10-K: PACS Group Restates Financials Amid Investigations

PACS Group, Inc. has restated prior financial statements and identified material weaknesses in internal controls following an independent Audit Committee investigation into allegations from a short seller report.

Summary

• PACS Group, Inc. has restated its condensed combined/consolidated financial statements for the three months ended March 31, 2024, and the three and six months ended June 30, 2024, due to improper revenue recognition for certain respiratory and other therapy services billed under Medicare Part B, and incorrect classification of certain leases.
• Management identified material weaknesses in internal control over financial reporting, specifically in designing and maintaining an effective control environment for risk assessment and adequate controls within the revenue recognition process for new services.
• An independent Audit Committee investigation, initiated due to a short seller report, found that the former Chief Financial Officer, Derick Apt, violated company policies by accepting high-value items from related entities, leading to his resignation.
• The company is currently subject to multiple ongoing regulatory investigations by the U.S. Department of Justice (DOJ) and the SEC concerning alleged False Claims Act violations, HIPAA violations, and accounting/disclosure practices.
• Net income for the year ended December 31, 2024, decreased by 51.0% to $55.3 million, compared to $112.9 million in 2023.
• Total revenue increased by 31.4% to $4.1 billion for the year ended December 31, 2024, primarily driven by acquisitions and an increase in patient days.
• Adjusted EBITDA increased to $279.5 million in 2024 from $237.5 million in 2023.
• The company is in a state of forbearance with its lenders under the Amended and Restated 2023 Credit Facility due to technical events of default, which prohibits new borrowings.
• Securities class action and derivative lawsuits have been filed against the company and certain executive officers following the short-seller report and subsequent decline in stock price.
• As of December 31, 2024, the company operated 314 post-acute care facilities across 17 states, serving over 30,100 patients daily, with an average QM Star rating of 4.3 and an occupancy rate of 94% for its Mature facilities, significantly above industry averages.

Sentiment

Score: 3

Explanation: The company faces significant challenges including financial restatements, material weaknesses in internal controls, multiple ongoing regulatory investigations, and a decrease in net income. While revenue growth and strong operational metrics in mature facilities are positive, the severity and breadth of the negative disclosures, particularly the legal and compliance issues, indicate a highly unfavorable short-to-medium term outlook.

Positives

• Total revenue increased by 31.4% to $4.1 billion for the year ended December 31, 2024, demonstrating significant growth.
• Adjusted EBITDA increased to $279.5 million in 2024 from $237.5 million in 2023, indicating operational profitability growth.
• Maintains a strong market position as one of the largest skilled nursing providers in the U.S., operating 314 facilities.
• Successful acquisition strategy focuses on transforming underperforming long-term custodial care facilities into higher-acuity, high value-add short-term transitional care SNFs.
• Mature facilities (purchased more than 36 months prior) consistently outperform industry averages with a 4.3 average QM Star rating (vs. 3.4 industry average) and 94% occupancy rate (vs. 77% industry average) as of December 31, 2024.
• Low voluntary turnover rate of 2.5% among facility administrators for the year ended December 31, 2024, suggesting strong leadership retention.
• Management is committed to maintaining a strong internal control environment and is taking comprehensive actions to remediate identified material weaknesses.
• The Audit Committee's independent investigation did not identify any additional material financial misstatements or financial irregularities beyond the restatement.
• The company has a robust pipeline for potential single-facility tuck-in acquisitions, larger multi-facility portfolio acquisitions, and new facility builds.
• Diversified portfolio of owned and leased properties strategically located in 17 states, with plans for further penetration and expansion into new states.

Negatives

• Restatement of previously issued interim financial statements for Q1 and Q2 2024 due to improper revenue recognition for certain therapy services and incorrect lease classifications.
• Net income decreased by 51.0% to $55.3 million for the year ended December 31, 2024, from $112.9 million in 2023.
• Operating income decreased by 40.8% to $123.1 million for the year ended December 31, 2024.
• Identified material weaknesses in internal control over financial reporting, specifically in risk assessment and revenue recognition processes.
• Former Chief Financial Officer, Derick Apt, resigned due to violations of company policies, including the Code of Conduct & Ethics, for accepting high-value items from related entities.
• Subject to multiple ongoing regulatory investigations by the DOJ and SEC related to alleged False Claims Act violations, HIPAA violations, and accounting/disclosure practices.
• Currently in forbearance with lenders under its Amended and Restated 2023 Credit Facility due to technical events of default, which prohibits the borrowing of new loans.
• General and administrative expense increased significantly by 60.9% to $343.8 million in 2024, partly due to stock compensation expense and legal/professional fees for investigations.
• Skilled mix by revenue decreased from 55.1% in 2023 to 50.3% in 2024, and skilled mix by nursing patient days decreased from 32.4% to 29.2% over the same period.
• Total facility occupancy rate slightly decreased from 90.9% in 2023 to 90.4% in 2024, attributed to lower occupancy in newly acquired facilities.
• A refund liability of $145.8 million was recorded as of December 31, 2024, for consideration collected related to revenue that is not probable of significant reversal.
• The company has recorded $21.9 million in other liabilities for Employee Retention Tax Credit (ERTC) cash received that may need to be returned.

