NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of the Business
Global
Healthcare REIT, Inc. (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 related to the healthcare industry. Prior to the Company changing
its name to Global Healthcare REIT, Inc. on September 30, 2013, 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 was deemed to be the accounting acquirer.
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, manages and disposes of healthcare real estate, and provides financing to healthcare providers.
As of June 30, 2017, the Company owned nine healthcare properties which are leased to third-party operators under triple-net operating
leases.
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 six months ended June 30, 2017 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, 2016 filed with the Securities and Exchange Commission.
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. 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.
2.
GOING CONCERN
The
accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For
the six months ended June 30, 2017, the Company incurred a net loss of $923,301, reported net cash used in operations of $151,736
and has an accumulated deficit of $6,938,154. These circumstances raise substantial doubt as to the Company’s ability to
continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s
ability to generate sufficient revenues and cash flows to operate profitably and meet contractual obligations, or raise additional
capital through debt financing or through sales of common stock.
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.
PROPERTY AND EQUIPMENT
The
gross carrying amount and accumulated depreciation of the Company’s property and equipment as of June 30, 2017 and December
31, 2016 are as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,597,500
|
|
|
$
|
1,577,500
|
|
Land Improvements
|
|
|
200,000
|
|
|
|
200,000
|
|
Buildings and Improvements
|
|
|
35,312,195
|
|
|
|
33,461,661
|
|
Furniture, Fixtures and Equipment
|
|
|
1,430,502
|
|
|
|
1,125,507
|
|
Construction in Progress
|
|
|
3,253,952
|
|
|
|
3,115,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,794,149
|
|
|
|
39,479,822
|
|
Less Accumulated Depreciation
|
|
|
(3,917,077
|
)
|
|
|
(3,316,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,877,072
|
|
|
$
|
36,162,881
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
$
|
600,137
|
|
|
$
|
895,460
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Capital Expenditures
|
|
$
|
140,745
|
|
|
$
|
13,660
|
|
|
|
|
|
|
|
|
|
|
Addition to property and equipment financed with debt
|
|
$
|
2,173,582
|
|
|
$
|
189,557
|
|
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 will
be 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 $38,421 in loan costs, which was amortized over the life of the loan.
The
facility was closed 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
June 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:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
States and Municipalities
|
|
$
|
2,357
|
|
|
$
|
-
|
|
Contractual
maturities of held-to-maturity securities at June 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 six months ended June 30, 2017, the Company invested $58,164 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 face value of $92,000. This resulted in a gain on extinguishment of $36,193 based on the difference 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 June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Convertible Notes Payable
|
|
$
|
3,200,000
|
|
|
$
|
3,200,000
|
|
Senior Secured Promissory Notes
|
|
|
150,000
|
|
|
|
150,000
|
|
Senior Secured Promissory Notes - Related Parties
|
|
|
775,000
|
|
|
|
450,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
14,449,974
|
|
|
|
14,666,206
|
|
Variable-Rate Mortgage Loans
|
|
|
8,441,661
|
|
|
|
6,273,129
|
|
Bonds Payable
|
|
|
5,488,000
|
|
|
|
5,640,000
|
|
Other Debt
|
|
|
2,586,000
|
|
|
|
2,394,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,090,635
|
|
|
|
32,773,335
|
|
|
|
|
|
|
|
|
|
|
Premium, Unamortized Discount and Debt Issuance Costs
|
|
|
(692,182
|
)
|
|
|
(735,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,398,453
|
|
|
$
|
32,037,431
|
|
|
|
|
|
|
|
|
|
|
As presented in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, Net
|
|
$
|
33,715,124
|
|
|
$
|
31,662,724
|
|
|
|
|
|
|
|
|
|
|
Debt - Related Parties, Net
|
|
$
|
683,329
|
|
|
$
|
374,707
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,398,453
|
|
|
$
|
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 redemption at the option of the Company at any time (i) after September 15, 2015 but prior
to September 15, 2016 at an early redemption price equal to 103% of the face amount of the Notes, plus accrued 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
price 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 June 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 $30,161 for the six months June 30, 2017.
The
Notes are secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio.
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, an additional $125,000 in notes 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.
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 six months ended June 30, 2017, an additional
$325,000 in notes with 325,000 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:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
126.8%
- 144.8%
|
|
|
|
131.3%
- 133.2%
|
|
Risk-free Interest Rate
|
|
|
0.81%
- 1.12%
|
|
|
|
0.81%
- 0.92%
|
|
Exercise Price
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Fair Value of Common Stock
|
|
|
$0.39
- $0.46
|
|
|
|
$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 $49,793
and $95,873 as of June 30, 2017 and December 31, 2016 with $46,080 recorded as amortization expense during 2017.
