	322		313		645		620
Interest on lease liabilities	736		198		1,476		330
Total financing lease expense	1,058		511		2,121		950
Total Lease Expense	$	75,617	$	58,364	$	150,365	$	110,182

__________________

(1)Rent - cost of services includes other variable lease costs such as Consumer Price Index (CPI) increases and other rent adjustments of $497 and $620 for the three months ended June 30, 2024 and 2023, respectively, and $1,035 and $1,578 for the six months ended June 30, 2024 and 2023, respectively.

(2)Variable lease costs, including property taxes and insurance, are classified in Cost of services in the Company’s unaudited condensed combined/consolidated statements of (loss) income and comprehensive (loss) income.

Operating lease expense is included in Rent - cost of services and General and administrative expense as indicated above. For finance lease expense, the amortization of right-of-use assets is included in depreciation and amortization while the interest component is included in interest expense.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

The following table summarizes supplemental cash flow information related to leases:


	Six Months Ended June 30,
	2024		2023
Operating cash paid for amounts included in the measurement of operating lease liabilities	$	116,026	$	88,175
Operating cash paid for amounts included in the measurement of finance lease liabilities	1,476		330
Financing cash paid for amounts included in the measurement of finance lease liabilities	438		1,065
Operating lease right-of-use assets obtained in exchange for lease liabilities	259,201		557,412
Financing lease right-of-use assets obtained in exchange for lease liabilities	—		2,028

Information relating to the lease term and discount rate is as follows:


	As of June 30, 2024
Weighted-average remaining lease term (years)
Operating leases	14
Financing leases	2
Weighted-average discount rate
Operating leases	5.8	%
Financing leases	7.2	%

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.

Maturities of lease liabilities as of June 30, 2024 were as follows:


	Finance Leases		Operating Leases		Total
2024 (remainder)	$	1,929	$	116,501	$	118,430
2025	23,560		232,133		255,693
2026	2,241		231,843		234,084
2027	17,995		229,876		247,871
2028	782		231,979		232,761
2029	391		233,208		233,599
Thereafter	—		1,934,120		1,934,120
Total lease payments	$	46,898	$	3,209,660	$	3,256,558
Less: present value discount	(5,627)		(1,027,797)		(1,033,424)
Present value of lease liabilities	$	41,271	$	2,181,863	$	2,223,134

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 condensed combined/consolidated statements of (loss) income and comprehensive (loss) income.

NOTE 10.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

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

Consulting Agreement) which automatically renewed for successive one-year terms. The Helios Consulting Agreement provided for a cash consulting fee of approximately $4,000 annually, paid in monthly installments, for consulting and strategic advisory services provided to the Company by Helios. For the three months ended June 30, 2024 and 2023, the Company paid $0 and $1,000 (inclusive of $0 and $38, respectively, paid to a subsidiary of Helios), respectively. For the six months ended June 30, 2024 and 2023, the Company paid $0 and $2,000 (inclusive of $0 and $75, respectively, paid to a subsidiary of Helios), respectively. As of December 31, 2023, the Company terminated the Helios Consulting Agreement.

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.

NOTE 11.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.

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. The defense of these lawsuits may result on significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories. The Company and other companies in its industry are routinely subjected to varying types of claims and suits, including class-actions. Class-action suits have the potential to result in large jury verdicts and settlements, and may result in significant legal costs. The Company expects the plaintiffs’ bar to continue to be aggressive in their pursuit of claims. The Company has been subjected to, and is currently involved in, litigation alleging violations of state and federal wage and hour laws as resulting from the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes of action. While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, cash flows, financial condition, or results of operations.

The Company has been, and continues to be, subject to 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. While there can be no assurance, based on the Company’s evaluation of information currently available, management does not believe the results of such litigation and investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company, 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.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