Risks

• Dependence on reimbursement from third-party payors (Medicare, Medicaid); changes in acuity mix, payor mix, payment methodologies, or cost containment initiatives could negatively impact revenue and financial condition.
• Risk of not being fully reimbursed for all services billed through consolidated billing or bundled payments.
• Increased competition for, or a shortage of, nurses and other skilled personnel could increase staffing and labor costs and lead to monetary fines.
• State efforts to regulate or deregulate the healthcare services industry or facility construction/expansion could impair growth or increase competition.
• Failure to attract patients and compete effectively with other healthcare providers could lead to declining revenue and profitability.
• Internal reviews and audits may detect instances of noncompliance, requiring reduced or repaid billed amounts or other costs.
• Subject to litigation, which is commonplace in the industry, potentially resulting in significant legal costs and large settlement amounts or damage awards; self-insurance programs may expose the company to unexpected costs.
• Material weaknesses in internal control over financial reporting could impair accurate and timely financial reporting, adversely affecting investor confidence and potentially leading to litigation or penalties.
• Inability to provide consistently high quality of care or employee/staff misconduct could adversely impact business and lead to civil or criminal penalties, fines, or other actions.
• Significant reliance on information technology; any failure, inadequacy, or interruption could harm business operations.
• Operational metrics calculated using internal systems and tools are not independently verified, and real or perceived inaccuracies could harm reputation.
• May be unable to complete future facility or business acquisitions at attractive prices or integrate them successfully, or may elect to dispose of underperforming subsidiaries, decreasing revenue.
• Difficulty completing partnerships that increase capacity consistent with growth strategy.
• Failure to achieve or maintain competitive quality of care ratings from CMS or private organizations could negatively affect business.
• Difficulty obtaining or increased cost of insurance could adversely affect business.
• Geographic concentration of facilities (e.g., California) makes the company vulnerable to economic downturns, regulatory changes, or acts of nature in those areas.
• Actions of national labor unions may adversely affect revenue and profitability.
• Subject to risks associated with leased real property, including lease termination, extensions, and special charges, as the majority of facilities are leased.
• Failure to generate sufficient cash flow to cover required payments or meet operating covenants under long-term debt, mortgages, and long-term leases could result in defaults and loss of facilities.
• May need additional capital to fund growth and operations, which may not be available on acceptable terms, on a timely basis, or at all.
• Subject to extensive and complex laws and government regulations; non-compliance or changes in regulations could require significant expenditures or operational changes.
• Founders Jason Murray and Mark Hancock have substantial control (70.4% voting power), and their interests may conflict with other stockholders.
• Controlled company status allows reliance on exemptions from certain NYSE corporate governance standards, potentially reducing protections for other stockholders.
• Future sales, or the perception of future sales, of common stock by existing stockholders could cause the market price to decline.
• If estimates or judgments relating to critical accounting policies are based on assumptions that change or prove to be incorrect, operating results could fall below guidance, leading to a stock price decline.
• The market price of common stock may be volatile or decline steeply/suddenly regardless of operating performance, including due to short-seller reports.
• Subject to securities class action litigation and derivative lawsuits, which are expensive, time-consuming, and divert management attention.
• Cannot assure compliance with NYSE listing standards, and delisting could negatively affect stock price and capital raising ability.
• Management team has limited experience managing a public company, potentially impacting efficient management under regulatory oversight.
• Disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
• Global economic and financial market conditions, including severe market disruptions, could impact business operations and demand for services.
• Acquisitions or investments may divert management attention, result in additional dilution to stockholders, or fail to achieve expected benefits.
• Inability to pay or maintain dividends would adversely affect the stock price.

Future Outlook

The company plans to expand its presence in existing and new markets through disciplined acquisitions and new facility builds, leveraging operational upside within its current footprint by driving higher occupancy and increasing skilled mix. It intends to continue investing in training leaders and expanding its talent pool. The company also aims to extract embedded value from real estate ownership through purchase options and explore ancillary investment opportunities (PACS Ventures) in areas like pharmacy, laboratory, transportation, and imaging services, with potential future monetization of PACS Services to third-party SNF operators. Furthermore, the company is evaluating expansion into other post-acute sites of care, including home health, hospice, and broader senior living communities. Management is committed to remediating the identified material weaknesses in internal control over financial reporting and is in active discussions with lenders to amend and waive terms of its credit facility.

