UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2022
OR
[ ] ☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from _______________ to________ ______
Commission file number 0-15415
GLOBAL HEALTHCARE REIT, INC.Selectis Health, Inc.
(Exact Namename of Small Business IssuerRegistrant as Specifiedspecified in its Charter)
Utah | 87-0340206 | |
(State or other jurisdiction of | I.R.S. Employer | |
incorporation or organization) | Identification number | |
8480 E Orchard Rd, Ste 4900, | ||
Greenwood Village, CO | 80111 | |
(Address of principal executive offices) | (Zip Code) |
6800 N. 79th Street, Suite 200, Niwot, CO 80503
(Address of Principal Executive Offices)
Issuer’s telephone number: (303) 449-2100(720)680-0808
Former name, former address, and former fiscal year, if changed since last report
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer☐ | Smaller Reporting Company ☒ |
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
Emerging Growth Company [X]
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company [X]☒
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. [ ]Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] ☐ No [X] ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [ ] ☒ No [X]☐
As ofNovember 20, 2017, September 19, 2022, the Registrant had 26,300,317 shares of its Common Stock outstanding.
INDEX
2 |
PART 1. FINANCIAL INFORMATIONSelectis Health, Inc.
Item 1. Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)(Unaudited)
September 30, 2017 | December 31, 2016 | March 31, 2022 | December 31, 2021 | |||||||||||||
Unaudited | ||||||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and Cash Equivalents | $ | 2,310,526 | $ | 3,939,445 | ||||||||||||
Accounts Receivable, Net | 4,168,272 | 3,506,719 | ||||||||||||||
Prepaid Expenses and Other | 971,349 | 498,015 | ||||||||||||||
Investments in Debt Securities | 24,387 | 24,387 | ||||||||||||||
Total Current Assets | 7,474,534 | 7,968,566 | ||||||||||||||
Long Term Assets | ||||||||||||||||
Restricted Cash | 893,512 | 853,656 | ||||||||||||||
Property and Equipment, Net | $ | 37,985,136 | $ | 36,162,881 | 36,641,097 | 37,024,592 | ||||||||||
Cash and Cash Equivalents | 105,485 | 578,242 | ||||||||||||||
Restricted Cash | 563,151 | �� | 580,747 | |||||||||||||
Accounts Receivable, Net | 89,636 | - | ||||||||||||||
Investments in Debt Decurities | 128,259 | - | ||||||||||||||
Prepaid Expenses and Other | 393,311 | 221,962 | ||||||||||||||
Goodwill | 1,076,908 | 1,076,908 | ||||||||||||||
Total Assets | $ | 39,264,978 | $ | 37,543,832 | $ | 46,086,051 | $ | 46,923,722 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Liabilities | ||||||||||||||||
Debt, Net of discount of $596,895 and $660,611, respectively | $ | 33,884,660 | $ | 31,662,724 | ||||||||||||
Debt – Related Parties, Net of discount of $63,616 and $75,293, respectively | 711,384 | 374,707 | ||||||||||||||
Accounts Payable and Accrued Liabilities | 408,359 | 591,446 | $ | 3,673,336 | $ | 4,363,917 | ||||||||||
Accounts Payable – Related Parties | 69,909 | 96,689 | - | 21,571 | ||||||||||||
Dividends Payable | 7,500 | 7,500 | - | 7,500 | ||||||||||||
Derivative Liability | 95,371 | 246,451 | ||||||||||||||
Short term debt – Related Parties, Net of discount of $0 and $3,234, respectively | 150,000 | 150,000 | ||||||||||||||
Current Maturities of Long Term Debt, Net of Discount of $1,184 and $1,714, respectively | 3,438,860 | 6,312,562 | ||||||||||||||
Other Current Liability | 345,547 | 931,446 | ||||||||||||||
Total Current Liabilities | 7,607,743 | 11,786,996 | ||||||||||||||
Debt- Related Parties, Net of discount of $0 and $0, respectively | 750,000 | 750,000 | ||||||||||||||
Debt, Net of discount of $602,614 and $452,593, respectively | 33,860,900 | 31,054,962 | ||||||||||||||
Lease Security Deposit | 280,000 | 30,000 | 235,081 | 229,582 | ||||||||||||
Total Liabilities | 35,457,183 | 33,009,517 | 42,453,724 | 43,821,540 | ||||||||||||
Commitments and Contingencies | - | |||||||||||||||
Equity | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred Stock: | ||||||||||||||||
Series A - No Dividends, $2.00 Stated Value, Non-Voting; 2,000,000 Shares Authorized, 200,500 Shares Issued and Outstanding | 401,000 | 401,000 | ||||||||||||||
Series D - 8% Cumulative, Convertible, $1.00 Stated Value, Non-Voting; 1,000,000 Shares Authorized, 375,000 Shares Issued and Outstanding | 375,000 | 375,000 | ||||||||||||||
Common Stock - $0.05 Par Value; 50,000,000 Shares Authorized, 26,289,352 and 25,027,260 Shares Issued and Outstanding at September 30, 2017 and December 31, 2016, Respectively | 1,314,467 | 1,251,363 | ||||||||||||||
Series A - No Dividends, $ Stated Value, Non-Voting; Shares Authorized, Shares Issued and Outstanding | 401,000 | 401,000 | ||||||||||||||
Series D - 8% Cumulative, Convertible, $ | Stated Value, Non-Voting; Shares Authorized, Shares Issued and Outstanding375,000 | 375,000 | ||||||||||||||
Preferred Stock Value | ||||||||||||||||
Common Stock - $ | Par Value; Shares Authorized, and Shares Issued and Outstanding at March 31, 2022 and December 31, 2021, respectively152,728 | 150,168 | ||||||||||||||
Additional Paid-In Capital | 9,312,337 | 8,707,116 | 13,793,300 | 13,494,394 | ||||||||||||
Accumulated Deficit | (7,394,698 | ) | (6,021,903 | ) | (11,089,701 | ) | (11,318,380 | ) | ||||||||
Total Global Healthcare REIT, Inc. | ||||||||||||||||
Stockholders’ Equity | 4,008,106 | 4,712,576 | ||||||||||||||
Noncontrolling Interests | (200,311 | ) | (178,261 | ) | ||||||||||||
Total Selectis Health, Inc. Stockholders’ Equity | 3,632,327 | 3,102,182 | ||||||||||||||
Total Equity | 3,807,795 | 4,534,315 | 3,632,327 | 3,102,182 | ||||||||||||
Total Liabilities and Equity | $ | 39,264,978 | $ | 37,543,832 | $ | 46,086,051 | $ | 46,923,722 |
See accompanying notes to unaudited consolidated financial statements.
3 |
GLOBAL HEALTHCARE REIT, INC.Selectis Health, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)(Unaudited)
2022 | 2021 | |||||||||||||||||||||||
Nine Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Rental Revenue | $ | 2,303,355 | $ | 2,310,584 | $ | 749,269 | $ | 850,520 | $ | 154,194 | $ | 390,386 | ||||||||||||
Healthcare Revenue | 9,367,854 | 5,372,457 | ||||||||||||||||||||||
Healthcare Grant Revenue | 568,958 | - | ||||||||||||||||||||||
Total Revenue | 10,091,006 | 5,762,843 | ||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Property Taxes, Insurance and Other Operating | 6,961,903 | 3,544,730 | ||||||||||||||||||||||
General and Administrative | 876,623 | 1,616,476 | 313,764 | 734,891 | 1,811,517 | 2,098,327 | ||||||||||||||||||
Property Taxes, Insurance and Other Operating | 375,171 | 202,635 | 28,755 | 43,255 | ||||||||||||||||||||
Acquisition Costs | - | 52,325 | - | - | ||||||||||||||||||||
Gain on Disposal of Property and Equipment | - | (980,839 | ) | - | - | |||||||||||||||||||
Depreciation | 920,001 | 1,182,849 | 319,864 | 287,389 | ||||||||||||||||||||
Provision for Bad Debts | 253,963 | 24,134 | ||||||||||||||||||||||
Depreciation and Amortization | 447,687 | 401,023 | ||||||||||||||||||||||
Total Expenses | 2,171,795 | 2,073,446 | 662,383 | 1,065,535 | 9,475,070 | 6,068,214 | ||||||||||||||||||
Income (Loss) from Operations | 131,560 | 237,138 | 86,886 | (215,015 | ) | 615,936 | (305,371 | ) | ||||||||||||||||
Other (Income) Expense | ||||||||||||||||||||||||
(Gain) Loss on Warrant Liability | (151,080 | ) | (126,614 | ) | (47,523 | ) | 31,110 | |||||||||||||||||
Gain on Extinguishment of Debt | (36,193 | ) | (1,163,458 | ) | - | (1,163,458 | ) | |||||||||||||||||
Gain on Settlement of Other Liabilities | (32,073 | ) | - | - | - | |||||||||||||||||||
Interest Income | (1 | ) | (32,149 | ) | - | - | ||||||||||||||||||
Interest Expense | 1,723,252 | 1,971,025 | 583,453 | 603,511 | ||||||||||||||||||||
Loss on Extinguishment of Debt | 46,466 | - | ||||||||||||||||||||||
Interest Expense, net | 382,312 | 543,543 | ||||||||||||||||||||||
Gain on Forgiveness of PPP Loan | - | (675,598 | ) | |||||||||||||||||||||
Other Income | (41,521 | ) | (432,022 | ) | ||||||||||||||||||||
Total Other (Income) Expense | 1,503,905 | 648,804 | 535,930 | (528,837 | ) | 387,257 | (564,077 | ) | ||||||||||||||||
Equity in Income from Unconsolidated Partnership | - | - | - | - | ||||||||||||||||||||
Net Income (Loss) | (1,372,345 | ) | (411,666 | ) | (449,044 | ) | 313,822 | |||||||||||||||||
Net Income | 228,679 | 258,706 | ||||||||||||||||||||||
Net Loss Attributable to Noncontrolling Interests | 22,050 | 115,367 | - | 42,005 | - | (10,650 | ) | |||||||||||||||||
Net Income (Loss) Attributable to Global Healthcare REIT, Inc. | (1,350,295 | ) | (296,299 | ) | (449,044 | ) | 355,827 | |||||||||||||||||
Net Income Attributable to Selectis Health, Inc. | 228,679 | 248,056 | ||||||||||||||||||||||
Series D Preferred Dividends | (22,500 | ) | (22,500 | ) | (7,500 | ) | (7,500 | ) | - | (7,500 | ) | |||||||||||||
Net Income (Loss) Attributable to Common Stockholders | $ | (1,372,795 | ) | $ | (318,799 | ) | $ | (456,544 | ) | $ | 348,327 | |||||||||||||
Net Income Attributable to Common Stockholders | $ | 228,679 | $ | 240,556 | ||||||||||||||||||||
Per Share Data: | ||||||||||||||||||||||||
Net Income (Loss) per Share Attributable to Common Stockholders: | ||||||||||||||||||||||||
Basic | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.01 | $ | 0.07 | $ | 0.09 | |||||||||
Diluted | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.01 | $ | 0.07 | $ | 0.09 | |||||||||
Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||
Basic | 25,697,705 | 22,791,649 | 25,899,337 | 23,802,472 | 3,052,769 | 2,686,638 | ||||||||||||||||||
Diluted | 25,697,705 | 22,791,649 | 25,899,337 | 23,377,972 | 3,052,769 | 2,760,569 |
See accompanying notes to unaudited consolidated financial statements.
4 |
Selectis Health, Inc.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
Global Healthcare | ||||||||||||||||||||||||||||||||||||||||||||
REIT, Inc. | ||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Stockholders’ | Non- controlling | Total | |||||||||||||||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Capital | Deficit | Equity | Interests | Equity | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 25,027,260 | $ | 1,251,363 | $ | 8,707,116 | $ | (6,021,903 | ) | $ | 4,712,576 | $ | (178,261 | ) | $ | 4,534,315 | |||||||||||||||||||||||
Share Based Compensation – Restricted Stock Awards | - | - | - | - | 1,262,092 | 63,105 | 525,976 | - | 589,081 | - | 589,081 | |||||||||||||||||||||||||||||||||
Series D Preferred Dividends | - | - | - | - | - | - | - | (22,500 | ) | (22,500 | ) | - | (22,500 | ) | ||||||||||||||||||||||||||||||
Relative Fair Value of Warrants Issued with Notes Payable | - | - | - | - | - | - | 79,244 | - | 79,244 | - | 79,244 | |||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | (1,350,295 | ) | (1,350,295 | ) | (22,050 | ) | (1,372,345 | ) | |||||||||||||||||||||||||||||
Balance, September 30, 2017 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 26,289,352 | $ | 1,314,468 | $ | 9,312,336 | $ | (7,394,698 | ) | $ | 4,008,106 | $ | (200,311 | ) | $ | 3,807,795 |
Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||||
Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional | Selectis Health, Inc. | ||||||||||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2021 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 2,998,362 | $ | 150,168 | $ | 13,494,394 | $ | (11,318,380 | ) | - | $ | 3,102,182 | |||||||||||||||||||
Series D Preferred Dividends | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Common shares issued for debt | - | - | - | - | 56,226 | 2,560 | 252,440 | - | - | 255,000 | ||||||||||||||||||||||||||
Loss on Forgiveness of Debt | - | - | - | - | - | - | 46,466 | - | - | 46,466 | ||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | 228,679 | - | 228,679 | ||||||||||||||||||||||||||
Balance, March 31, 2022 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 3,054,588 | $ | 152,728 | $ | 13,793,300 | $ | (11,089,701 | ) | - | $ | 3,632,327 |
Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Controlling Interests | Stockholders’ Equity | |||||||||||||||||||||||||||||||
Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional | Non- | Selectis Health, Inc. | |||||||||||||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Controlling Interests | Stockholders’ Equity | |||||||||||||||||||||||||||||||
Balance, December 31, 2020 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 2,686,638 | $ | 134,332 | $ | 11,540,052 | $ | (9,036,400 | ) | $ | (198,045 | ) | $ | 3,215,939 | |||||||||||||||||||||
Balance | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 2,686,638 | $ | 134,332 | $ | 11,540,052 | $ | (9,036,400 | ) | $ | (198,045 | ) | $ | 3,215,939 | |||||||||||||||||||||
Series D Preferred Dividends | - | - | - | - | - | - | - | (7,500 | ) | - | (7,500 | ) | ||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | 248,056 | 10,650 | 258,706 | ||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 2,686,638 | $ | 134,332 | $ | 11,540,052 | $ | (8,795,844 | ) | $ | (187,395 | ) | $ | 3,467,145 | |||||||||||||||||||||
Balance | 200,500 | $ | 401,000 | 375,000 | $ | 375,000 | 2,686,638 | $ | 134,332 | $ | 11,540,052 | $ | (8,795,844 | ) | $ | (187,395 | ) | $ | 3,467,145 |
See accompanying notes to unaudited consolidated financial statements.