The total value of the 2017 warrants on the
issue date was estimated to be $59,459 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 $50,972
as of June 30, 2017 with $8,487 recorded as amortization expense during the six-month period ended June 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
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Rate
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Georgia Nursing Home
(1)
|
|
$
|
4,200,000
|
|
|
$
|
3,682,485
|
|
|
$
|
3,742,706
|
|
|
|
5.50% Fixed
|
|
|
|
October 4, 2018
|
|
Goodwill Nursing Home
(1)
|
|
|
4,976,316
|
|
|
|
4,503,854
|
|
|
|
4,520,816
|
|
|
|
5.50% Fixed
|
|
|
|
March 19, 2020
|
|
Goodwill Nursing Home
(3)
|
|
|
80,193
|
|
|
|
46,412
|
|
|
|
80,193
|
|
|
|
5.50% Fixed
|
|
|
|
June 12, 2018
|
|
Warrenton Nursing Home(4)
|
|
|
2,720,000
|
|
|
|
2,422,709
|
|
|
|
2,476,109
|
|
|
|
5.00% Fixed
|
|
|
|
December 20, 2018
|
|
Edward Redeemer Health & Rehab
|
|
|
2,303,815
|
|
|
|
2,232,628
|
|
|
|
2,268,096
|
|
|
|
5.50% Fixed
|
|
|
|
January 16, 2020
|
|
Southern Hills Retirement Center(5)
|
|
|
1,750,000
|
|
|
|
1,561,886
|
|
|
|
1,578,286
|
|
|
|
4.75% Fixed
|
|
|
|
November 10, 2017
|
|
Abbeville Health & Rehab
(6)
|
|
|
2,660,000
|
|
|
|
2,193,282
|
|
|
|
-
|
|
|
|
Prime Plus 0.50%/ 4.75% Floor/ 5.50% Ceiling
|
|
|
|
April 25, 2021
|
|
Providence of Sparta Nursing Home
|
|
|
1,725,000
|
|
|
|
1,630,373
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,891,635
|
|
|
$
|
20,939,335
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mortgage
loans are non-recourse to the Company except for the Southern Hills line of credit owed
to First United Bank, Goodwill, Eastman and Abbeville.
|
|
(2)
|
Effective
September 19, 2016, we executed a Modification to the mortgage note pursuant to which
some accrued payments were deferred and the lender agreed to permit interest only payments
through March 2017. The mortgage loan collateralized by the Grand Prairie Nursing Home
(formerly Golden Years Manor Nursing Home) 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. The Company is subject
to financial covenants and customary affirmative and negative covenants. As of June 30,
2017, the Company was not in compliance with certain of these financial and non-financial
covenants which is considered to be a technical Event of Default as defined in the note
agreement. Remedies available to the lender in the event of a continuing Event of Default,
at its option, include, but are necessarily limited to the following (1) lender may declare
the principal and all accrued interest on the note due and payable; and (2) lender may
exercise additional rights and remedies under the note agreement to include taking possession
of the collateral or seeking satisfaction from the guarantors. The Company has not been
notified by the lender regarding the exercise of any remedies available. Guarantors under
the mortgage loan are Christopher Brogdon and GLN Investors, LLC, in which the Company
owns a 100% membership interest. In May 2017, the Company entered into a Modification
Agreement with GL Nursing, LLC mortgage lender in which the lender agreed to (i) extend
the interest only payments from April 1, 2017 thru December 1, 2017, (ii) re-amortize
the loan over the remaining term of the loan, the regular principal and interest payment
shall begin from the payment due January 1, 2018. The Company continues to pay escrow
payments for the USDA annual fee and acknowledged that payments beginning from January
1, 2018 will recover any unpaid interests first, then to bring principal current.
|
|
(3)
|
The
$80,193 debt at Goodwill Nursing Home was incurred to pay off accrued interest on the
original primary note.
|
|
(4)
|
Amortization
expense related to loan costs of this loan totaled $3,080 for the six months ended June
30, 2017.
|
|
(5)
|
Amortization
expense related to loan costs of this loan totaled $12,881 for the six months ended June
30, 2017.
|
|
(6)
|
Amortization
expense related to loan costs of this loan totaled $817 for the six months ended June
30, 2017.
|
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, with the exception of Global Abbeville Property
LLC’s note with Colony Bank.
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
$9,409 and $1,522 for the six months June 30, 2017 and $14,149 and $2,726 for the six months ended June 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 June 30, 2017. As part of the loan terms, a $60,000 principal
reduction was paid on the bonds during the quarter. As of June 30, 2017, restricted cash of $555,254 is related to these bonds.
During
the six months ended June 30, 2017, the company invested $58,164 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
$36,193 based on the difference between investment in debt and the settled debt obligation.