Insurance Claims

The Company purchased PLGL claims made insurance policies to cover applicable claims through an unrelated insurer. The PLGL policies are claims-made high deductible self-insured policies whereby the Company is responsible for the first layer of coverage, generally ranging from $250 to $500 per claim, as well as an additional aggregate one-time deductible generally ranging from $750 to $4,000 per policy, with the unrelated insurer typically covering up to $10,000 in aggregate claims paid per policy year. The Company uses its wholly-owned captive insurance company for the purpose of insuring certain portions of its risk retained under its PLGL programs. Accordingly, the Company is in essence self-insured for claims that are less than policy deductible amounts, claims not covered by such policies, and claims that exceed policy limits. It is the Company’s policy to use an actuary to assist management in recording the expense and related liability for PLGL claims, both asserted and unasserted, on an undiscounted basis. Included as part of accrued self-insurance liabilities in the accompanying condensed combined/consolidated balance sheets are PLGL self-insurance liabilities amounting to $183,836 and $162,976 as of June 30, 2024 and December 31, 2023, respectively, which include $31,628 and $34,676, respectively, of estimated obligations that will be covered by the unrelated insurer. PLGL self-insurance liabilities as of June 30, 2024 and December 31, 2023 include $53,673 and $43,083, respectively, that were related to unasserted claims. The Company recorded an asset for the estimated obligations that will be covered by the unrelated insurer. As of June 30, 2024 this asset amounted to $5,377 and $26,251 recorded within other receivables and other assets, respectively, and as of December 31, 2023, this asset amounted to $5,895 and $28,781 recorded within other receivables and other assets, respectively, as the claims related to the Company's general and professional liability and the anticipated insurance recoveries are recorded on a gross rather than net basis in accordance with U.S. GAAP.

Indemnities

From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company officers, directors and others, under which the Company may be required to indemnify such persons for liabilities arising out of the nature of their relationship to the Company. The terms of such 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 12.OPERATION EXPANSIONS

FASB ASC Topic 805, Business Combinations (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.

2024 Expansions

During the six months ended June 30, 2024, the Company’s operations and real estate portfolio grew through a combination of long-term leases and real estate purchases, with the addition of 12 stand-alone facilities and nine real estate purchases. Of the nine real estate purchases, four of the properties were acquired in conjunction with the operations of the associated facility. For the other five acquired properties, the Company’s subsidiaries previously operated the respective facilities and have now acquired the real estate associated with those operations. The aggregate purchase price for these acquisitions was $175,150. These new operations added 1,501 skilled nursing beds and 174 assisted living beds operated by the Company's affiliated operating subsidiaries.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

The Company’s expansion strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities to improve both clinical and financial performance of the acquired facility. The operations added by the Company are underperforming financially and have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operations, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not 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 six months ended June 30, 2024 and through the issuance of the 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 June 30, 2024 condensed combined/consolidated balance sheets of the Company, and the operating results have been included in the condensed combined/consolidated statements of (loss) income and comprehensive (loss) income of the Company since the date the Company gained effective control.

Expansions After Period End

On August 1, 2024, the Company finalized the acquisition of operations for 12 skilled nursing and 13 assisted living and independent living facilities. The operations are located across six states, including 19 facilities in Washington, two in Nevada, and one facility each in Alaska, Arizona, California, and Montana. Collectively, these facilities comprise 1,072 skilled nursing beds and 831 assisted living and independent living units. Of these facilities, 21 are leased from a new joint venture the Company entered into on the same date for $10,000 in which it owns a 25.8% interest. The remaining four facilities are leased from unaffiliated third-party landlords.

Additionally, subsequent to June 30, 2024, the Company’s operations grew with the addition of three stand-alone facilities in Kansas through a long-term lease. The new operations added 378 skilled nursing beds operated by the Company’s affiliated operating subsidiaries.

NOTE 13.CAPITAL STOCK

The Reorganization on June 30, 2023 referred to in Note 1, “Organization and Nature of Business”, resulted in the Common Shares outstanding being converted from 600 shares of PGI to 20,000 shares of PACS Group (a 1 to 33.33 conversion ratio). On March 31, 2024, the Company’s board of directors approved a 1 to 6,436.1693 stock split of its issued and outstanding common stock, which was effective by amendment to the Company’s charter on April 1, 2024. As part of the amendment, the number of authorized shares of common stock was revised to 1,250,000,000 with the par value remaining at $0.001 per share, and the number of authorized shares of preferred stock was approved to be 50,000,000 with a par value of $0.001. All issued and outstanding common stock and per share amounts contained in the condensed combined/consolidated financial statements have been retrospectively adjusted to give effect to the stock split for all periods presented.