5 |
GLOBAL HEALTHCARE REIT, INC.Selectis Health, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (1,372,345 | ) | $ | (411,666 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: | ||||||||
Depreciation | 920,001 | 1,182,849 | ||||||
Amortization and Accretion | 183,091 | 90,725 | ||||||
Increase in Deferred Rent Receivable | (111,341 | ) | (63,665 | ) | ||||
Stock Based Compensation | 482,071 | 498,886 | ||||||
Gain on Settlement of Accounts Payable | (32,073 | ) | 12,500 | |||||
Gain on Extinguishment of Debt | (36,193 | ) | (1,163,458 | ) | ||||
Foregiveness of Debt | - | (100,000 | ) | |||||
Gain on Derivative Liability | (151,080 | ) | (126,614 | ) | ||||
Premium on Debt, net | (64,107 | ) | 120,250 | |||||
Gain on Sale of Property and Equipment | - | (980,839 | ) | |||||
Changes in Operating Assets and Liabilities, Net of Assets and Liabilities Acquired: | ||||||||
Rents Receivable | (89,636 | ) | (131,255 | ) | ||||
Other Assets | (60,008 | ) | 109,551 | |||||
Accounts Payable and Accrued Liabilities | 185,322 | 456,458 | ||||||
Lease Security Deposits | 250,000 | - | ||||||
Cash Provided by (Used in) Operating Activities | 103,702 | (506,278 | ) | |||||
Cash Flows From Investing Activities: | ||||||||
Collections on Notes Receivable - Related Parties | - | 573,428 | ||||||
Purchase of Investments in Debt Securities | (184,066 | ) | - | |||||
Proceeds from Sale of Property and Equipment | - | 2,112,970 | ||||||
Capital Expenditures on PP&E Additions | (568,673 | ) | (13,660 | ) | ||||
Cash Provided by (Used in) Investing Activities | (752,739 | ) | 2,672,738 | |||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from Debt, Related Parties | 325,000 | - | ||||||
Proceeds from Issuance of Debt, Outside Parties | 100,000 | |||||||
Proceeds from line of credit | 171,416 | |||||||
Payments on Debt | (399,876 | ) | (829,688 | ) | ||||
Cash paid for HUD Refinancing deposit | (15,356 | ) | ||||||
Change in Restricted Cash | 17,596 | (22,581 | ) | |||||
Deferred Loan Costs Paid | - | (10,731 | ) | |||||
Dividends Paid on Preferred Stock | (22,500 | ) | (22,500 | ) | ||||
Distributions to Noncontrolling Interests | - | - | ||||||
Cash Provided by (Used in) Financing Activities | 176,280 | (885,500 | ) | |||||
Net Increase (Decrease) in cash | (472,757 | ) | 1,280,960 | |||||
Cash at Beginning of the Year | 578,242 | 71,055 | ||||||
Cash at End of the Year | $ | 105,485 | $ | 1,352,015 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Cash Paid for Interest | $ | 1,826,155 | $ | 1,621,067 | ||||
Cash Paid for Income Taxes | $ | - | $ | - | ||||
Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
Dividends declared on Series D Preferred Stock | $ | 7,500 | $ | 22,500 | ||||
Capital Expenditures for Property paid by Bank | $ | 2,173,582 | $ | - | ||||
Loan Cost of Colony Bank Loan | $ | 38,421 | $ | - | ||||
Common Stock issued for Settlement of Accrued Compensation | $ | 107,010 | $ | 112,500 | ||||
Relative Fair Value of Warrants issued with Senior Secured Promissory Notes | $ | 79,244 | $ | - | ||||
Extinguishment of Bonds through Investments in Debt Securities | $ | 92,000 | $ | - | ||||
Acquisition of Membership Interests in exchange of Common Stock and Cash | $ | - | $ | 66,497 | ||||
Common Stock issued for Debt Cost | $ | - | $ | 23,800 | ||||
Common Stock issued for Debt and Accrued Interest | $ | - | $ | 486,000 | ||||
Payment of Mortgage Debt through Sale of Property | $ | - | $ | 1,683,200 | ||||
Construction in Progress Financed with Debt | $ | - | $ | 319,163 |
2022 | 2021 | |||||||
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net Income | $ | 228,679 | $ | 258,706 | ||||
Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: | ||||||||
Gain on Forgiveness from PPP Loan | - | (675,598 | ) | |||||
Other Income from Partial Settlement of Debt | (40,346 | ) | (432,022 | ) | ||||
Depreciation and Amortization | 447,687 | 401,023 | ||||||
Amortization of Deferred Loan Costs and Debt Discount | - | 34,977 | ||||||
Provision for Bad Debt | 253,963 | 24,134 | ||||||
Changes in Operating Assets and Liabilities, Net of Assets and Liabilities Acquired: | ||||||||
Accounts and Rents Receivable | (915,516 | ) | (365,543 | ) | ||||
Prepaid Expenses and Other Assets | 108,059 | (58,743 | ) | |||||
Accounts Payable and Accrued Liabilities | (1,305,551 | ) | 149,719 | |||||
Lease Security Deposits | 5,499 | (1,500 | ) | |||||
Cash Used in Operating Activities | (1,217,526 | ) | (664,847 | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Capital Expenditures for Property and Equipment | (64,192 | ) | (177,909 | ) | ||||
Cash Used in Investing Activities | (64,192 | ) | (177,909 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from Issuance of Debt, Non-Related Party | - | 885,164 | ||||||
Payments on Debt, Non-Related Party | (353,811 | ) | (223,483 | ) | ||||
Dividends Paid on Preferred Stock | - | (7,500 | ) | |||||
Debt Discount - Warrants RP | 46,466 | - | ||||||
Cash Provided by (Used in) Financing Activities | �� | (307,345 | ) | 654,181 | ||||
Net Decrease in Cash, Cash Equivalents and Restricted Cash | (1,589,063 | ) | (188,575 | ) | ||||
Cash and Cash Equivalents and Restricted Cash at Beginning of the Period | 4,793,101 | 3,978,303 | ||||||
Cash and Cash Equivalents and Restricted Cash at End of the Period | $ | 3,204,038 | $ | 3,789,728 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Cash Paid for Interest | 382,312 | 543,543 | ||||||
Cash Paid for Income Taxes | - | - | ||||||
Cash and Cash Equivalents | 2,310,526 | 3,378,862 | ||||||
Restricted Cash | 893,512 | 410,866 | ||||||
Total Cash and Cash Equivalents and Restricted Cash | 3,204,038 | 3,789,728 | ||||||
Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
Dividends Declared on Series D Preferred Stock | $ | 7,500 | $ | 7,500 | ||||
Non-cash financing of prepaid insurance | $ | 581,393 | $ | - |
TheSee accompanying notes are an integral part of theseto unaudited condensed consolidated financial statements.
6 |
GLOBAL HEALTHCARE REIT, INC.Selectis Health, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
Global Healthcare REIT,Selectis Health, Inc. (the(“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries, Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions of the US. In 2019 the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT) for the purpose of investing in real estate and other assets relatedshifted from leasing long-term care facilities to the healthcare industry. third-party, independent operators towards an owner operator model.
Prior to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. onfrom September 30, 2013, to May 2021. Prior to this, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as a reverse acquisition whereby(“WPF”). WPF was deemedmerged into the Company in 2019.
In September 2021, the Company successfully rebranded to beSelectis Health, Inc., from Global Healthcare REIT, Inc. to better align with the accounting acquirer.current and future business model, which is to own and operate it’s facilities.
The Company intends to make a REIT election under sections 856 through 859 of the Internal Revenue Code of 1986, as amended. Such election will be made by the Board of Directors at such time as the Board determines that we qualify as a REIT under applicable provisions of the Internal Revenue Code.
The Company acquires, develops, leases, managesWe acquire, develop, lease, manage, and disposesdispose of healthcare real estate, and providesprovide financing to healthcare providers. Asproviders, and provide healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of September 30, 2017,investments in the following three healthcare segments: (i) senior housing (including independent and assisted living), (ii) post-acute/skilled nursing, and (iii) bonds securing senior housing communities. We will make investments within our healthcare segments using the following six investment products: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA and (vi) owning healthcare operations.
Management’s Liquidity Plans
On August 27, 2014, FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
For the three months ended March 31, 2022, the Company owned nine healthcarehad negative operating cash flows of $1.2 million and a net working capital deficit of $.01 million. However, management believes that the Company’s ability to meet its obligations for the next twelve months from the date these financial statements were issued has been alleviated due to, but not limited to:
1. | Projected cash flows from operations resulting from continued improvement of the Company’s operating performance. During the three months ended March 31, 2022, the Company reported a net income of $228,679. The Company has also, through the Federal Bankruptcy Court of Middle Georgia, assumed the operations of two additional facilities in August and October 2021. Based on management’s projections we expect to generate positive cash flows for the next twelve months. |
2. | Future refinancing of existing debt. As of March 31, 2022, the Company has a net working capital deficit of approximately $.01 million. During the year ended December 31, 2021, management has refinanced all five of the Company’s mortgages that matured in 2021. We are continuing to work with HUD to refinance additional properties to longer-term paper which will provide more certainty for future loan payments. |
7 |
The focus on opportunities within our current portfolio and future properties which are leased to third-party operators under triple-net operating leases.acquire and operate, the settlement, refinance, and continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing to additional working capital should alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively impact our future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary to make the consolidated financial statements not misleading have been included. Operating results for the three and nine months ended September 30, 2017March 31, 2022, are not necessarily indicative of the results that may be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162021, filed with the Securities and Exchange Commission.
In May 2021, the board of directors of the Company approved a one-for-10 reverse stock split of the Company’s issued and outstanding shares of common stock. On September 21, 2021, the Company filed Amendment No. 1 to its Second Amended and Restated Articles of Incorporation reflecting the reverse split and name change. This took effect on September 22, 2021 upon approval from FINRA. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto, and elsewhere in this Form 10-Q, have been retroactively adjusted for the reverse stock split as if such reverse stock split occurred on the first day of the first period presented.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the standard will have on the consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company adopted this standard effective December 31, 2016 and has included going concern disclosures in Note 2.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases: Topic 842 (ASU 2016-02)”, to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first quarter of our fiscal year ending December 31, 2019 using a modified retrospective approach with the option to elect certain practical expedients. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective for the Company beginning on January 1, 2018. ASU 2016-18 must be applied using a retrospective transition method with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2017.2022. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net income.
8 |
Basic and Diluted
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. FASB ASC Topic 260, “Earnings per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.
Diluted earnings per share are based on the assumption that all dilutive options and warrants were converted or exercised by applying the treasury stock method and that all convertible preferred stock were converted into common shares by applying the if-converted method. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period or at the time of issuance, if later, and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, the preferred dividends applicable to convertible preferred stock are added back to the numerator. The convertible preferred stock is computedassumed to have been converted at the beginning of the period or at time of issuance, if later, and the resulting common shares are included in the denominator.
We calculate basic earnings per share by dividing net income attributable to common stockholders (the “numerator”) by the weighted-averageweighted average number of common shares outstanding (the “denominator”) during the reporting period. Diluted earnings per share is computed by dividing net earnings bycalculated similarly but reflects the weighted-average numberpotential impact of outstanding options, warrants and other commitments to issue common stock, including shares andissuable upon the conversion of convertible preferred stock outstanding, except where the impact would be anti-dilutive. Approximately shares of dilutive potential common shares outstanding duringwere excluded from the period. At September 30, 2017, there were 4,190,362 potential common shares. Because of the net loss, the effect of these potential common shares is anti-dilutive.
2. GOING CONCERN
The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For the ninethree months ended September 30, 2017,March 31, 2022 EPS calculation as their impact is antidilutive. There were approximately million shares of dilutive shares for the Company incurred a net lossthree months period ended March 31, 2022.
The failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. PROPERTYSCHEDULE OF BASIC AND EQUIPMENTDILUTED EARNING PER SHARE
The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of September 30, 2017 and December 31, 2016 are as follows:
2022 | 2021 | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Numerator for basic earnings per share: | ||||||||
Net Income Attributable to Selectis Health, Inc. | $ | 228,679 | $ | 248,056 | ||||
Series D Preferred Dividends | - | (7,500 | ) | |||||
Net Income Attributable to Common Stockholders – Basic | $ | 228,679 | $ | 240,556 | ||||
Numerator for diluted earnings per share: | ||||||||
Net Income Attributable to Common Stockholders | (228,679 | ) | (240,556 | ) | ||||
Series D Preferred Dividends | - | 7,500 | ||||||
Net Income Attributable to Common Stockholders – Diluted | $ | (228,679 | ) | $ | (233,056 | ) | ||
Denominator for basic earnings per share: | ||||||||
Weighted Average Common Shares Outstanding | 3,052,769 | 2,686,638 | ||||||
Denominator for diluted earnings per share: | ||||||||
Weighted Average Common Shares Outstanding – Basic | 3,052,769 | 2,686,638 | ||||||
Effect of dilutive securities: | ||||||||
Exercise of stock options | - | 24,542 | ||||||
Exercise of warrants | - | 49,389 | ||||||
Weighted Average Common Shares Outstanding – Diluted | 3,052,769 | 2,760,569 | ||||||
Net Income per Share Attributable to Common Stockholders: | ||||||||
Basic | $ | 0.07 | $ | 0.09 | ||||
Diluted | $ | 0.07 | $ | 0.09 |
9 |
September 30, 2017 | December 31, 2016 | |||||||
Land | $ | 1,597,500 | $ | 1,577,500 | ||||
Land Improvements | 200,000 | 200,000 | ||||||
Buildings and Improvements | 35,312,194 | 33,461,661 | ||||||
Furniture, Fixtures and Equipment | 1,430,502 | 1,125,507 | ||||||
Construction in Progress | 3,681,881 | 3,115,154 | ||||||
42,222,077 | 39,479,822 | |||||||
Less Accumulated Depreciation | (4,236,941 | ) | (3,316,941 | ) | ||||
$ | 37,985,136 | $ | 36,162,881 |
Fair Value Measurements
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Depreciation Expense | $ | 920,001 | $ | 1,182,849 | ||||
Cash Paid for Capital Expenditures | $ | 568,673 | $ | 13,660 | ||||
Property and Equipment financed with Debt | $ | 2,173,582 | 319,163 |
Acquisition of Property
Abbeville Health & Rehab
On April 4, 2017, we successfully bid at foreclosure sale to purchase a 101-bed skilled nursing facility located In Abbeville, Georgia. We formed a new wholly-owned subsidiary, Global Abbeville Property, LLC (“GAP”) for the purpose of bidding on the facility. Colony Bank, the senior lender on the facility, was the party undertaking the foreclosure in light of the default of the prior owner. The purchase transaction was consummated in May 2017.
The purchase price for the Abbeville facility was $2.1 million which was entirely financed by Colony Bank through a newly approved closed-end revolving credit facility in the maximum amount of $2.6 million. The additional $500,000 under the credit line was used for renovations on a dollar-for-dollar matching basis. The loan agreement was executed in May 2017, and the maturity date is April 25, 2021. It carries an interest rate of prime plus 0.5%, 4.75% minimum, 5.50% maximum, is cross collateralized with the Eastman note with the same lender, and backed by a corporate guarantee from the Company. The transaction has been treated as an asset acquisition financed by debt, with $20,000 land, $1,827,000 building, and $253,000 fixed assets allocated in relative fair value. The Company recognized $38,421utilizes the methods of fair value measurement as described in loan costs, which was amortized over the life of the loan.
The facility was closedASC 820 to value its financial assets and liabilities. As defined in March 2016 due to uncured deficiencies. On March 17, 2017, in anticipation of our purchase of the facility, the State of Georgia approved initially a 45 day extension and then a six-month conditional Certificate of Need (“CON”) to allow us to complete renovations and reopen the property. The Company assessed that the acquisition of the Abbeville facility did not qualify as a business combination in accordance with the provisions of ASC 805. The Company accounted for the acquisition as an acquisition of asset.
4. INVESTMENTS IN DEBT SECURITIES
At September 30, 2017 and December 31, 2016, the Company held investments in marketable securities that were classified as held-to-maturity and carried at amortized costs. Held-to-maturity securities consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
States and Municipalities | $ | 128,259 | $ | - |
Contractual maturities of held-to-maturity securities at September 30, 2017 are as follows:
Net Carrying Amount | ||||
Due in One Year or Less | $ | 5,000 |
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
During the nine months ended September 30, 2017, the Company invested $184,066 in held-to-maturity debt securities consisting of the Tulsa County Industrial Authority Series 2014 Bonds secured by the Southern Hills ALF and ILF, with contractual maturity dates between 2023 and 2044. We subsequently used $55,807 of these purchases to settle and retire early debt obligations related to these bonds for the face820, fair value of $92,000. This resulted in a gain on extinguishment of debt of $36,193 for the nine months ended September 30, 2017is based on the differenceprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between investment in debt and the settled debt obligation.
5. DEBT AND DEBT-RELATED PARTIES
The following is a summary of the Company’s debt outstanding as of September 30, 2017 and December 31, 2016:
September 30, 2017 | December 31, 2016 | |||||||
Convertible Notes Payable | $ | 3,200,000 | $ | 3,200,000 | ||||
Senior Secured Promissory Notes | 250,000 | 150,000 | ||||||
Senior Secured Promissory Notes - Related Parties | 775,000 | 450,000 | ||||||
Fixed-Rate Mortgage Loans | 14,349,475 | 14,666,206 | ||||||
Variable-Rate Mortgage Loans | 8,608,080 | 6,273,129 | ||||||
Bonds Payable | 5,488,000 | 5,640,000 | ||||||
Other Debt | 2,586,000 | 2,394,000 | ||||||
35,256,555 | 32,773,335 | |||||||
Premium, Unamortized Discount and Debt Issuance Costs | (660,511 | ) | (735,904 | ) | ||||
$ | 34,596,044 | $ | 32,037,431 | |||||
As presented in the Consolidated Balance Sheets: | ||||||||
Debt, Net | $ | 33,884,660 | $ | 31,662,724 | ||||
Debt - Related Parties, Net | $ | 711,384 | $ | 374,707 | ||||
$ | 34,596,044 | $ | 32,037,431 |
Convertible Notes Payable
6.5% Notes Due 2017
On September 26, 2014, the Company completed a private offering of its 6.5% Senior Secured Convertible Promissory Notes in the amount of $3,200,000 which mature on September 25, 2017. The Notes can be called for redemptionmarket participants at the option of the Company at any time (i) after September 15, 2015 but priormeasurement date. In order to September 15, 2016 at an early redemption price equal to 103% of the face amount of the Notes, plus accruedincrease consistency and unpaid interest, or (ii) any time after September 15, 2016 but prior to September 15, 2017 at an early redemption price equal to 102% of the face amount of the Notes, plus accrued and unpaid interest. Each Note is convertible at the option of the holder into shares of common stock of the Company at a conversion price of $1.37 per share. The Notes will automatically convert into common stock at the conversion pricecomparability in the event (i) there exists a public market for the Company’s common stock, (ii) the closing price of the common stock in the principal trading market has been $2.00 per share or higher for the preceding ten (10) trading days, and (iii) either (A) there is an effective registration statement registering for resale under the Securities Act of 1933, as amended, the conversion shares or (B) the conversion shares are eligible to be resold by non-affiliates of the Company without restriction under Rule 144 of the Securities Act. At the time of issuance and based on the Company’s common stock trading activity, the Company determined that no beneficial conversion feature was associated with the Notes. As of September 30, 2017, none of the Notes have been converted into common stock. Deferred loan costs incurred of $180,963 related to the loan are amortized to interest expense over the life of the loan. Amortization expense related to deferred loan costs totaled $ 45,241 for the nine months September 30, 2017. The Notes are secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio.
Subsequent to September 30, 2017, the Notes were refinanced with a new senior loan from ServisFirst Bank in the principal amount of $3.0 million.See Subsequent Events.
Senior Secured Promissory Notes
From November through December 2016, the Company undertook a private offering of its 10% Senior Secured Promissory Notes in the aggregate amount up to $1,000,000, on a best efforts basis. As of December 31, 2016, $600,000 of the notes had been issued of which $450,000 were issued to the directors of the Company or entities or persons affiliated with these directors. The notes bear interest at a rate of 10% payable monthly with principal and unpaid interest due at maturity on January 13, 2018. The notes are secured by all assets of the Company not serving as collateral for other notes. In January 2017, additional $125,000 were sold and issued to related parties. In June 2017, an additional $200,000 in notes were sold and issued to related parties with a maturity date of December 31, 2018. Additional notes were issued in July 2017 for $50,000 and September 2017 for $50,000 with a maturity date of December 31, 2018.
As part of the offering, the notes issued in 2016 had attached warrants to purchase 600,000 shares of common stock at an exercise price of $0.75 per share. The warrants have a cashless exercise provision. During the nine months ended September 30, 2017, an additional $425,000 in notes with 425,000 warrants were issued. The value of the warrants issued to the note holders was calculated using the Black-Scholes pricing model using the following weighted average assumptions:
September 30, 2017 | December 31, 2016 | |||||||
Volatility | 114.6% - 144.8 | % | 131.3% - 133.2 | % | ||||
Risk-free Interest Rate | 0.81% - 1.24 | % | 0.81% - 0.92 | % | ||||
Exercise Price | $ | 0.75 | $ | 0.75 | ||||
Fair Value of Common Stock | $ | 0.39 - $0.50 | $ | 0.39 - $0.44 | ||||
Expected Life | 1 – 1.5 years | 1.1 years |
The total value of the 2016 warrants on the issue date was estimated to be $102,280 and was bifurcated from the value of the note. The corresponding note discount is being amortized over the life of the note using the straight-line method. The unamortized balance of the discount on the note was $28,613 and $95,873 as of September 30, 2017 and December 31, 2016 with $67,260 recorded as amortization expense during 2017.
The total value of the 2017 warrants on the issue date was estimated to be $79,244 and was bifurcated from the value of the note. The corresponding note discount is being amortized over the life of the note using the straight-line method. The unamortized balance of the discount on the note was $58,787 as of September 30, 2017 with $20,457 recorded as amortization expense during the nine month period ended September 30, 2017.
Mortgage Loans
Mortgage loans are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:
Stated | ||||||||||||||||||||
Face | Principal Outstanding at | Interest | Maturity | |||||||||||||||||
Property | Amount | September 30, 2017 | December 31, 2016 | Rate | Date | |||||||||||||||
Middle Georgia Nursing Home(1) | $ | 4,200,000 | $ | 3,656,802 | $ | 3,742,706 | 5.50% Fixed | October 4, 2018 | ||||||||||||
Goodwill Nursing Home(1) | 4,976,316 | 4,485,267 | 4,520,816 | 5.50% Fixed | March 19, 2020 | |||||||||||||||
Goodwill Nursing Home(3) | 80,193 | 37,593 | 80,193 | 5.50% Fixed | June 12, 2018 | |||||||||||||||
Warrenton Nursing Home(4) | 2,720,000 | 2,399,714 | 2,476,109 | 5.00% Fixed | December 20, 2018 | |||||||||||||||
Edward Redeemer Health & Rehab | 2,303,815 | 2,221,592 | 2,268,096 | 5.50% Fixed | January 16, 2020 | |||||||||||||||
Southern Hills Retirement Center(5) | 1,750,000 | 1,548,507 | 1,578,286 | 4.75% Fixed | November 10, 2017 | |||||||||||||||
Abbeville Health & Rehab(6) | 2,660,000 | 2,364,698 | - | Prime Plus 0.50%/ 4.75% Floor/ 5.50% Ceiling | April 25, 2021 | |||||||||||||||
Providence of Sparta Nursing Home(7) | 1,725,000 | 1,625,376 | 1,655,123 | Prime Plus 0.50%/ 6.00% Floor | September 26, 2017 | |||||||||||||||
Golden Years Manor Nursing Home(2) | 5,000,000 | 4,618,006 | 4,618,006 | Prime Plus 1.50%/ 5.75% Floor | August 3, 2037 | |||||||||||||||
$ | 22,957,555 | $ | 20,939,335 |
Other mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some instances in an untimely manner. These mortgage loans are technically in default, except for the loan related to Abbeville Health & Rehab.
Subsequent to September 30, 2017, the Company completed refinances of the mortgage loans on Providence of Sparta and Southern Hills.SeeSubsequent Events.
Bonds Payable - Tulsa County Industrial Authority
On March 1, 2014, Southern Tulsa, LLC (Southern Tulsa), a subsidiary of WPF that owns the Southern Hills Retirement Center, entered into a loan agreement with the Tulsa County Industrial Authority (Authority) in the State of Oklahoma pursuant to which the Authority lent to Southern Tulsa the proceeds from the sale of the Authority’s Series 2014 Bonds. The Series 2014 Bonds consist of $5,075,000 in Series 2014A First Mortgage Revenue Bonds and $505,000 in Series 2014B Taxable First Mortgage Revenue Bonds. The Series 2014 Bonds were issued pursuant to a March 1, 2014 Indenture of Trust between the Authority and the Bank of Oklahoma. $4,325,000 of the Series 2014A Bonds mature on March 1, 2044 and accrue interest at a fixed rate of 7.75% per annum. The remaining $750,000 of the Series 2014A Bonds mature on various dates through final maturity on March 1, 2029 and accrue interest at a fixed rate of 7.0% per annum. The Series 2014B Bonds mature on March 1, 2023 and accrue interest at a fixed rate of 8.5% per annum. The debt is secured by a first mortgage lien on the independent living units and assisted living facility (facilities), an assignment of the facilities’ leases, a first lien on all personal property located in the facilities, and a guarantee by the Company. Deferred loan costs incurred of $483,606 and an original issue discount of $78,140 related to the loan are amortized to interest expense over the life of the loan. Amortization expense related to deferred loan costs and the original issue discount totaled $14,113 and $2,283 for the nine months ended September 30, 2017 and $5,645 and $653 for the nine months ended September 30, 2016, with the variance due to an adjustment to accumulated amortization in March 2016. The loan agreement includes certain financial covenants required to be maintained by the Company, which were not compliance as of September 30, 2017. As part of the loan terms, a $60,000 principal reduction was paid on the bonds during the nine months ended September 30, 2017. As of September 30, 2017, restricted cash of $563,151 is related to these bonds.