Other
Debt
Other
debt at June 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
|
|
|
June 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
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As
of December 31, 2016, the income from the Goodwill facility was insufficient to cover
debt service for the subordinated debt for the facility. The debt had been accruing interest
at the default rate but not currently being paid. In May 2017, we entered into an Allonge
and Modification described in Note 2 below. The Company has entered into a new ten-year
operating lease covering the facility which became effective in February, 2017 with the
new operator having obtained all licenses, permits and other regulatory approval necessary
to recertify and reopen the facility. After receiving regulatory approvals, the lease
operator invested approximately $2.0 million in capital improvements in the property.
The facility has been relicensed and began taking patients in December 2016 and is currently
building census.
|
|
(2)
|
Effective
May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill
investors pursuant to which they agreed to (i) waive all accrued interest through December
31, 2017, (ii) reduce interest rate to 13% beginning January 1, 2018 and (iii) extend
the maturity date of the notes to December 31, 2019. In exchange, the Company agreed
that upon repayment of the notes, the investors would be entitled to a one-time premium
payment in the amount of 15% of the principal balance of the notes. The total premium
on debt recognized was $192,000, and the accrued interest payable written off was $256,107,
for a net gain on premium of $64,107.
|
|
(3)
|
The
subordinated note on Sparta matured on August 1, 2016. Investors in the Sparta note were
entitled to an additional 5% equity in Providence HR, LLC every six months if the note
is not paid when due.
|
|
(4)
|
We
have applied to refinance the senior and subordinated debt at Sparta with a new HUD loan.
To accommodate that application, in March 2017 the investors in Providence HR Investors,
LLC, the holder of the subordinated debt, entered into a Forbearance Agreement pursuant
to which they agreed to (i) waive the equity ratchet they were entitled to due to our
failure to repay the debt on or before the maturity date (ii) waive the accrual of default
interest and (iii) extend the maturity date of the subordinated debt to December 31,
2017.
|
For
the six months ended June 30, 2017, amortization expenses related to loan costs of other debt totaled $4,604.
For
the six months ended June 30, 2017, the Company received proceeds from the issuance of debt of $325,000. Cash payments on debt
totaled $295,902 and $336,502 for the six months ended June 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
|
|
$
|
20,116,819
|
|
2018
|
|
|
4,839,944
|
|
2019
|
|
|
1,777,969
|
|
2020
|
|
|
6,401,030
|
|
2021
|
|
|
1,954,873
|
|
2022
and after
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
35,090,635
|
|
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 June 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 June 30, 2017 and December 31, 2016, the Company had 375,000 shares of Series D preferred stock outstanding.
During the six months ended June 30, 2017,
the Company paid $15,000 for Series D preferred stock dividends, $7,500 of Series D preferred stock dividends was declared and
accrued as of June 30, 2017. All quarterly dividends previously declared have been paid.
Restricted
Stock Awards
The
following table summarizes the restricted stock unit activity during the six months ended June 30, 2017 and 2016.
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Beginning
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
755,426
|
|
|
|
227,275
|
|
Vested
|
|
|
(755,426
|
)
|
|
|
(227,275
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Ending
|
|
|
-
|
|
|
|
-
|
|
In
connection with these director restricted stock grants in the six months ended June 30, 2017, the Company recognized stock-based
compensation of $254,070. The Company recognized stock-based compensation of $150,000 for the six months ended June 30, 2016.
Common
Stock Warrants
As
of June 30, 2017 and December 31, 2016, the Company had 1,891,736 and 1,821,736, respectively, of outstanding warrants to purchase
common stock at a weighted average exercise price of $0.82 and $0.79, respectively. In June 2017, the company issued 200,000 warrants
to Directors in connection with the purchase of the company’s promissory notes. During the six-month period ended June 30,
2017, 255,000 warrants with a weighted average exercise price of $0.53 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 six-month period ended June 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 June 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 six-month period ended June 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 and (iv) 86,364
shares of common stock for CFO services provided in the quarter ended March 31, 2017.
During the six-month period ended June 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 and (iv) 86,364 shares of common stock for
CEO services provided in the quarter ended March 31, 2017.
During
the six-month period ended June 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)
|
|
$
|
20,667
|
|
|
|
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
|
|
|
(1)
|
Monthly
lease income reflects rent income on a straight-line basis over, where applicable, the
term of each lease.
|
|
(2)
|
On
January 22, 2016, a lease operator that operates Middle Georgia, Edwards Redeemer, Golden
Years (until January 1, 2016) and Goodwill filed a voluntary petition in bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code. Under the Chapter 11 Bankruptcy, the lease operator
can either assume or reject the leases of Middle Georgia, Edwards Redeemer and Goodwill.