Management Comments

• Management determined that it is appropriate to reconsider the Company's judgmental assessments of the compliance of its respiratory and certain other therapy services.
• Management also determined that it is appropriate to reconsider the application of certain aspects of revenue recognition guidance under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts With Customers (ASC 606), including with respect to estimating variable consideration and constraining estimated variable consideration related to revenue from billings for such services.
• Management is committed to maintaining a strong internal control environment.
• Management believes that the combined/consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented, in accordance with U.S. GAAP.
• 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.

Industry Context

The post-acute care industry is a large and growing segment of the healthcare ecosystem, with the Centers for Medicare & Medicaid Services (CMS) projecting total industry expenditures to increase from $193.6 billion in 2022 to $283.3 billion in 2031, representing a compound annual growth rate (CAGR) of 4.3%. Skilled Nursing Facilities (SNFs) are integral to this, providing cost-efficient facility-based care to patients discharged from hospitals. Demand for SNFs is outpacing supply due to a rapidly aging population and increasing prevalence of chronic conditions. The industry is highly fragmented, with many small and independent operators facing pressures from billing requirements, regulations, and staffing shortages, creating opportunities for larger, well-managed providers. The reimbursement environment is generally favorable, with Medicare and Medicaid rates steadily increasing over the past few years, though subject to frequent regulatory changes and cost-containment efforts.

Comparison to Industry Standards

• The company's average QM Star rating across its Mature facilities was 4.3 as of December 31, 2024, compared to the industry average of 3.4 Stars.
• The company's average occupancy rate across its Mature facilities was 94% as of December 31, 2024, significantly higher than the industry average of 77%.
• Skilled nursing facilities (SNFs) are reported by MedPAC to be the lowest cost facility-based post-acute healthcare, costing an average of $550 per covered day, compared to $1,850 for inpatient rehabilitation facilities and $1,753 for long-term acute care hospitals.
• Approximately 24% of Medicare patients over 65 years old were discharged to SNFs in the first half of 2023, exceeding discharges to inpatient rehabilitation facilities and long-term acute care hospitals (approximately 6%) and home health nursing care (22%).
• The SNF industry is highly fragmented, with the top 10 operators representing approximately 11% of total SNFs, while approximately 5,000 smaller and independent operators make up the remainder, indicating the company's significant scale as one of the largest operators.

Management Changes

Corporate Governance

Legal Proceedings

• Civil Investigative Demand (CID) from the DOJ to Providence Administrative Consulting Services and Paradise Valley Healthcare Center (April 8, 2024) regarding alleged False Claims Act violations by improperly inducing patient referrals.
• CID from the DOJ to California-based skilled nursing facilities (September 11, 2024) regarding alleged False Claims Act violations by submitting false claims to Medicare under the patient-driven payment model (PDPM).
• CID from the DOJ to Providence Group, Inc. (September 30, 2024) regarding alleged False Claims Act violations by submitting false claims to Medicare for reimbursement under the COVID-19 related Hospital Stay Waiver (1135 waiver).
• Subpoena from the DOJ Criminal Division (February 26, 2025) regarding possible HIPAA violations related to fraudulent or false statements to the U.S. government, including 1135 COVID Waiver practices and Medicare Part B billing.
• SEC investigation by the Division of Enforcement into matters related to the company's accounting, financial reporting, disclosure, and internal controls over financial reporting and disclosure controls.
• Securities class action lawsuit (Manchin v. PACS Group, Inc., et al., filed November 13, 2024) alleging a multi-year scheme to inflate revenue and profitability through Medicare waiver exploitation, unnecessary Medicare Part B billing, and falsifying documentation.
• Shareholder derivative actions (IN RE PACS GROUP, INC. DERIVATIVE LITIGATION, filed February 14, 2025, and Boers v. Murray, et. al., filed August 19, 2025) with substantially similar allegations as the Manchin Action.
• Ongoing litigation alleging violations of state and federal wage and hour laws.