During the nine months ended September 30, 2017, the Company invested $184,066 in debt securities, consisting of the Tulsa County Industrial Authority Series 2014 Bonds secured by the Southern Hills ALF and ILF. We subsequently used $55,807 of these purchases to settle and retire debt obligations related to these bonds for the face value of $92,000. This resulted in a gain on extinguishment of debt of $36,193 based on the difference between investment in debt and the settled debt obligation.
Other Debt
Other debt at September 30, 2017 and December 31, 2016 includes unsecured notes payable issued to facilitate the acquisition of the nursing home properties.
Face | Principal Outstanding at | Stated Interest | Maturity | |||||||||||||||||
Property | Amount | September 30, 2017 | December 31, 2016 | Rate | Date | |||||||||||||||
Goodwill Nursing Home | $ | 2,180,000 | $ | 1,536,000 | $ | 1,344,000 | 13%(1)(2)Fixed | December 31, 2019(2) | ||||||||||||
Providence of Sparta Nursing Home | 1,050,000 | 1,050,000 | 1,050,000 | 10.0% Fixed | December 31, 2017(3)(4) | |||||||||||||||
$ | 2,586,000 | $ | 2,394,000 |
For the nine months ended September 30, 2017, the Company received proceeds from the issuance of debt of $425,000. Cash payments on debt totaled $399,876 and $829,688 for the nine months ended September 30, 2017 and 2016, respectively.
Future maturities of all of the notes and bonds payable listed above for the next five years and thereafter are as follows:
Years | ||||||
2017 | $ | 20,011,924 | ||||
2018 | 4,929,667 | |||||
2019 | 1,789,496 | |||||
2020 | 6,412,035 | |||||
2021 | 2,113,433 | |||||
2022 and after | - | |||||
$ | 35,256,555 |
6. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.
Series A Convertible Redeemable Preferred Stock
The Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred stock has a senior liquidation preference value of $2.00 per share, has no voting or redemption rights and does not accrue dividends.
As of September 30, 2017 and December 31, 2016, the Company has 200,500 shares of Series A Preferred stock outstanding.
Series D Convertible Preferred Stock
The Company has established a class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share. Holders of the Series D preferred stock are entitled to receive dividends at the annual rate of eight percent (8%) based on the stated value per share computed on the basis of a 360-day year and twelve 30-day months. Dividends are cumulative, shall be declared quarterly, and are calculated from the date of issue and payable on the fifteenth day of April, July, October and January. The dividends may be paid, at the option of the holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the dividend record date. Shares of the Series D preferred stock are redeemable at the Company’s option. At the option of the holder, shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s common stock at a conversion rate of $1.00 per share.
As of September 30, 2017 and December 31, 2016, the Company had 375,000 shares of Series D preferred stock outstanding.
During the nine months ended September 30, 2017, the Company paid $22,500 for Series D preferred stock dividends, and $7,500 of Series D preferred stock dividends was declared and accrued as of September 30, 2017. All quarterly dividends previously declared have been paid.
Restricted Stock Awards
The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2017 and 2016.
2017 | 2016 | |||||||
Outstanding Non-Vested Restricted Stock Units, Beginning | - | - | ||||||
Granted | 1,262,092 | 977,275 | ||||||
Vested | (1,262,092 | ) | (977,275 | ) | ||||
Outstanding Non-Vested Restricted Stock Units, Ending | - | - |
In connection with director restricted stock grants in the nine months ended September 30, 2017, the Company recognized stock-based compensation of $482,071. The company recognized stock-based compensation of $498,886 for the nine months ended September 30, 2016.
Common Stock Warrants
As of September 30, 2017 and December 31, 2016, the Company had 1,854,596 and 1,821,736, respectively, of outstanding warrants to purchase common stock at a weighted average exercise price of $0.83 and $0.79, respectively. During the nine-month period ended September 30, 2017, 392,140 warrants with a weighted average exercise price of $0.55 expired.
7. RELATED PARTIES
Clifford Neuman is a manager and member of Gemini Gaming, LLC. Mr. Neuman provides office space for the Company’s Controller at no charge. In 2017, Mr. Neuman was issued 52,632 shares of common stock with a fair value of $30,000 for directors’ fees. During the nine-month period ended September 30, 2017, a gain of $32,073 was recognized from an agreement to reduce the accounts payable due to Mr. Neuman for legal services rendered. As of September 30, 2017 and December 31, 2016, the Company owed Mr. Neuman for legal services rendered $69,909 and $96,689, respectively.
Creative Cyberweb developed and maintains the Company’s website, and is affiliated with CFO Zvi Rhine’s family. The initial setup fee was $5,000 and ongoing upkeep is $400 per month.
During the fourth quarter of 2016 and the first quarter of 2017, the Company undertook a private offering (“Offering”) of Units, each Unit consisting of a 10% Senior Secured Note and one warrant for every dollar in principal amount of Note purchased. In the Offering, Zvi Rhine invested $50,000, while his brother David Rhine invested $50,000 and his father Gary Rhine invested $25,000. In June 2017, CEO Lance Baller invested an additional $200,000.
During the nine-month period ended September 30, 2017, Zvi Rhine was issued (i) 52,632 shares of common stock for board compensation, (ii) 87,000 shares of common stock for CFO services provided in the quarter ended December 31, 2016, which resulted in $35,670 of accrued compensation being settled and reclassed to equity, (iii) 29,269 shares of common stock for bonus compensation (iv) 86,364 shares of common stock for CFO services provided in the quarter ended March 31, 2017 (v) 84,444 shares of restricted stock for CFO services provided in the three months ended June 30, 2017 and (vi) 168,889 shares of restricted stock as a retainer for services rendered for the remaining months of calendar year 2017.
During the nine-month period ended September 30, 2017, Lance Baller was issued (i) 52,632 shares of common stock for board compensation, (ii) 87,000 shares of common stock for CEO services provided in the quarter ended December 31, 2016, which resulted in $71,340 of accrued compensation being settled and reclassed to equity, (iii) 29,269 shares of common stock for bonus compensation (iv) 86,364 shares of common stock for CEO services provided in the quarter ended March 31, 2017, (v) 84,444 shares of restricted stock for CEO services provided in the three months ended June 30, 2017 and (vi) 168,889 shares of restricted stock as a retainer for services rendered for the remaining months of calendar year 2017.
During the nine-month period ended September 30, 2017, the directors of the Company (five persons – including the Company CEO and CFO) were granted a total of 263,160 shares of restricted common stock for services as directors.
8. FACILITY LEASES
The following table summarizes our leasing arrangements related to the Company’s healthcare facilities:
Facility | Monthly Lease Income(1) | Lease Expiration | Renewal Option, if any | |||||||||
Middle Georgia(2) | $ | 49,000 | June 30, 2017 | Term may be extended for one additional five-year term. | ||||||||
Warrenton | $ | 55,724 | June 30, 2026 | Term may be extended for one additional ten-year term. | ||||||||
Goodwill(2), (3) | $ | 32,125 | February 1, 2027 | Term may be extended for one additional five-year term. | ||||||||
Edwards Redeemer(2) | $ | 46,818 | November 30, 2017 | Term may be extended for one additional five-year term. | ||||||||
Providence | $ | 42,519 | June 30, 2026 | Term may be extended for one additional ten-year term. | ||||||||
Meadowview | $ | 33,695 | October 31, 2024 | Term may be extended for one additional five-year term. | ||||||||
Golden Years(2) (4) | $ | - | - | None | ||||||||
Abbeville H&R | $ | - | - | None | ||||||||
Southern Hills SNF(5) | $ | 38,000 | May 31, 2019 | Term may be extended for one additional five-year term. | ||||||||
Southern Hills ALF(6) | - | - | None | |||||||||
Southern Hills ILF(7) | - | - | None |
Lessees are responsible for payment of insurance, taxes and other charges while under the lease. Should the lessees not pay all such charges, as required under the leases, the Company may become liable for such operating expenses. We have been required to cover those expenses at Goodwill since the facility was closed by regulators in January 2016 and at Southern Hills ALF and ILF.
Future cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows (excludes Middle Georgia and Edwards Redeemer due to pending bankruptcy of operator, Southern Tulsa ALF and Southern Tulsa ILF due to property being non-operating, and GL Nursing):
Years Ending December 31, | ||||
2017 | 533,000 | |||
2018 | 2,299,407 | |||
2019 | 2,381,484 | |||
2020 | 1,969,654 | |||
2021 | 2,014,885 | |||
2022 and Thereafter | 9,134,036 | |||
$ | 18,332,466 |
The Company is in active negotiations with potential lease operators to assume the operations of the properties whose operator is in bankruptcy (Middle Georgia, Edwards Redeemer and Goodwill) as well as a new operator for the Southern Hills’ facilities.
9. FAIR VALUE MEASUREMENTS
Financial assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based uponmeasurements, ASC 820 establishes a fair value hierarchy established by GAAP, whichthat prioritizes theobservable and unobservable inputs used to measure fair value into the following levels:three broad levels, which are described below:
Level 1—1 – Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2—2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level 3—3 – Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company has no financial assets or financial liabilities that are required to be measured at fair value on a recurring basis as of March 31, 2022.
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, advances to related parties, notesaccounts receivable, restricted cash, accounts payable, debt and lease security deposits.deposit. We consider the carrying values of our short-term financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the short period of time between origination of the financial assets and liabilities and their expected settlement, or because of their proximity to acquisition date fair values. The carrying value of long-term debt approximates fair value based on borrowing rates currently available for debt of similar terms and maturities.
Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price basebased on the fair value of the tangible assets and intangible assets, if any, acquired and any liabilities assumed based on Level 3 inputs. These Level 3 inputs can include comparable sales values, discount rates, and capitalization rate assumptionsrates from a third partythird-party appraisal or other market sources.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 are summarized below:
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3. PROPERTY AND EQUIPMENT, NET
The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of March 31, 2022, and December 31, 2021, are as follows:
SCHEDULE OF PROPERTY PLANT AND EQUIPMENT
March 31, 2022 | December 31, 2021 | |||||||
Land | $ | 1,778,250 | $ | 1,778,250 | ||||
Land Improvements | 329,055 | 329,055 | ||||||
Buildings and Improvements | 44,632,647 | 44,574,401 | ||||||
Furniture, Fixtures and Equipment | 2,328,243 | 2,322,297 | ||||||
Property and Equipment, Gross | 49,068,195 | 49,004,003 | ||||||
Less Accumulated Depreciation | (10,867,098 | ) | (10,419,411 | ) | ||||
Less Impairment | (1,560,000 | ) | (1,560,000 | ) | ||||
Property and Equipment, Net | $ | 36,641,097 | $ | 37,024,592 |
Fair Value Measurement | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Warrant Liability | $ | 95,371 | $ | - | $ | - | $ | 95,371 | ||||||||
Investment in Debt Securities | 128,259 | 128,259 | - | - | ||||||||||||
Fair Value at September 30, 2017: | $ | 223,630 | $ | 128,259 | $ | - | $ | 95,371 | ||||||||
Warrant Liability – December 31, 2016 | $ | 246,451 | $ | - | $ | - | $ | 246,451 |
2022 | 2021 | |||||||
For the Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Depreciation Expense (excluding Intangible Assets) | $ | 447,687 | $ | 1,733,349 | ||||
Cash Paid for Capital Expenditures | $ | 64,192 | $ | 519,575 |
Because these warrants have full reset adjustments tied to future issuance of equity securities by4. INVESTMENTS IN DEBT SECURITIES
At March 31, 2022 and December 31, 2021, the Company it is subject to derivative liability treatment under ASC 815-40-15.
The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other (Income) Expense on the Company’s Consolidated Statement of Operations until the warrants are exercised, expire, or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined each reporting period by utilizing the Black-Scholes option pricing model.
Theheld investments in debt securities are recordedthat were classified as held-to-maturity and carried at amortized cost since theycosts. Held-to-maturity securities consisted of the following:
SCHEDULE OF INVESTMENTS IN MARKETABLE SECURITIES
March 31, 2022 | December 31, 2021 | |||||||
States and Municipalities | $ | 24,387 | $ | 24,387 |
Contractual maturity of held-to-maturity securities at March 31, 2022, is $24,387, all due in one year or less, and total value of securities at their respective maturity dates is $24,387. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
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5. DEBT AND DEBT - RELATED PARTIES
SCHEDULE OF DEBT INSTRUMENTS
March 31, 2022 | December 31, 2021 | |||||||
Senior Secured Promissory Notes | $ | 1,305,000 | $ | 1,305,000 | ||||
Senior Secured Promissory Notes - Related Parties | 750,000 | 750,000 | ||||||
Fixed-Rate Mortgage Loans | 31,395,111 | 31,407,503 | ||||||
Variable-Rate Mortgage Loans | 5,015,982 | 5,063,841 | ||||||
Other Debt, Subordinated Secured | 741,000 | 741,000 | ||||||
Other Debt, Subordinated Secured - Related Parties | 150,000 | 150,000 | ||||||
Other Debt, Subordinated Secured - Seller Financing | 85,738 | 93,251 | ||||||
Debt Instrument, Gross | 39,442,831 | 39,510,595 | ||||||
Unamortized Discount and Debt Issuance Costs | (1,243,071 | ) | (1,243,071 | ) | ||||
Debt Instrument, Net of Discount | $ | 38,199,760 | $ | 38,267,524 | ||||
As presented in the Consolidated Balance Sheets: | ||||||||
Current Maturities of Long Term Debt, Net | $ | 3,438,860 | $ | 6,312,562 | ||||
Short term debt – Related Parties, Net | 150,000 | 150,000 | ||||||
Debt, Net | 33,860,900 | 31,054,962 | ||||||
Debt - Related Parties, Net | 750,000 | 750,000 |
The weighted average interest rate and term of our fixed rate debt are considered held-to-maturity.3.55% and 15.17 years, respectively, as of March 31, 2022. The weighted average interest rate and term of our variable rate debt are 5.90% and 16.12 years, respectively, as of March 31, 2022.