On April 15, 2024, the Company completed an IPO in which the Company issued and sold 21,428,572 shares of common stock at a public offering price of $21.00 per share, generating aggregate gross proceeds of $450,000 before underwriter discounts and commissions, fees and other expenses of $35,843. In addition, the underwriters exercised their 30-day option to purchase an additional 3,214,284 shares of the Company’s common stock at the initial public offering price from the selling stockholders, less underwriting discounts and commissions. The Company did not receive any proceeds from any sale of shares by the selling stockholders. The Company’s common stock is traded on the New York Stock Exchange under the symbol “PACS”.

As of June 30, 2024, the amount of issued and outstanding common stock is 152,399,733. The Company has not issued any shares of preferred stock.

NOTE 14.COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE

Basic net (loss) income per share is calculated by dividing net (loss) income attributable to the common stockholders by the weighted-average shares of Common Stock outstanding for the period. The computation of diluted net (loss) income per share is similar to the computation of basic net (loss) 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.

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NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

A reconciliation of the numerator and denominator used in the calculation of basic net (loss) income per common share follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Numerator:
Net (loss) income	$	(10,908)	$	21,220	$	38,232	$	58,818
Less: net income attributable to noncontrolling interest	2		2		4		3
Net (loss) income attributable to PACS Group, Inc.	$	(10,910)	$	21,218	$	38,228	$	58,815
Denominator:
Weighted average common shares outstanding	149,463,655		128,723,386		139,093,520		128,723,386

Basic net (loss) income per common share	$	(0.07)	$	0.16	$	0.27	$	0.46

A reconciliation of the numerator and denominator used in the calculation of diluted net (loss) income per common share follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Numerator:
Net (loss) income	$	(10,908)	$	21,220	$	38,232	$	58,818
Less: net income attributable to noncontrolling interest	2		2		4		3
Net (loss) income attributable to PACS Group, Inc.	$	(10,910)	$	21,218	$	38,228	$	58,815
Denominator:
Weighted average common shares outstanding	149,463,655		128,723,386		139,093,520		128,723,386
Plus: effect of diluted shares(1)	—		—		591,098		—
Adjusted weighted average common shares outstanding	149,463,655		128,723,386		139,684,618		128,723,386

Diluted net (loss) income per common share	$	(0.07)	$	0.16	$	0.27	$	0.46

__________________

(1) The diluted per share amounts do not reflect 1,182,196 common share equivalents from restricted stock units for the three months ended June 30, 2024 because of their anti-dilutive effect.

NOTE 15.STOCK AWARDS

Stock-based compensation expense consists of stock-based payment awards made to employees and directors, comprised of restricted stock units, based on their estimated fair values. Stock-based compensation expense recognized in the Company’s condensed combined/consolidated statements of (loss) income and comprehensive (loss) income for the three and six months ended June 30, 2024 and 2023 was based on the vesting of awards granted to date.

2024 Incentive Award Plan (2024 Plan)

On March 31, 2024, the Company’s board of directors and stockholders approved the PACS Group, Inc. 2024 Incentive Award Plan (2024 Plan), which became effective on the date immediately preceding the date on which the Company’s IPO registration statement was declared effective by the Securities and Exchange Commission (SEC). 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).

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PACS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED COMBINED/CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except for share and per share values)

2024 Employee Stock Purchase Plan (2024 ESPP)

On March 31, 2024, the Company’s board of directors and stockholders approved the 2024 Employee Stock Purchase Plan (2024 ESPP), which became effective on the date immediately preceding the date on which the Company’s registration statement was declared effective by the SEC. The number of shares initially available for issuance pursuant to the 2024 ESPP was equal to the number of shares equal to 1% of the number of shares of common stock outstanding as of immediately following the completion of the IPO (disregarding the shares issuable under the 2024 Plan). As of June 30, 2024 there have been no shares issued under this plan.

Restricted Stock Unit Awards

The Company granted RSU awards to key executives and directors of 15,409,470 and 0 shares during the six months ended June 30, 2024 and 2023, respectively. For certain awards granted to key executives, the stock price used to determine the award fair value was the initial public offering price of $21.00 per share. Subsequent grants to non-employee directors used the market price on the date of respective grant to determine the award fair value. Awards granted to key executives at the time of the IPO vested 25% upon issuance with the remaining shares scheduled to vest in equal increments on an annual basis over the next five years as the grantee meets the requisite service condition. Other awards granted vest over one year. The fair value per share of RSU awards granted during the six months ended June 30, 2024 ranged from $21.00 to $24.85. The fair value per share includes awards to non-employee directors.