Related Party Transactions

• Founders Jason Murray and Mark Hancock collectively beneficially own approximately 70.4% of the voting power of common stock.
• A Stockholders Agreement (April 10, 2024) grants Messrs. Murray and Hancock the right to designate directors (currently four out of five board members).
• A Registration Rights Agreement (April 10, 2024) provides Messrs. Murray and Hancock with customary demand and piggyback registration rights for their shares.
• Messrs. Murray and Hancock, and their respective spouses, have provided personal guarantees on certain operating leases, for which the company has agreed to indemnify them.
• Messrs. Murray and Hancock each entered into margin loans with UBS AG Stamford Branch, pledging 9,500,000 shares of common stock as collateral (both loans were terminated in November 2024).
• The Helios Consulting Agreement with Helios Consulting, LLC (owned by Messrs. Murray and Hancock) provided for an annual cash consulting fee of $4.0 million, which was terminated on December 31, 2023.
• Messrs. Murray and Hancock each purchased 10,000 shares of the company's common stock for $0.001 per share on March 24, 2023.
• As of the date of this Annual Report, $613,510 each of erroneously awarded compensation remains outstanding and unpaid by Messrs. Murray and Hancock under the 2024 Management Bonus Program, which the Compensation Committee will seek to recover.

Stakeholder Impact

• Shareholders face potential negative impacts due to financial restatements, identified material weaknesses, ongoing regulatory investigations, and associated litigation, which could lead to stock price volatility and erosion of investor confidence.
• Employees may experience changes in compensation structures (e.g., clawback policy), increased scrutiny under enhanced compliance programs, and potential impacts from management changes, though the company also emphasizes career development and training.
• Patients and residents are directly impacted by the company's commitment to high-quality care and facility improvements, but regulatory deficiencies or non-compliance issues could negatively affect the quality and continuity of services.
• Lenders are impacted by the company being in forbearance due to technical events of default, leading to restrictions on new borrowings and increased scrutiny of financial health.
• Regulatory authorities are actively engaged in investigations and oversight, indicating a heightened focus on the company's compliance with healthcare laws and financial reporting standards.

Next Steps

• Implement remedial measures and enhancements to reinforce a culture of compliance, a care-first mentality, and ethical principles, with Board oversight.
• Continue implementing updates to the company's compliance program, overseen by a new interim Chief Compliance Officer, and recruit additional compliance, legal, and internal audit personnel.
• Remediate identified material weaknesses in internal control over financial reporting by designing, implementing, and testing necessary controls.
• Actively engage in discussions with Required Lenders to reach an agreement on an amendment and waiver to the Amended and Restated 2023 Credit Facility before the forbearance period ends.
• Expand presence in existing and new markets through strategic acquisitions and new facility builds, consistent with growth strategy.
• Leverage operational upside within the existing footprint by driving higher occupancy and increasing skilled mix in Ramping and New facilities.
• Continue to grow the pipeline of leaders through leadership and industry training, including the Administrator-in-Training program.
• Extract embedded value from real estate ownership by selectively exercising purchase options and structuring additional purchase options.
• Evaluate and capitalize on ancillary investment opportunities (PACS Ventures) such as pharmacy, laboratory, transportation, and imaging services, and potentially monetize PACS Services to third-party SNF operators.
• Explore expansion into other post-acute sites of care, including home health, hospice, and broader senior living communities.
• Vigorously defend against ongoing regulatory investigations and legal proceedings, including the DOJ and SEC investigations and securities class action lawsuits.
• Recoup the remaining erroneously awarded compensation of $613,510 each from Messrs. Murray and Hancock in accordance with the Clawback Policy.
• Deliver all documentation required to satisfy Section 5.12 of the Credit Agreement for Specified Joinder Subsidiaries and Schedule VII Subsidiaries by November 4, 2025.
• Deliver all documentation required to satisfy Section 5.13 of the Credit Agreement for Specified Joinder Subsidiaries and Schedule VII Subsidiaries by January 19, 2026.

Key Dates

Recommendation

The company is facing severe headwinds, including a financial restatement, identified material weaknesses in internal controls, and multiple ongoing regulatory investigations by the DOJ and SEC, which could lead to significant fines, penalties, or operational restrictions. The resignation of the former CFO due to policy violations further highlights governance issues. While the company shows revenue growth and strong operational metrics in its mature facilities, the pervasive legal and compliance risks, coupled with a substantial decrease in net income and being in forbearance with lenders, create a highly uncertain and unfavorable investment environment. The securities class action and derivative lawsuits add to the potential financial liabilities and reputational damage. Investors should consider selling to mitigate exposure to these significant and unresolved risks.

Keywords

Skilled Nursing Facilities, Post-Acute Care, SEC Filing, 10-K, Financial Restatement, Internal Controls, Corporate Governance, Healthcare Regulation, Medicare, Medicaid, Acquisitions, Litigation, Short Seller, Compliance, Financial Performance, Risk Management, PACS Group