During the three months ended March 31, 2022, the Company did not issue any non-related party debt. The table presented below isCompany has made payments of $353,811 on non-related party debt. Additionally, the Company financed $581,393of insurance premiums.
Corporate Senior and Senior Secured Promissory Notes
As of March 31, 2022, and December 31, 2021, the senior secured notes are subject to annual interest ranging from 10% to 11% and an original maturity date of October 31, 2021. These notes were extended to June 30, 2023 and as consideration the Company modified the outstanding warrants to extend the life and additional 1.67 years. As a summaryresult of changesthe warrant modification, the Company recorded the incremental increase in the fair value of $844,425 as a debt discount which will be amortized over the Company’s Level 3 valuationnew life of the loans.
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Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon, formerly but no longer a related party, or corporate guarantees. Mortgage loans for the nine months ended September 30, 2017:periods presented consisted of the following:
SCHEDULE OF MORTGAGE LOAN DEBT
Total Principal Outstanding as of | ||||||||||||||||
State | Number of Properties | Total Face Amount | March 31, 2022 | December 31, 2021 | ||||||||||||
Arkansas(1) | 1 | $ | 5,000,000 | $ | 4,017,993 | $ | 4,058,338 | |||||||||
Georgia | 5 | $ | 17,765,992 | $ | 16,519,160 | $ | 16,581,283 | |||||||||
Ohio | 1 | $ | 3,000,000 | $ | 2,728,599 | $ | 2,728,599 | |||||||||
Oklahoma(3) | 6 | $ | 12,129,769 | $ | 11,520,588 | $ | 11,823,385 | |||||||||
13 | $ | 37,895,761 | $ | 34,786,340 | $ | 35,191,605 |
(1) | The mortgage loan collateralized by this property is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. Guarantors under the mortgage loan include Christopher Brogdon. Mr. Brogdon has assumed operations of the facility and is making payments of principal and interest on the loan on our behalf in lieu of paying rent on the facility to us. During the three months ended March 31, 2022, the Company recognized other income of $40,346 for repayments on the loan. |
(2) | The Company has refinanced two of its mortgages that would have matured in June and October of 2021 amounting to $2,961,167 and $3,289,595, to extend their maturity dates to May 2024 for both. |
(3) | The Company refinanced all three mortgages in July 2021, that would have matured in June and July of 2021 amounting to $2,065,969 and $750,000, $500,000, to extend their maturity dates to June, 2027 for all three. Additionally, the Company has refinanced the primary mortgage at the Southern Hills Campus, for 35 years at 2.38%. |
Beginning Balance January 1, 2017 | $ | 246,451 | ||
Change in Fair Value of Warrant Liability | (151,080 | ) | ||
Ending Balance, September 30, 2017 | $ | 95,371 |
Subordinated, Corporate and Other Debt
The significant assumptions used in the Black-Scholes option pricing modelOther debt outstanding as of September 30, 2017March 31, 2022 and December 31, 2016 include2021 includes unsecured notes payable issued to entities controlled by the following:Company used to facilitate the acquisition of the nursing home properties.
SCHEDULE OF OTHER DEBT
Principal Outstanding at | ||||||||||||||||
Property | Face Amount | March 31, 2022 | December 31, 2021 | Stated Interest Rate | Maturity Date | |||||||||||
Goodwill Nursing Home | $ | 2,030,000 | $ | 741,000 | $ | 741,000 | 13% Fixed | 31-Dec-19 | ||||||||
Goodwill Nursing Home – Related Party | $ | 150,000 | 150,000 | 150,000 | 13% Fixed | 31-Dec-19 | ||||||||||
Higher Call Nursing Center | $ | 150,000 | 82,265 | 93,251 | 8% Fixed | 1-Apr-24 | ||||||||||
$ | 973,265 | $ | 984,251 |
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September 30, 2017 | December 31, 2016 | |||||||
Volatility | 81.0% - 168.3 | % | 105.3% - 124.9 | % | ||||
Risk-free Interest Rate | 0.81% - 1.27 | % | 0.44% - 1.47 | % | ||||
Exercise Price | $ | 0.60 - $1.37 | $ | 0.50 - $1.37 | ||||
Fair Value of Common Stock | $ | 0.44 | $ | 0.57 | ||||
Expected Life | 0.03 – 2.0 years | 0.1 – 2.7 years |
Our corporate debt outstanding as of March 31, 2022, and December 31, 2021 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
SCHEDULE OF UNSECURED NOTES AND NOTES SECURED BY ALL ASSETS
Principal Outstanding at | ||||||||||||||||
Series | Face Amount | March 31, 2022 | December 31, 2021 | Stated Interest Rate | Maturity Date | |||||||||||
10% Senior Secured Promissory Notes | 1,670,000 | 1,230,000 | 1,230,000 | 10.0% Fixed | 30-Jun-23 | |||||||||||
10% Senior Secured Promissory Notes – Related Party | 975,000 | 750,000 | 750,000 | 10.0% Fixed | 30-Jun-23 | |||||||||||
$ | 1,980,000 | $ | 1,980,000 |
During the three months ended March 31, 2022, $255,000 of debt was converted to of shares.
6. STOCKHOLDERS’ EQUITY
Preferred Stock
During the three months ended March 31, 2022, the Company paid $7,500 for Series D preferred stock dividends. Dividends of $7,500 were declared during the three months ended March 31, 2021. All quarterly dividends previously declared have been paid.
Common Stock
For the three months ended March 31, 2022, the Company did not issue nor did it pay dividends on common stock.
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Common Stock Warrants
As of March 31, 2022, and December 31, 2021, the Company had 206,000 and 206,000, respectively, of outstanding warrants to purchase common stock at a weighted average exercise price of $ and $ , respectively, and weighted average remaining term of years and years, respectively. The aggregate intrinsic value of common stock warrants outstanding as of March 31, 2022, and December 31, 2021 was $ and $ , respectively. Activity for the three months ended March 31, 2022, related to common stock warrants is as follows:
SCHEDULE OF COMMON STOCK WARRANTS ACTIVITY
March 31, 2022 | ||||||||
Number of | Weighted Average | |||||||
Warrants | Exercise Price | |||||||
Beginning Balance | 206,000 | $ | 5 | |||||
Exercised | - | - | ||||||
Expired | - | - | ||||||
Ending Balance | 206,000 | $ | 5 |
7. OTHER CURRENT LIABILITY
During the year ended December 31, 2021 the Company received an overpayment from Medicare of $931,446. Beginning in February, 2022 payments were recouped to satisfy the overpayment as follows:
SCHEDULE OF OTHER CURRENT LIABILITY
Period | ||||
Balance at December 31, 2021 | $ | 931,446 | ||
February 2022 Recoupments | $ | (246,425 | ) | |
March 2022 Recoupment | $ | (339,474 | ) | |
Recoupment | $ | (339,474 | ) | |
Balance at March 31, 2022 | $ | 345,547 |
As of the date of this filing the liability has been paid in full.
8. RELATED PARTIES
Clifford Neuman, a member of the Company’s Board of Directors, provided legal services to the Company. As of March 31, 2022, and December 31, 2021, the Company owed Mr. Neuman for legal services rendered $0 and $21,571, respectively. During the three months ended March 31, 2022 the Company has paid Mr. Neuman $32,181 for legal services. During the year ended December 31, 2021 the Company paid Mr. Neuman $158,392 for legal services.
9. FACILITY LEASES
The following table summarizes our leasing arrangements related to the Company’s healthcare facilities at March 31, 2022:
SCHEDULE OF LEASING ARRANGEMENTS
Monthly Lease | |||||||||
Facility | Income (1) | Lease Expiration | Renewal Option if any | ||||||
Goodwill (1) | $ | 48,125 | February 1, 2027 | Term may be extended for one additional five-year term. |
(1) | The lease became effective on February 1, 2017, and the facility began generating rental revenue thereafter. |
Future cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows:
SCHEDULE OF FUTURE CASH PAYMENTS FOR RENT RECEIVED DURING INITIAL TERM OF LEASE
Years Ending March 31, | ||||
2022 | 470,610 | |||
2023 | 635,026 | |||
2024 | 643,401 | |||
2025 | 651,954 | |||
2026 | 660,665 | |||
2027 and Thereafter | 55,116 | |||
Total | $ | 3,116,772 |
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10. LEGAL PROCEEDINGS
The Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Southern Tulsa,Bailey v. GL Nursing, LLC, v. Healthcare Management of Oklahoma, LLC, Districtet. al in the Circuit Court of TulsaLonoke County, State of Oklahoma, Case No. CJ – 2016- 01781.Arkansas, 23rd Circuit, 43CV-19-151.
This matterIn April 2019, the Company’s wholly-owned subsidiary was brought by us to havenamed as a co-defendant in the appointmentaction arising out of a Receiver forclaimed personal injury suffered by the Southern Tulsa SNFplaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and to recover damages from our formernot the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that facility. The Court has ordered the appointmentlikelihood of a Receiver effective May 10, 2016. Other claims and matters are pending.an adverse outcome is remote.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility.facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity;indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement and Release with the Receiver and an Operations Transfer Agreement pursuant to which our newly formed subsidiary will acquire the assets and operations of the facility. In March 2021, the Court approved the Settlement Agreement and Operations Transfer Agreement, the skilled nursing license was assigned to the Company’s wholly-owned subsidiary Park Place Health, LLC and the Company reopened the facility under the name Park Place Health. This matter is considered resolved.
Oliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
In re: Providence HR, LLC v. CRM of Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
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VerizonIn re: ALT/WARR, LLC v. CRM of Sparta, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
These are companion cases arising out of the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta, Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March 22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease operators to comply with their leases, including payment of rent, pending the next hearing. In June 2021, the Court entered an Order approving a Lease Termination Agreement, Operations Transfer Agreement and Interim Management Agreement which had been negotiated by the Company and the two operating tenants, CRM of Warrenton, LLC and CRM of Sparta, LLC. The Lease Termination Agreement and Operations Transfer Agreement became effective upon the granting of a new License by the State of Georgia for the Warrenton and Sparta facilities to two newly formed wholly owned operating subsidiaries of the Company: Selectis Sparta, LLC and Selectis Warrenton, LLC.
High Street Nursing, LLC v. Ohio Department of Health, Court of Common Pleas, Franklin County, Ohio, Case No. 21 CV 6559.
The Company brought this action through its wholly owned subsidiary High Street Nursing, LLC (“High Street”) against the Ohio Department of Health (ODH) to prevent the Department of Health from revoking the state issued license covering the Meadowview skilled nursing facility located in Seville, Ohio. The facility is owned by High Street and was leased to a third-party operator who abandoned the facility. The Department of Health is trying to revoke the license of the former operator and has refused our request to transfer the license to a new operator controlled by the Company. Our Motion for Temporary Injunction was denied by the Court. We have subsequently filed a Motion for Preliminary and Permanent Injunction which is pending. Our claims against the Department of Health are based upon our property interests in the facility and raise issues of unlawful condemnation and eminent domain. No prediction can be made regarding the outcome of this matter; but the Company will pursue the ODH to the fullest extent.
In the Matter of Hunter
The Company received a spoliation letter from an attorney dated October 8, 2021, advising of the intent to assert a personal injury claim against our operating subsidiary Glen Eagle Health & Rehab, LLC which operates our skilled nursing facility in Abbeville, Georgia. We have been provided no further information, but after reviewing the information we believe at this time that the likelihood of an adverse outcome is remote.
Edwards Redeemer Property Holdings, LLC, et.al. v. Buildstrong Roofing and Construction, Inc., v. Southern Tulsa, LLC, et. al.,et.al. District Court of and for Tulsa County, Oklahoma, Case No. CJ-2015-04326.CJ-202
This Company brought this action against a contractor that performed work at our Park Place facility in Oklahoma City and our Southern Hills SNF in Tulsa. The claims are based upon negligence and breach of contract for subpar work due to defects in materials, workmanship and Buildstrong not providing services for which they received payment. The case is pending.
Tara Gaspar, et.al v. GL Nursing, LLC, et.al., Circuit Court of Lonoke County, Arkansas, Civil Division, Case. No. 43CV-21-864.
This case is a mechanic’s lien foreclosurepersonal injury action on the Southern Hills facility in Tulsa arising from work performed. The Plaintiffwhich our subsidiary GL Nursing, LLC was a subcontractor to our general contractor; and while we paid the general contractor for that work, the general contractor apparently did not pay the subcontractor. Plaintiff is seeking $441,939 previously invoiced to the general contractor, plus attorney’s fees and costs. The general contractor, also a named defendant, is liable for this amount but may not have the resources to pay the plaintiff, therefore the Company may be liable for some unknown amount less than or equal to Plaintiff’s claim. The Company has accrued $25,000joined as a probable loss for this matter indefendant because it is the consolidated financial statements forowner of the year ended December 31, 2016 and nine months ended September 30, 2017,property leased to an operating tenant. The action is based upon an initial draft settlement agreement but intends to vigorously defend the matter ifquality of care over which we had no control. We believe that our risk of a settlementmaterial adverse outcome is not achieved. Subsequent to September 30, 2017, this matter was settled in consideration of payment in the amount of $20,000.remote.
11. SUBSEQUENT EVENTS
Election of Additional member ofOn July 1, 2022 the Board of Directors
Effective October 16, 2017 appointed David Furstenberg to serve on the Board of Directors elected an additional member, Mr Josh Mandell. Mr. Mandell will participate in the Company’s compensation plan for directors, an annual restricted stock award having a market value of $30,000. As his election is effective October 16, 2017, Mr. Mandell will be entitled to receive for the calendar year 2017 a restricted stock award having a market valueCompany.
