| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Restricted cash consists of deposits required by certain lenders as collateral pursuant to letters of credit. The deposits must remain so long as the letters of credit are outstanding which are subject to renewal annually. The following table sets forth our cash and cash equivalents and restricted cash (in thousands):
September 30,
2019
2018
Cash and cash equivalents
$
7,703
$
9,245
Restricted cash
13,073
13,473
$
20,776
$
22,718
Assets Held for Sale Assets are classified as held for sale when the Company has determined all of the held-for-sale criteria have been met. The Company determines the fair value, net of costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset is recorded at the lower of its fair value, net of cost of disposal, or carrying value on that date. The Company periodically reevaluates assets held for sale to determine if the assets are still recorded at the lower of fair value, net of cost of disposal, or carrying value. The fair values are generally determined based on market rates, industry trends, and recent comparable sales transactions. The actual sales price of these assets could differ significantly from the Company’s estimates. During the third quarter of fiscal 2019, the Company classified two communities, located in Springfield, Missouri and Peoria, Illinois, as assets held for sale resulting in net assets of $24.4 million being reclassified to assets held for sale and $44.4 million of corresponding mortgage debt being reclassified to the current portion of notes payable within the Company’s Consolidated Balance Sheets. The Company determined, using level 2 inputs as defined in the accounting standards codification, that the assets had an aggregate fair value of $62.8 million, net of disposal costs. The two senior living communities were sold on October 1, 2019, for $64.8 million resulting in net proceeds to the Company of approximately $14.8 million. See additional discussion at “Note 10 - Subsequent Events.” There were no senior housing communities classified as held for sale by the Company at December 31, 2018. Revenue Recognition Resident revenue consists of fees for basic housing and certain support services and fees associated with additional housing and expanded support requirements such as assisted living care, memory care, and ancillary services. Basic housing and certain support services revenue is recorded when services are rendered and amounts billed are Residency agreements are generally short term in nature with durations of one year or less and are typically terminable by either party, under certain circumstances, upon providing 30 days notice, unless state law provides otherwise, with resident fees billed monthly in advance. Revenue for certain ancillary services is recognized as services are provided, and includes fees for services such as medication management, daily living activities, beautician/barber, laundry, television, guest meals, pets, and parking which are generally billed monthly in arrears and totaled approximately $1.0 million and $3.1 million for the three and nine months ended September 30, 2019, respectively, and approximately $1.2 million and $3.6 million for the three and nine months ended September 30, 2018, respectively, as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company's senior housing communities have residency agreements which generally require the resident to pay a community fee prior to moving into the community and are recorded initially by the Company as deferred revenue. At September 30, 2019 and December 31, 2018, the Company had contract liabilities for deferred community fees totaling approximately $1.9 million and $1.1 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets. The Company recognized community fees as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Loss of approximately $0.7 million and $1.9 million during the three and nine months ended September 30, 2019, respectively. The Company recognized community fees as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Loss of approximately $0.7 million and $2.1 million during the three and nine months ended September 30, 2018, respectively. Lease Accounting Effective January 1, 2019, the Company adopted the new lease standard provisions of ASC 842. Due to the adoption of ASC 842, the unamortized balances of lease acquisition costs and lease incentives were reclassified as a component of the respective operating lease right-of-use asset. Additionally, the unamortized balance of deferred gains associated with sale leaseback transactions totaling approximately $10.0 million was written-off to retained deficit. Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term on the lease commencement date. When the implicit lease rate is not determinable, management uses the Company’s incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future minimum lease payments. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms. Certain of the Company’s lease arrangements have lease and non-lease components. The Company accounts for the lease components and non-lease components as a single lease component for all classes of underlying assets. Leases with an expected lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term. Credit Risk and Allowance for Doubtful Accounts The Company’s resident receivables are generally due within 30 days from the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $7.6 million and $6.8 million at September 30, 2019, and December 31, 2018, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses. Employee Health and Dental Benefits, Workers’ Compensation, and Insurance Reserves The Company offers full-time employees an option to participate in its health and dental plans. The Company is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of employee health and dental benefits, net of employee contributions, is shared between the corporate office and the senior housing communities based on the respective number of plan participants. Funds collected are used to pay the actual program costs, including estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by the plans. Claims are paid as they are submitted to the Company’s third-party administrator. The Company records a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. Additionally, the Company may be liable for an Employee Shared