A summary of the status of the Company’s non-vested RSU awards for the six months ended June 30, 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 June 30, 2024	11,561,818	$	21.01

During the six months ended June 30, 2024, the company granted 18,891 RSU awards to non-employee directors for their service on the Company’s board of directors from the 2024 Plan. The fair value per share of these awards were $24.85 based on the market price on the grant date.

Stock-based compensation expense

Stock-based compensation expense recognized for the Company’s equity incentive plans was as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Stock-based compensation expense related to restricted stock unit awards	$	90,936	$	—	$	90,936	$	—
Total stock-based compensation expense	$	90,936	$	—	$	90,936	$	—

In future periods, the Company expects to recognize approximately $232,736 in stock-based compensation expense for unvested RSU awards that were outstanding as of June 30, 2024. Future stock-based compensation expense will be recognized over 4.8 weighted average years for unvested RSU awards.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed combined/consolidated financial statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (SEC), including our audited consolidated financial statements and related notes as disclosed in our final prospectus dated April 12, 2024 in connection with our IPO, which includes for the year ended December 31, 2023, and discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information. The section titled “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q, and similar discussions in our other SEC filings, also describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Quarterly Report on Form 10-Q and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

Overview

We are a leading post-acute healthcare company primarily focused on delivering high-quality skilled nursing care through a portfolio of independently operated facilities. Founded in 2013, we are one of the largest skilled nursing providers in the United States based on number of facilities, with 220 post-acute care facilities across nine states serving over 22,000 patients daily. We also provide senior care, assisted living, and independent living options in some of our communities. Our significant historical growth has been primarily driven by our expertise in acquiring underperforming long-term custodial care skilled nursing facilities and transforming them into higher acuity, high value-add short-term transitional care skilled nursing facilities. We believe our success is driven in significant part by our decentralized, local operating model, through which we empower local leaders at each facility to operate their facility autonomously and deliver excellence in clinical quality and a superior experience for our patients. We provide our independently operated facilities with a comprehensive suite of technology, support, and back-office services that allow local leadership teams to focus more of their time and effort on providing quality care to patients. We believe our operating model delivers value to all of our healthcare stakeholders, including patients and families, referring providers, payors, and administrators and clinicians.

We aim to create value by identifying and acquiring underperforming custodial care facilities and converting them into higher-value short-term transitional care facilities by investing in clinical teams and processes and upgrading technology, equipment, training, staffing, aesthetics, and other aspects of the business. The resources and guidance offered by PACS Services is key to rapid integration of new facilities and provides our local leadership teams with an effective technology infrastructure, support tools, and regional support teams that allow local leadership to focus on operational improvements. Our facilities generally undergo an up to three-year post-acquisition transition period. During this period, we seek to implement best practices designed to realize and sustain the facility’s full potential. These practices often result in significant improvements to clinical quality and other operational metrics, including skilled mix, occupancy rates and payor contracting. We believe the results of our acquisition strategy are demonstrated by our high average QM Star rating and occupancy rate for Mature facilities of 4.3 and 94%, respectively, as of June 30, 2024. As of June 30, 2024, the average QM Star rating and occupancy rate for New facilities was 4.1 and 84%, respectively.

On April 10, 2024, our registration statement on Form S-1 (File No. 333-277893) (Registration Statement) related to our IPO was declared effective by the SEC, and our common stock began trading on The New York Stock Exchange (NYSE), on April 11, 2024. Our IPO closed on April 15, 2024.

Facility Information

The following table provides summary information regarding the location of our post-acute care facilities and operational beds by property type as of June 30, 2024:

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	Leased		Owned		Total
	Facilities	Beds/Units	Facilities	Beds/Units	Facilities	Beds/Units
Arizona	9	1,219	—	—	9	1,219
California	114	13,144	24	2,587	138	15,731
Colorado	19	2,226	1	242	20	2,468
Kentucky	5	596	2	340	7	936
Missouri	2	190	3	424	5	614
Nevada	3	215	2	165	5	380
Ohio	6	637	—	—	6	637
South Carolina	21	2,352	4	488	25	2,840
Texas	3	290	2	246	5	536
	182	20,869	38	4,492	220	25,361

During the six months ended June 30, 2024, we expanded our operations with the addition of eleven stand-alone skilled nursing operations and one assisted living facility. These new operations added a total of 1,501 skilled nursing beds and 174 assisted living beds to be operated by our affiliated operating subsidiaries.