On July 25, 2022 the Board of $6,250. The grant will be effective October 16, 2017Directors approved and will be based uponadopted the closing pricefollowing committee charters and policies: Audit Committee Charter, Nominating and Governance Committee, Charter Compensation Committee, Charter Code of Conduct and Ethics Policy, Document Retention Policy, and Whistleblower Policy.
On August 19th, 2022 the Company’s common stock on January 3, 2017 valued at $0.57 per share, for 10,965 shares.
Additional Investments in Debt Securities
In October 2017,Board of Directors approved the Company purchased additional investments in debt securities in the amount of $30,446, consisting of market purchases of the outstanding revenue bonds secured by the Southern Hills ALF and ILF. These investments have a contractual maturity of $60,000.
Refinance of Senior Mortgages
Providence HR, LLC
Providence of Sparta Health And Rehab
In October, 2017, the Company, through its wholly-owned subsidiary Providence HR, LLC consummated a HUD refinancing of its senior mortgage on its skilled nursing facility in Sparta, Georgia. Funding was provided by Greystone Funding Corporation pursuant to a secured Healthcare Facility Note in the principal amount of $3,039,300 (the “HUD Note”).
Proceeds from the HUD Note were used to pay off an existing senior mortgage and certain unsecured debt. The interest rate on the HUD Note is 3.88%, fixed for the full term of the HUD Note. Payments of principal and interest begin on December 1, 2017 until the Note is paid in full on November 1, 2047. The Note is secured by a Healthcare Deed to Secure Debt, Security Agreement and Assignment of Rents.
High Street Nursing, LLC
Meadowview Care Center
Effective November 1, 2017, the Company, through its wholly-owned subsidiary High Street Nursing, LLC consummated a refinancing of its senior notes on its skilled nursing facility in Seville, Ohio. with ServisFirst Bank pursuant to Term Note in the principal amount of $3,000,000 (the “Meadowview Note”).
Proceeds from the Meadowview Note were used to pay off an existing senior notes. The interest rate on Meadowview Note is 6.0%. Monthly payments of interest only begin on November 30, 2017 until January 2018, at which time monthly payments of principal and accrued interest shall be due until the Meadowview Note is paid in full on Octoberrecension agreement, dated March 30, 2022, (the “Maturity Date”). The Note is secured by an Open-End Mortgage, Assignment of Leaseswhereby Lance Baller, CEO, and Rents, Security AgreementChristopher Barker, President and Fixture Filing (the “Mortgage”).
Southern Tulsa, LLC
Southern Tulsa TLC, LLC
Southern Hills Rehabilitation Center (“SNF”)
Southern Hills Independent Living Facility (“ILF”)
Southern Hills Assisted Living Facility (“ALF”)
Effective October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with First Commercial Bank pursuantCOO, each agreed to a Promissory Note in the principal amount of $7,229,051.52 (the “Line of Credit”). Under the Line of Credit, the Company will refinance the existing mortgage on its skilled nursing facility in Tulsa, Oklahoma, fund the outstanding reverse Dutch tender offer on the Industrial Revenue Bonds covering the ALF and ILF, and for working capital, including improvementsrescind their immediately vested, non-statutory stock option agreements dated March 30, 2022. No expense was recorded related to the ALF and ILF.options due to the fact the options were rescinded ab initio.
The interest rate on Line of Credit is 5.25%. Monthly payments of interest only begin on November 30, 2017 until the Promissory Note is paid in full on April 30, 2018 (the “Maturity Date”). The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for it Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location.
Additional Sales of Senior Notes
Subsequent to September 30, 2017, we sold an additional $300,000 in senior notes, which accrue interest at the rate of 10% per annum and payable, principal and accrued interest on October 31, 2020. The proceeds of the notes were used to complete the refinance of the Meadowview facility in Seville, OH. In connection with the notes, the company issued warrants to purchase 300,000 shares of common stock, one for every dollar of note, at an exercise price of $0.75 per share, with an expiration date of November 8, 2018.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a resultbecause of new information, future events or otherwise. All forward-looking statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162021, as filed with the SEC.
Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:
● | strategic business relationships; |
● | statements about our future business plans and strategies; |
● | anticipated operating results and sources of future revenue; |
● | our organization’s growth; |
● | adequacy of our financial resources; |
● | development of markets; |
● | competitive pressures; |
● | changing economic conditions; |
● | expectations regarding competition from other companies |
● | the duration and scope of the COVID-19 pandemic |
● | the impact of the COVID-19 pandemic on occupancy rates and on the operations of the Company’s facilities and its operators/tenants. |
● | Actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting our properties and our operations and the operations of our operators/tenants. |
● | The effects of health and safety measures adopted by us and our operators/tenants in response to the COVID-19 pandemic. |
● | Increased operational costs because of health and safety measures related to COVID-19. |
● | The impact of the COVID-19 pandemic on the business and financial conditions of our operators/tenants and their ability to pay rent. |
● | Disruptions to our property acquisition and disposition activities due to economic uncertainty caused by COVID-19. |
● | General economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth. |
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● | macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets; |
● | |
changes in national and local economic conditions in the real estate and healthcare markets specifically; |
● | |
legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010; |
● | |
the availability of debt and equity capital; |
● | |
changes in interest rates; |
● | |
competition in the real estate industry; and, |
● | |
the supply and demand for operating properties in our market areas. |
OverviewProperties
Global Healthcare REIT, Inc. was organized for the purposeAs of investing in real estate related to theMarch 31, 2022, we owned thirteen (13) long-term care industry.
We plan to elect to be treated asfacilities including a real estate investment trust (REIT)campus of three buildings in the future; however, we did not make that election for the 2017 fiscal year.
The Company invests primarily in real estate serving the healthcare industry in the United States. We acquire, develop, lease, manage and dispose of healthcare real estate. Our portfolio will be comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments within our healthcare segments using the following five investment products: (i) properties under lease, (ii) mortgage debt investments, (iii) developments and redevelopments, (iv) investment management and (v) RIDEA, which represents investments in senior housing operations utilizing the structure permitted by the Housing and Economic Recovery Act of 2008.
The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the following:
Acquisitions
We acquired one property, Abbeville Health & Rehab in Abbeville, GA, during the nine-month period ended September 30, 2017 and no properties during the nine-month period ended September 30, 2016.
Properties
As of September 30, 2017, we owned nine long-term care facilities.Tulsa, OK. The following table provides summary information regarding these facilities at September 30, 2017:March 31, 2022:
Property Name | Location | Effective Percentage Equity Ownership | Date Acquired | Gross Square Feet | Purchase Price | Outstanding Debt at September 30, 2017 | ||||||||||||||
Middle GA Nursing Home (a/k/a Crescent Ridge) | Eastman, GA | 100 | % | 3/15/2013 | 28,808 | $ | 5,000,000 | $ | 3,656,802 | |||||||||||
Warrenton Health and Rehabilitation | Warrenton, GA | 100 | % | 12/31/2013 | 26,894 | $ | 3,500,000 | $ | 2,399,714 | |||||||||||
Southern Hills Retirement Center | Tulsa, OK | 100 | % | 2/7/2014 | 104,192 | $ | 2,000,000 | $ | 7,036,507 | |||||||||||
Goodwill Nursing Home | Macon, GA | 85 | % | 5/19/2014 | 46,314 | $ | 7,185,000 | $ | 6,058,860 | |||||||||||
Edwards Redeemer Health & Rehab | Oklahoma City, OK | 100 | % | 9/16/2014 | 31,939 | $ | 3,142,233 | $ | 2,221,592 | |||||||||||
Providence of Sparta Nursing Home | Sparta, GA | 100 | %(2) | 9/16/2014 | 19,441 | $ | 2,836,930 | $ | 2,675,376 | |||||||||||
Meadowview Healthcare Center | Seville, OH | 100 | % | 9/30/2014 | 27,500 | $ | 3,000,000 | $ | 3,200,000 | |||||||||||
Golden Years Manor Nursing Home | Lonoke, AR | 100 | % | 9/16/2014 | 40,737 | $ | 6,742,767 | $ | 4,618,006 | |||||||||||
Abbeville Health & Rehab | Abbeville, GA | 100 | % | 5/25/2016 | 29,393 | $ | 2,100,000 | $ | 2,364,698 |
Total Square Feet | # of Beds | |||||||||||||||||||||||||||
Operating | Leased | |||||||||||||||||||||||||||
Leased | Square | Square | Operating | Leased | ||||||||||||||||||||||||
State | Properties | Operations | Operations | Feet | Feet | Beds | Beds | |||||||||||||||||||||
Arkansas | 1 | - | 1 | - | 40,737 | - | 141 | |||||||||||||||||||||
Georgia | 5 | 4 | 1 | 78,197 | 46,199 | 454 | 100 | |||||||||||||||||||||
Ohio | 1 | 1 | - | 27,500 | 99 | - | ||||||||||||||||||||||
Oklahoma | 6 | 6 | - | 162,976 | - | 351 | - | |||||||||||||||||||||
Total | 13 | 11 | 2 | 268,673 | 86,936 | 904 | 241 |
Property Name | 2017 Base Revenue Per Lease | Operating Lease Expiration | ||||||
Middle Georgia Nursing Home (a/k/a Crescent Ridge) (3) | $ | 294,000 | June 30, 2017 | |||||
Warrenton Health and Rehabilitation | $ | 612,000 | June 30, 2026 | |||||
Southern Hills Retirement Center | $ | 444,000 | May 31, 2019 | |||||
Goodwill Nursing Home (1) (3) (4) | $ | 166,667 | February 1, 2027 | |||||
Edwards Redeemer Health & Rehab (3) | $ | 559,062 | November 30, 2017 | |||||
Providence of Sparta Nursing Home (2) | $ | 450,000 | June 30, 2026 | |||||
Meadowview Healthcare Center | $ | 384,000 | October 31, 2024 | |||||
Golden Years Manor Nursing Home (3)(5) | $ | - | - | |||||
Abbeville Health & Rehab | $ | - | - |
Results of Operations
The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations - Nine– Three Months Ended September 30, 2017March 31, 2022, Compared to the NineThree Months Ended September 30, 2016March 31, 2021
Rental revenues for the nine-month periodsthree months ended September 30, 2017March 31, 2022, and 20162021 totaled $2,303,355$154,194 and $2,310,584, respectively, a decrease$390,386, respectively. The Company also had healthcare revenue of $7,229. On January 22, 2016,$9,367,854 for the lease operator that leased our Middle Georgia, Edwards Redeemer, Golden Yearsthree months ended March 31, 2022, compared to $5,372,457 for the three months ended March 31, 2021. Healthcare grant revenue for the three months ended March 31, 2022 and Goodwill properties filed a voluntary petition in bankruptcy under Chapter 11 of the U.S Bankruptcy Code,2021 totaled $568,958 and at the same time the regulators closed the Goodwill facility. At the time of the bankruptcy petition, we were owed pre-petition rent of over $600,000 which likely will not be recovered. The bankrupt lease operator also owned unpaid property taxes on each of the controlled properties totaling approximately $300,000 which constitute a lien on our interests and must be paid. We recognized no rental revenues related$0. Due to our assisted living facility in Tulsa, Oklahoma which wereconcerted effort to have begun April 1, 2015; however, additional renovationsfocus on healthcare operations, our healthcare revenues are requiredincreasing. As we assume operations and purchase more facilities, we anticipate this trend to open the facility. The senior lender for Grand Prairie (formerly Golden Years Manor) has agreedcontinue. As a result of this, our rental income will likely continue to accept payments of interest only through December 31, 2017. Our senior lender for Goodwill permitted interest only payments through March 2017 and then extended the loan for an additional three years. Revenues from Goodwill ceased in January 2016 and recommenced in February 2017.decrease.
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For the nine months ended September 30, 2017, we recognized rental revenues on all nine properties with the exception of our assisted living facility and independent living facility located in Tulsa, Oklahoma, the Golden Years Manor/GL Nursing facility in Lonoke, AR, and the newly acquired Abbeville facility in Abbeville, GA.
General and administrative expenses were $876,623$1,811,517 and $1,616,476$2,098,327 for the nine-month periodsthree months ended September 30, 2017March 31, 2022 and 2016, respectively, a decrease of $739,853. The decrease was predominantly2021, respectively. This is due to reductionsour efforts to transition to our care-delivery model. The G&A expenses will continue to represent the shared services and support structure for our healthcare operations. To support the healthcare operations management, our corporate support to continue to aid the facilities in accounting fees, legal fees, and regular payroll. For the nine months ended September 30, 2017 and 2016, general and administrative expenses include $482,071 and $498,886 of share based compensation related to restricted stock and common stock awards.delivering world class care.
Property taxes, insurance, and other operating expenses totaled $375,171$6,961,903 and $202,635$3,544,730 for the nine-month periodsthree months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. TheThis increase of $172,536 is predominantly due to advances of $267,198can be attributed to the operator of GL NursingCompany operating additional facilities compared to cover cash flow deficits during the straddle period, which has been expensed pending potential recovery. Lessees are responsible for the payment of insurance, taxes and other charges while under the lease. Should the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We have been required to cover these expenses at our Goodwill since the facility was closed by regulators in January 2016. We are also responsible for property taxes and insuranceprevious year.
Expenses related to the ALF and ILF at our Southern Hills Retirement Center.
Depreciation expense decreased $262,848 from $1,182,849provision for bad debt was $253,963 for the ninethree months ended September 30, 2016 to $920,001March 31, 2022, and $24,134 for the ninethree months ended September 30, 2017. March 31, 2021. This increase is due to the Company’s growth in healthcare revenue which also increased the provision for bad debt expense.