Responsibility Payment (“ESRP”) pursuant to the Affordable Care Act (“ACA”). The ESRP is applicable to employers that had 50 or more full-time equivalent employees, did not offer minimum essential coverage (“MEC”) to at least 70% of full-time employees and their dependents, or did offer MEC to at least 70% of full-time employees and their dependents which did not meet the affordable or minimum value criteria and had one or more full-time employees certified as being allowed the premium tax credit (“PTC”). The IRS determines the amount of the proposed ESRP from information returns completed by employers and from income tax returns completed by employees. Management believes that the liabilities recorded and reserves established for outstanding losses and expenses are adequate to cover the ultimate cost of losses and expenses incurred at September 30, 2019; however, actual claims and expenses may differ. Any subsequent changes in estimates are recorded in the period in which they are determined. The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgments based on projected future events including potential settlements for pending claims, known incidents which may result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, the actual expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in the period in which they are determined. Income Taxes Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. The effective tax rates for the three and nine months ended September 30, 2019 and 2018 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes a tax on modified gross revenues for communities within the State of Texas. During each of the three and nine months ended September 30, 2019 and 2018, the Company consolidated 38 Texas communities, and the TMT increased the overall provision for income taxes. Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which we expect those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this analysis, an adjustment to the valuation allowance of $5.0 million and $2.7 million was recorded during the third quarters of fiscal 2019 and 2018, respectively. Cumulative adjustments to the valuation allowance for the nine months ended September 30, 2019 and 2018 were $10.7 million and $6.3 million, respectively. The valuation allowance reduces the Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) to be realized and resulted in net reductions of $57.0 million and $46.3 million to the Company’s deferred tax assets at September 30, 2019 and December 31, 2018, respectively. However, in the event that we were to determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period such determination was made . The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if management’s assessment is that such position is “more likely than not” to be upheld on audit based only on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense. The Company is generally no longer subject to federal and state tax audits for years prior to 2015. Net Loss Per Share Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Potentially dilutive securities consist of unvested restricted shares and shares that could be issued under outstanding stock options. Potentially dilutive securities are excluded from the computation of net loss per common share if their effect is antidilutive. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except for per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Net loss
$
(20,731
)
$
(11,089
)
$
(46,249
)
$
(27,305
)
Net loss allocated to unvested restricted shares
—
—
—
—
Undistributed net loss allocated to common shares
$
(20,731
)
$
(11,089
)
$
(46,249
)
$
(27,305
)
Weighted average shares outstanding – basic
30,324
29,877
30,236
29,779
Effects of dilutive securities:
Employee equity compensation plans
—
—
—
—
Weighted average shares outstanding – diluted
30,324
29,877
30,236
29,779
Basic net loss per share – common shareholders
$
(0.68
)
$
(0.37
)
$
(1.53
)
$
(0.92
)
Diluted net loss per share – common shareholders
$
(0.68
)
$
(0.37
)
$
(1.53
)
$
(0.92
) Awards of unvested restricted stock and restricted stock units representing approximately 1,127,647 shares, as well as 147,239 outstanding stock options, were antidilutive as a result of the net loss reported by the Company for the three months ended September 30, 2019. For the nine months ended September 30, 2019, awards of unvested restricted stock and restricted stock units representing approximately 1,055,981 shares, as well as 147,239 outstanding stock options, were antidilutive as a result of the net loss reported by the Company for such period. For the three and nine months ended September 30, 2018, unvested restricted stock and restricted stock units representing approximately 1,367,000 shares and approximately 1,339,000 shares, respectively, were antidilutive as a result of the net loss reported by the Company for such periods. Accordingly, such shares and options were not included in the calculation of diluted weighted average shares outstanding for the three and nine months ended September 30, 2019 and 2018. Treasury Stock The Company accounts for treasury stock under the cost method and includes treasury stock as a component of shareholders’ equity. All shares acquired by the Company have been purchased in open-market transactions. There were no repurchases of the Company’s common stock during the nine months ended September 30, 2019 or fiscal 2018. Recently Issued Accounting Guidance In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments In February 2016, the FASB issued ASU 2016-02, Leases Leases, Targeted Improvements The fair value of the right-of-use assets was estimated, utilizing a discounted cash flow approach based upon historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio. The estimated future cash flows were discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The adoption of ASC 842 resulted in the following adjustments to the Company’s Consolidated Balance Sheet at January 1, 2019:
Assets
Prepaid expenses and other
$
(2,050)
Property and equipment, net
(15,569)
Operating lease right-of-use assets, net
255,386
Other assets, net
(4,715)
Total assets
$
233,052
Liabilities and Shareholder’s Equity
Deferred income
$
(17,498)
Financing obligations
(35,956)
Operating lease liabilities
289,513
Other long-term liabilities
(15,643)
Total liabilities
$
220,416
Total shareholder’s equity
$
12,636 |