Subsequent to June 30, 2024, our operations grew with the addition of 28 stand-alone facilities through long-term leases across seven states, including four new states for the Company. Of the new facilities, 21 are leased from a new joint venture we entered into in which we own a 25.8% interest. The new operations added 1,450 skilled nursing beds and 831 assisted living and independent living beds operated by our affiliated operating subsidiaries. For further discussion of our real estate properties and expansions, see Note 12, “Operation Expansions”, in the Notes to the condensed combined/consolidated financial statements.

Key Skilled Services Metrics and Non-GAAP Financial Measures

We use the following key skilled services metrics and non-GAAP financial measures to help us evaluate our business, identify trends that affect our financial performance, and make strategic decisions.

Key Skilled Services Metrics

We monitor the below key skilled services metrics across all of our facilities and by Mature facilities, Ramping facilities, and New facilities. Mature facilities are defined as facilities purchased more than 36 months prior to a respective measurement date. Ramping facilities are defined as facilities purchased within 18 to 36 months prior to a respective measurement date. New facilities are defined as facilities purchased less than 18 months prior to a respective measurement date.

•Skilled nursing services revenue — Skilled nursing services revenue reflects the portion of patient and resident service revenue generated from all patients in skilled nursing facilities, excluding revenue generated from our assisted and independent living services.

•Skilled mix — We measure both revenue and nursing patient days by payor. Medicare and managed care patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing care. As a result, Medicare and managed care reimbursement rates are typically higher than those from other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly affect our revenue and profitability. To monitor this performance, we evaluate two different measures of skilled mix:

◦Skilled mix by revenue — Skilled mix by revenue represents the portion of routine revenue generated from treating high acuity Medicare and managed care patients. Routine revenue refers to skilled nursing services revenue generated by contracted daily rates charged for skilled nursing services. Services provided outside of routine contractual agreements are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not routine revenue. The inclusion of therapy and other ancillary treatments in the contracted daily rate varies by payor source and by contract. Revenue associated with calculating skilled mix is based on contractually agreed-upon amounts or rates,

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excluding the estimates of variable consideration under the revenue recognition standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606.

◦Skilled mix by nursing patient days — Skilled mix by nursing patient days represents the number of days our high acuity Medicare and managed care patients receive skilled nursing services at skilled nursing facilities as a percentage of the total number of days that patients from all payor sources receive skilled nursing services at skilled nursing facilities for any given period.

•Occupancy — The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in such facility that are available for occupancy during the period.

•Number of facilities — The total number of skilled nursing facilities that we operate. Excludes six and three assisted living and independent living facilities for the six months ended June 30, 2024 and 2023, respectively.

•Number of operational beds — The total number of operational beds associated with the skilled nursing facilities that we own.

The following tables present the above key skilled services metrics by category for all facilities, Mature facilities, Ramping facilities and New facilities as of and for the three months ended June 30, 2024 and 2023:


	Three Months Ended June 30,
	2024			2023			Change		% Change

	(dollars in thousands)
Total facility results:
Skilled nursing services revenue	$	973,082		$	755,994		$	217,088	28.7	%
Skilled mix by revenue	51.2		%	58.0		%			(6.8)	%
Skilled mix by nursing patient days	29.2		%	34.7		%			(5.5)	%
Occupancy for skilled nursing services:
Available patient days	2,225,208			1,773,346			451,862		25.5	%
Actual patient days	2,023,865			1,621,868			401,997		24.8	%
Occupancy rate (operational beds)	91.0		%	91.5		%			(0.5)	%
Number of facilities at period end	214			185			29		15.7	%
Number of operational beds at period end	24,483			20,536			3,947		19.2	%


	Three Months Ended June 30,
	2024			2023			Change		% Change

	(dollars in thousands)
Mature facility(1) results:
Skilled nursing services revenue	$	298,199		$	272,629		$	25,570	9.4	%
Skilled mix by revenue	55.2		%	60.1		%			(4.9)	%
Skilled mix by nursing patient days	32.2		%	37.0		%			(4.8)	%
Occupancy for skilled nursing services:
Available patient days	634,361			621,374			12,987		2.1	%

Form: 10-Q

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