Depreciation and amortization expense totaled $447,687 and $401,023 for the three months ended March 31, 2022, and 2021 respectively. This increase is related to an increase in our plant, property, and equipment, compared to the same period in the prior year.
The Company had $382,312 of interest expense for the three months ended March 31, 2022, and $543,543 interest expense for the three months ended March 31, 2021. This decrease is predominantly duerelated to an adjustment in March 2016 that increased accumulated depreciation by $269,075, and the salerefinancing mortgages during the year ended December 31, 2021.
The Company had $41,521 of the Wash / Greene facility in July 2017. We have not recorded depreciation expense on our assisted living facility and independent living facility located at our Southern Hills Retirement Center which will commence once renovations have been completed and the properties are placed in service.
Interestother income decreased $32,148 from $32,149 for the ninethree months ended September 30, 2016 to $1 recognizedMarch 31, 2022, and $432,022 for the ninethree months ended September 30, 2017 as a result of repayment in full of a note receivable from a related party in 2016.
Interest expense decreased $247,773 from $1,971,025March 31, 2021. Management is recording the principal reduction payments made by the operator for the nine months ended September 30, 2016Arkansas facility as other income. We will continue to $1,723,252 forrecord this as the nine months ended September 30, 2017 as a result of repayment in full of Wash / Greene senior and subordinatedoperator continues to satisfy the debt. We did not capitalize any interest during the nine months ended September 30, 2017.
Liquidity and Capital Resources
Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities.
At September 30, 2017,March 31, 2022, the Company had cash and cash equivalents of $105,485$2,310,526 and restricted cash of $893,512. Our restricted cash is to be spent on hand.insurance, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home, Warrenton Health and Rehab, and Southern Hills Rehab. Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with the acquisition of properties.our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from healthcare operations, rental revenues received, and existing cash on hand. We have successfully refinanced or plan to renew senior debtall five mortgage that mature during 2017,in the 2021 fiscal year, as well as the mortgage on our projected cash flow from operations will be insufficient to retire the debt. Our restricted cash approximated $563,151 as of September 30, 2017 which is to be expended on debt service associated with our Southern Hills Retirement Center.Tulsa campus.
Cash provided byused in operating activities was $ 103,702$1,217,526 for the ninethree months ended September 30, 2017March 31, 2022, compared to cash used inby operating activities of $506,278$664,847 for the ninethree months ended September 30, 2016. Cash flows from operations were primarily impactedMarch 31, 2021. Healthcare revenue was adversely affected by the increase in rental revenues received during the first quarter of 2017 as well as lease security deposits received during 2017. COVID-19 which increased costs and decreased our census.
Cash used in investing activities was $752,739, including $184,066 for open market bond purchases and $568,673 for capital expenditures on property, plant, and equipment$64,192 for the nine-month periodthree months ended September 30, 2017,March 31, 2022, compared to cash provided byused in investing activities of $2,672,738$177,909 for the nine-month period ended September 30, 2016. For the ninethree months ended September 30, 2016, we collected the total carrying value of a note receivable with a related party in the amount of $573,428 and received proceeds of $2,112,970 from the sale of our Wash/Greene facility.March 31, 2021.
Cash used in financing activities was $176,280$307,345 for the ninethree months ended September 30, 2017. ForMarch 31, 2022 compared to cash provided by financing activities of $654,181 for the ninethree months ended September 30, 2016, cash used in financing activities was $885,500. DuringMarch 31, 2021. This resulted from proceeds from a PPP loan during the ninethree months ended September 30, 2017, we issued $425,000March 31, 2021.
In accordance with ASU 2014-15 management believes the Company has sufficient liquidity and capital resources to maintain ongoing operations. This is, in part due to all of these positive changes to cash flows, positive year-end earnings, refinancing debt to more favorable terms, and made payments on debtthe optimization of $399,876. During the nine months ended September 30, 2016, we did not issue any new debt and made payments on debtour operations in many of $829,688.our current facilities.
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As of September 30, 2017 and December 31, 2016, our debt balances consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Convertible Notes Payable | $ | 3,200,000 | $ | 3,200,000 | ||||
Senior Secured Promissory Notes | 250,000 | 150,000 | ||||||
Senior Secured Promissory Notes - Related Parties | 775,000 | 450,000 | ||||||
Fixed-Rate Mortgage Loans | 14,349,475 | 14,666,206 | ||||||
Variable-Rate Mortgage Loans | 8,608,080 | 6,273,129 | ||||||
Bonds Payable | 5,488,000 | 5,640,000 | ||||||
Other Debt | 2,586,000 | 2,394,000 | ||||||
35,256,555 | 32,773,335 | |||||||
Premium, Unamortized Discount and Debt Issuance Costs | (660,511 | ) | (735,904 | ) | ||||
$ | 34,596,044 | $ | 32,037,431 | |||||
As presented in the Consolidated Balance Sheets: | ||||||||
Debt, Net | $ | 33,884,660 | $ | 31,662,724 | ||||
Debt - Related Parties, Net | $ | 711,384 | $ | 374,707 | ||||
$ | 34,596,044 | $ | 32,037,431 |
The weighted average interest rate and term of our fixed rate debt are 6.8% and 5.7 years, respectively, as of September 30, 2017. The weighted average interest rate and term of our variable rate debt are 5.7% and 11.6 years, respectively, as of September 30, 2016.
Mortgage Loans
Mortgage loans are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:
Stated | ||||||||||||||||
Face | Principal Outstanding at | Interest | Maturity | |||||||||||||
Property | Amount | September 30, 2017 | December 31, 2016 | Rate | Date | |||||||||||
Middle Georgia Nursing Home(1) | $ | 4,200,000 | $ | 3,656,802 | $ | 3,742,706 | 5.50% Fixed | October 4, 2018 | ||||||||
Goodwill Nursing Home(1) | 4,976,316 | 4,485,267 | 4,520,816 | 5.50% Fixed | March 19, 2020 | |||||||||||
Goodwill Nursing Home(3) | 80,193 | 37,593 | 80,193 | 5.50% Fixed | June 12, 2018 | |||||||||||
Warrenton Nursing Home | 2,720,000 | 2,399,714 | 2,476,109 | 5.00% Fixed | December 20, 2018 | |||||||||||
Edward Redeemer Health & Rehab | 2,303,815 | 2,221,592 | 2,268,096 | 5.50% Fixed | January 16, 2020 | |||||||||||
Southern Hills Retirement Center | 1,750,000 | 1,548,507 | 1,578,286 | 4.75% Fixed | November 10, 2017 | |||||||||||
Abbeville Health & Rehab | 2,660,000 | 2,364,698 | - | Prime Plus 0.50%/ 4.75% Floor/ 5.50% Ceiling | April 25, 2021 | |||||||||||
Providence of Sparta Nursing Home | 1,725,000 | 1,625,376 | 1,655,123 | Prime Plus 0.50%/ 6.00% Floor | September 26, 2017 | |||||||||||
Golden Years Manor Nursing Home(2) | 5,000,000 | 4,618,006 | 4,618,006 | Prime Plus 1.50%/ 5.75% Floor | August 3, 2037 | |||||||||||
$ | 22,957,555 | $ | 20,939,335 |
Other mortgage loans contain financial and non-financial covenants, including reporting obligations, with which the Company has not complied in some instances in an untimely manner.
We had $4.1 million of debt maturing for the remaining three months of 2017, all of which was refinanced subsequent to September 30, 2017. See Subsequent Events and the consolidated financial statements included elsewhere in the Form 10-Q for additional debt details. The following is a summary of our subordinated debt at September 30, 2017 and December 31, 2016:
Face | Principal Outstanding at | Stated Interest | Maturity | |||||||||||||
Property | Amount | September 30, 2017 | December 31, 2016 | Rate | Date | |||||||||||
Goodwill Nursing Home | $ | 2,180,000 | $ | 1,536,000 | $ | 1,344,000 | 13.0 %(1)(2) Fixed | December 31, 2019(2) | ||||||||
Providence of Sparta Nursing Home | 1,050,000 | 1,050,000 | 1,050,000 | 10.0% Fixed | December 31, 2017(3) | |||||||||||
$ | 2,586,000 | $ | 2,394,000 |
Subordinated Debt
Our subordinated debt at September 30, 2017 and December 31, 2016 includes unsecured notes payable issued to controlled entities used to facilitate the acquisition of the nursing home properties.
Other mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some instances in an untimely manner. These mortgage loans are technically in default, except for the mortgage loan related to Abbeville Health & Rehab.
Contractual Obligations
As of September 30, 2017, we had the following contractual obligations:
Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | ||||||||||||||||
Notes and Bonds Payable - Principal | $ | 32,056,555 | $ | 20,034,164 | $ | 12,001,173 | $ | 21,218 | $ | - | ||||||||||
Notes and Bonds Payable - Interest | 1,795,519 | 938,024 | 798,676 | 58,818 | - | |||||||||||||||
Convertible Notes Payable - Principal | 3,200,000 | 3,200,000 | - | - | - | |||||||||||||||
Convertible Notes Payable - Interest | - | - | - | - | - | |||||||||||||||
Total Contractual Obligations | $ | 37,052,072 | $ | 24,172,188 | $ | 12,799,849 | $ | 80,036 | $ | - |
Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand, combined proceeds from the issuance of our 10% Senior Secured Promissory Notes in the aggregate amount of $425,000 and $600,000 during 2017 and 2016 and revenues generated from operations, are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations at Grand Prairie, Abbeville and Southern Hills Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.
Critical Accounting Policies
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require thatthe application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.
Property Acquisitions
We allocate the purchase price of acquired properties to net tangible and identified intangible assets and any liabilities based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing and leasing at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the purchase price or fair value of an acquired property.
Impairment of Long LivedLong-Lived Assets
When circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties using standard industry valuation techniques.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
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The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.
Revenue Recognition
The Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets and totaled $177,716 and $589,379 as of March 31, 2022, and 2021, respectively.
Rent receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line recognition of rents. Such allowances are charged to net against rental incomes.
When the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. As of March 31, 2022, and 2021, there were no deferred lease incentives recorded.
For our healthcare operations, we recognize revenue in accordance with ASC 606 whereby we apply the following steps:
a. | Step 1: Identify the contract(s) with a customer |
b. | Step 2: Identify the performance obligations in the contract |
c. | Step 3: Determine the transaction price |
d. | Step 4: Allocate the transaction price to the performance obligations in the contract |
e. | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
In accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that are a direct reduction to net operating revenues.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the standard will have on the consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company adopted this standard effective December 31, 2016 and has included going concern disclosures in Note 2.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases: Topic 842 (ASU 2016-02)”, to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first quarter of our fiscal year ending December 31, 2019 using a modified retrospective approach with the option to elect certain practical expedients. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective for the Company beginning on January 1, 2018. ASU 2016-18 must be applied using a retrospective transition method with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2017.2022. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
SUBSEQUENT EVENTS
Election of Additional member of the Board of Directors
Effective October 16, 2017 the Board of Directors elected an additional member, Mr Josh Mandell. As a director, Mr. Mandell will participate in the Company’s compensation plan for directors pursuant to which he will be entitled to receive an annual restricted stock award having a market value of $30,000. As his election is effective October 16, 2017, Mr. Mandell will be entitled to receive for the calendar year 2017 a restricted stock award having a market value of $6,250. The grant will be effective October 16, 2017 and will be based upon the closing price of the Company’s common stock on January 3, 2017 valued at $0.57 per share, for 10,965 shares.
Additional Investments in Debt Securities
In October 2017, the Company purchased additional investments in debt securities in the amount of $30,446, consisting of market purchases of the outstanding revenue bonds secured by the Southern Hills ALF and ILF. These investments have a contractual maturity of $60,000.
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Refinance of Senior Mortgages
Providence HR, LLC
Providence of Sparta Health And Rehab
In October, 2017, the Company, through its wholly-owned subsidiary Providence HR, LLC consummated a HUD refinancing of its senior mortgage on its skilled nursing facility in Sparta, Georgia. Funding was provided by Greystone Funding Corporation pursuant to a secured Healthcare Facility Note in the principal amount of $3,039,300 (the “HUD Note”).
Proceeds from the HUD Note were used to pay off an existing senior mortgage and certain unsecured debt. The interest rate on the HUD Note is 3.88%, fixed for the full term of the HUD Note. Payments of principal and interest begin on December 1, 2017 until the Note is paid in full on November 1, 2047. The Note is secured by a Healthcare Deed to Secure Debt, Security Agreement and Assignment of Rents.
High Street Nursing, LLC
Meadowview Care Center
Effective November 1, 2017, the Company, through its wholly-owned subsidiary High Street Nursing, LLC consummated a refinancing of its senior notes on its skilled nursing facility in Seville, Ohio. with ServisFirst Bank pursuant to Term Note in the principal amount of $3,000,000 (the “Meadowview Note”).
Proceeds from the Meadowview Note were used to pay off an existing senior notes. The interest rate on Meadowview Note is 6.0%. Monthly payments of interest only begin on November 30, 2017 until January 2018, at which time monthly payments of principal and accrued interest shall be due until the Meadowview Note is paid in full on October 30, 2022 (the “Maturity Date”). The Note is secured by an Open-End Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the “Mortgage”).
Southern Tulsa, LLC
Southern Tulsa TLC, LLC
Southern Hills Rehabilitation Center (“SNF”)
Southern Hills Independent Living Facility (“ILF”)
Southern Hills Assisted Living Facility (“ALF”)
Effective October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with First Commercial Bank pursuant to a Promissory Note in the principal amount of $7,229,051.52 (the “Line of Credit”). Under the Line of Credit, the Company will refinance the existing mortgage on its skilled nursing facility in Tulsa, Oklahoma, fund the outstanding reverse Dutch tender offer on the Industrial Revenue Bonds covering the ALF and ILF, and for working capital, including improvements to the ALF and ILF.
The interest rate on Line of Credit is 5.25%. Monthly payments of interest only begin on November 30, 2017 until the Promissory Note is paid in full on April 30, 2018. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for it Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location.
Additional Sales of Senior Notes
Subsequent to September 30, 2017, we sold an additional $300,000 in senior notes, which accrue interest at the rate of 10% per annum and payable, principal and accrued interest on October 31, 2020. The proceeds of the notes were used to complete the refinance of the Meadowview facility in Seville, OH. In connection with the notes, the company issued warrants to purchase 300,000 shares of common stock, one for every dollar of note, at an exercise price of $0.75 per share, with an expiration date of November 8, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
Our management, including our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were not effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures. The Controller and CFO both have direct contact with all levels of review. The Company plans to implement multi-level review in 2022, and management intends to work internally and with various third-parties to ensure we have the proper controls in place going forward.
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the nine monthsquarter ended September 30, 2017,March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
The Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Southern Tulsa,Bailey v. GL Nursing, LLC, v. Healthcare Management of Oklahoma, LLC, Districtet. al in the Circuit Court of TulsaLonoke County, State of Oklahoma, Case No. CJ – 2016- 01781.Arkansas, 23rd Circuit, 43CV-19-151.
This matterIn April 2019, the Company’s wholly-owned subsidiary was brought by us to havenamed as a co-defendant in the appointmentaction arising out of a Receiver forclaimed personal injury suffered by the Southern Tulsa SNFplaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and to recover damages from our formernot the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that facility. The Court has ordered the appointmentlikelihood of a Receiver effective May 10, 2016. Other claims and matters are pending.an adverse outcome is remote.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility.facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity;indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement and Release with the Receiver and an Operations Transfer Agreement pursuant to which our newly formed subsidiary will acquire the assets and operations of the facility. In March 2021, the Court approved the Settlement Agreement and Operations Transfer Agreement, the skilled nursing license was assigned to the Company’s wholly-owned subsidiary Park Place Health, LLC and the Company reopened the facility under the name Park Place Health. This matter is considered resolved.
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VerizonOliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
In re: Providence HR, LLC v. CRM of Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
In re: ALT/WARR, LLC v. CRM of Sparta, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
These are companion cases arising out of the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta, Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March 22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease operators to comply with their leases, including payment of rent, pending the next hearing. In June 2021, the Court entered an Order approving a Lease Termination Agreement, Operations Transfer Agreement and Interim Management Agreement which had been negotiated by the Company and the two operating tenants, CRM of Warrenton, LLC and CRM of Sparta, LLC. The Lease Termination Agreement and Operations Transfer Agreement became effective upon the granting of a new License by the State of Georgia for the Warrenton and Sparta facilities to two newly formed wholly owned operating subsidiaries of the Company: Selectis Sparta, LLC and Selectis Warrenton, LLC.
High Street Nursing, LLC v. Ohio Department of Health, Court of Common Pleas, Franklin County, Ohio, Case No. 21 CV 6559.
The Company brought this action through its wholly owned subsidiary High Street Nursing, LLC (“High Street”) against the Ohio Department of Health (ODH) to prevent the Department of Health from revoking the state issued license covering the Meadowview skilled nursing facility located in Seville, Ohio. The facility is owned by High Street and was leased to a third-party operator who abandoned the facility. The Department of Health is trying to revoke the license of the former operator and has refused our request to transfer the license to a new operator controlled by the Company. Our Motion for Temporary Injunction was denied by the Court. We have subsequently filed a Motion for Preliminary and Permanent Injunction which is pending. Our claims against the Department of Health are based upon our property interests in the facility and raise issues of unlawful condemnation and eminent domain. No prediction can be made regarding the outcome of this matter; but the Company will pursue the ODH to the fullest extent.
In the Matter of Hunter
The Company received a spoliation letter from an attorney dated October 8, 2021, advising of the intent to assert a personal injury claim against our operating subsidiary Glen Eagle Health & Rehab, LLC which operates our skilled nursing facility in Abbeville, Georgia. We have been provided no further information, but after reviewing the information we believe at this time that the likelihood of an adverse outcome is remote.
Edwards Redeemer Property Holdings, LLC, et.al. v. Buildstrong Roofing and Construction, Inc., v. Southern Tulsa, LLC, et. al.,et.al. District Court of and for Tulsa County, Oklahoma, Case No. CJ-2015-04326.CJ-202
This Company brought this action against a contractor that performed work at our Park Place facility in Oklahoma City and our Southern Hills SNF in Tulsa. The claims are based upon negligence and breach of contract for subpar work due to defects in materials, workmanship and Buildstrong not providing services for which they received payment. The case is pending.
Tara Gaspar, et.al v. GL Nursing, LLC, et.al., Circuit Court of Lonoke County, Arkansas, Civil Division, Case. No. 43CV-21-864.
This case is a mechanic’s lien foreclosurepersonal injury action on the Southern Hills facility in Tulsa arising from work performed. The Plaintiffwhich our subsidiary GL Nursing, LLC was a subcontractor to our general contractor; and while we paid the general contractor for that work, the general contractor apparently did not pay the subcontractor. Plaintiff is seeking $441,939 previously invoiced to the general contractor, plus attorney’s fees and costs. The general contractor, also a named defendant, is liable for this amount but may not have the resources to pay the plaintiff, therefore the Company may be liable for some unknown amount less than or equal to Plaintiff’s claim. The Company has accrued $25,000joined as a probable loss for this matter indefendant because it is the consolidated financial statements forowner of the year ended December 31, 2016 and nine months ended September 30, 2017,property leased to an operating tenant. The action is based upon an initial draft settlement agreement but intends to vigorously defend the matter ifquality of care over which we had no control. We believe that our risk of a settlementmaterial adverse outcome is not achieved. Subsequent to September 30, 2017, this matter was settled for $20,000.remote.
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Item 2. COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported globally.
Starting in March 2020, the COVID-19 pandemic, and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers.
The Centers for Disease Control & Prevention (“CDC”) will provide final confirmation of the cases. The Company is engaging in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health and safety of residents while respecting their rights. Employees at all of our facilities are taking several precautions as they care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Additionally, as of the date of this Report, all of our facilities have reported occurrences of COVID-19 in both staff and residents. We have implemented aggressive vaccination programs at all of our facilities but have not imposed mandates. As of the date of this Report, the vast majority of our staff and residents have been vaccinated.
The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers, and managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers, and managers regarding ways in which these programs could benefit them or us.
The COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results, and financial condition.
We expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business, tenants, and operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and cash flows but it could be material.
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Recent Developments Related to COVID-19
In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, we and our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, personal protective equipment (“PPE”), quality of care, visitation protocols, staffing levels, and reporting, among other regulations, throughout the pandemic. Many of our controlled and third-party operators have reported incurring significant cost increases as a result of the COVID-19 pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, we are experiencing declines, in some cases that are material, in occupancy levels as a result of the pandemic, which declines on average appear to be stabilizing. We believe these declines may be in part due to COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.
While substantial government support, primarily through the federal CARES Act in the U.S. and distribution of PPE, vaccines and testing equipment by federal and state governments, has been allocated to SNFs and to a lesser extent to ALFs, further government support will likely be needed to continue to offset these impacts. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, it remains unclear as to whether unallocated funds under the Provider Relief Fund will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fund or otherwise allocated to health care operators or our operators, or whether additional Medicaid funds under the recently enacted American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) in the U.S. will ultimately support reimbursement to our operators. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief that is sufficient and timely, we anticipate that the operating results of certain of our operators would be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.
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There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the impact of vaccination programs and participation levels in those programs in reducing the spread of COVID-19 in our facilities, and the extent to which funding support from the federal government and the states will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.
While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the impact of occupancy declines at many of our operators, and it remains uncertain whether and when demand and occupancy levels will return to pre-COVID-19 levels.
Government Regulation and Reimbursement
The healthcare industry is heavily regulated. We are subject to extensive and complex federal, state and local healthcare laws and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
The U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020, following the World Health Organization’s decision to declare COVID-19 a public health emergency of international concern. This declaration, which has been extended, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. These regulatory actions could contribute to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion.
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020, and discussed below, continue to have a significant impact on our operations and financial condition. The extent of the COVID-19 pandemic’s effect on the Company’s and our operators’ operational and financial performance will depend on future developments, including the sufficiency and timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, the impact of new vaccine distributions on our operators and their populations, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business; however, the adverse impact on our business, results of operations, financial condition and cash flows could be material.
A significant portion of our revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government health care programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses.
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The following is a discussion of recent developments regarding certain U.S. laws and regulations generally applicable to our operators, and in certain cases, to us, and their impact.
Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds, through the CARES Act and Provider Relief Fund, appropriating $178 Billion to Health Care Providers. In response to the pandemic, Congress enacted a series of economic stimulus and relief measures throughout 2020 and 2021. On March 18, 2020, the Families First Coronavirus Response Act was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the public health emergency terminates. States will make individual determinations about how this additional Medicaid reimbursement will be applied to SNFs, if at all.
In a further response to the pandemic, the CARES Act authorized approximately $178 Billion to be distributed through the Public Health and Social Services Emergency Fund (“Provider Relief Fund”) to reimburse eligible healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus. The Provider Relief Fund is administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements.
HHS began distributing Provider Relief Fund grants in April 2020 and has made grants available to various provider groups in three general phases. In May 2020, HHS announced that approximately $9.5 Billion in targeted distributions would be made available to eligible skilled nursing facilities, approximately $2.5 Billion of which were composed of performance-based incentive payments tied to a facility’s infection rate. Approximately $8.5 billion in additional funds were added to the Provider Relief Fund through the American Rescue Plan Act enacted on March 11, 2021; however, these funds are limited to rural providers and suppliers.
As of March 15, 2021, based on data published by HHS, it appears that less than $29 billion of the Provider Relief Fund remains unallocated. HHS continues to evaluate and provide allocations of, and issue regulations and guidance regarding, grants made under the CARES Act and related legislation. There are substantial uncertainties regarding the extent to which our operators will receive funds which have not been allocated, whether additional funds will be allocated to the Provider Relief Fund, health care providers or senior care providers and whether additional payments will be distributed to providers, the financial impact of receiving any of these funds on their operations or financial condition, and whether operators will be able to meet the compliance requirements associated with the funds. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act.
The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments are loans that providers must repay. Additionally, CMS suspended Medicare sequestration payment adjustments, which would have otherwise reduced payments to Medicare providers by 2%, from May 1, 2020, through December 31, 2021, but also extended sequestration through 2030. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020, through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
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Quality of Care Initiatives and Additional Requirements Related to COVID-19:
In addition to COVID-19 reimbursement changes, several regulatory initiatives announced in 2020 and the first quarter of 2021 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. For example, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds and the implementation of new quality measures. Although the American Rescue Plan Act did not allocate specific funds to SNF or assisted living facility providers, approximately $200 million was allocated to quality improvement organizations to provide infection control and vaccination uptake support to SNFs.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020 and the first quarter of 2021. In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S. health care system, including the impact on quality of care provided within the skilled nursing industry. These hearings could result in legislation imposing additional requirements on our operators.
Reimbursement Generally:
Medicaid. The American Rescue Plan Act contains several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. For example, the American Rescue Plan Act increases the FMAP by 10 percentage points for state home and community-based services expenditures beginning April 1, 2021, through March 31, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. As a condition for receiving the FMAP increase, states must enhance, expand, or strengthen their Medicaid home and community-based services program during this period. These potential enhancements to Medicaid reimbursement funding may be offset in certain states by state budgetary concerns, the ability of the state to allocate matching funds and to comply with the new requirements, the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic, and the potential allocation of state Medicaid funds available for reimbursement away from SNFs in favor of home and community-based programs. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past and may in the future adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
Department of Justice and Other Enforcement Actions:
SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.
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COVID
The COVID-19 pandemic has subjected our business, operations, and financial condition to a number of risks including the risks described in greater detail in the Management’s Discussion and Analysis section of this Report, including, but not limited to, those discussed below:
● | Risks Related to Revenue: Our revenues and our operators’ revenues are dependent, in part, on occupancy. In addition to the impact of increases in mortality rates on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our operating and triple-net properties could further decrease. Such a decrease could affect the net operating income of our operating properties and the ability of our triple-net operators to make contractual payments to us. |
● | Risks Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy or insolvency due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant because of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about the operator’s financial condition and insolvency proceedings, particularly considering ongoing publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should such events occur, our revenue and operating cash flow may be adversely affected. |
● | Risks Related to Operations: Across all of our properties, we and our operators have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or tenants’ contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties, employees and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement of people. |
● | Risks Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have a significant development portfolio and have not experienced significant delays or disruptions but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position. |
● | Risks Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets. |
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None, except as previously disclosed.
The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many of the other risks described in this Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None, except as previously disclosed.
Item 3. Defaults Upon Senior Securities
None.None, except as disclosed in this Report.
None.
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of |
Certification of Chief Executive Officer | |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of |
101.INS | Inline XBRL Instance Document** |
101.SCH | Inline XBRL Schema Document** |
101.CAL | Inline XBRL Calculation Linkbase Document** |
101.LAB | Inline XBRL Label Linkbase Document** |
101.PRE | Inline XBRL Presentation Linkbase Document** |
101.DEF | Inline XBRL Definition Linkbase Document** |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* filed herewith
** furnished, not filed
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: | By: | /s/ Lance Baller |
Lance Baller, Chief Executive Officer | ||
(Principal Executive Officer) |
Date: September 19, 2022 | By: | /s/ |
Mary Lucus, Interim Chief Financial Officer | ||
(Principal Accounting Officer) |
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