As of the date of this Report, the lease operator has verbally represented that he intends
to assume the leases of Middle Georgia and Edwards Redeemer under modified lease terms
and has rejected the lease covering Goodwill. If the lease operator assumes a lease,
he is required to bring the leases current as a condition to such assumption.
|
|
(3)
|
In
January 2016, concurrently with the Chapter 11 Bankruptcy filing by the lease operator,
the Goodwill facility was closed by Georgia regulators and all residents were removed.
The Goodwill facility began generating rental revenue in February 2017. In the first
year, base rent is $16,667 per month, plus $2,000 per month for every ten occupied beds.
In a transaction related to the sale of the Greene Point facility, an affiliate of the
buyer of Greene Point has executed a ten-year operating lease covering Goodwill. The
former lease has been terminated. After receiving regulatory approvals, the lease operator
invested approximately $2.0 million in capital improvements in the property. The lease
became effective on February 1, 2017 with the lease operator having obtained all regulatory
approvals, completed renovations and began admitting patients.
|
|
(4)
|
Effective
January 1, 2016, the Golden Years facility was leased to another operator for a period
of ten years at a monthly base rent of $30,000 which was subject to increases based on
census levels. Under the terms of the lease, the Company agreed to fund certain capital
expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice
that it was terminating the lease effective August 31, 2016. The Company entered into
a Lease Termination Agreement under which it paid the tenant $145,000 and is obligated
to make future payments. Effective August 30, 2016, the Company entered into a new lease
agreement with another nursing home operator for its Golden Years facility. The lease
term commences at the end of a straddle period which, by virtue of an amendment to the
lease executed after June 30, 2017, will occur the earlier of (i) the Company recouping
all advances made during the Straddle Period or (ii) February 28, 2018. During the straddle
period, the Company has agreed to make working capital advances to enable the operator
to cover cash flow deficits resulting from initial operations of the facility. If at
the end of the straddle period, the operator has not reimbursed the full amount of advances
to the Company, the Company or operator have the right to terminate the lease agreement.
As of December 31, 2016, $230,000 has been advanced to the operator by the Company—$150,000
required by the lease for capital improvements booked to tenant improvements that is
not reimbursable, and $80,000 to cover tenant’s cash flow deficits during the straddle
period. During the six months ended June 30, 2017, $267,198 was advanced to the operator
by the Company to cover cash flow deficits during the straddle period. If the lease term
commences, the Company will receive monthly base rents beginning at $35,000 which is
subject to increases based on census levels.
|
|
(5)
|
Lease
agreement dated May 21, 2014 with lease payments commencing February 1, 2015. On May
10, 2016, the Company obtained a Court Order appointing a Receiver to control and operate
the Southern Hills SNF. The former lease operator represented that it was unable to meet
the financial commitments of the facility, including the payment of rent, payroll and
other operating requirements. The Company plans to engage a new lease operator for the
facility.
|
|
(6)
|
The
lease on the ALF has been abandoned. The Company plans to seek a new tenant for this
entity to assume operations at the completion of construction.
|
|
(7)
|
The
Southern Hills ILF requires renovation and is not subject to an operating lease.
|
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
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,066,000
|
|
2018
|
|
|
2,299,407
|
|
2019
|
|
|
2,381,484
|
|
2020
|
|
|
1,969,654
|
|
2021
|
|
|
2,014,885
|
|
2022 and Thereafter
|
|
|
9,134,036
|
|
|
|
|
|
|
|
|
$
|
18,865,466
|
|
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 upon a fair value
hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level
1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level
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— 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.
Our
consolidated balance sheets include the following financial instruments: cash and cash equivalents, advances to related parties,
notes receivable, restricted cash, accounts payable, debt and lease security deposits. 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 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
base 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 assumptions from a
third party appraisal or other market sources.
Assets
and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are summarized below:
|
|
|
|
|
Fair Value Measurement
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
142,894
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
142,894
|
|
Investment in Debt Securities
|
|
|
2,357
|
|
|
|
2,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2017:
|
|
$
|
145,251
|
|
|
$
|
2,357
|
|
|
$
|
-
|
|
|
$
|
142,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability – December 31, 2016
|
|
$
|
246,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
246,451
|
|
Because
these warrants have full reset adjustments tied to future issuance of equity securities by 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.
The
investments in debt securities are recorded at amortized cost since they are considered held-to-maturity.
The
table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the six months ended
June 30, 2017:
Beginning Balance January 1, 2017
|
|
$
|
246,451
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
(103,557
|
)
|
|
|
|
|
|
Ending Balance, June 30, 2017
|
|
$
|
142,894
|
|
The
significant assumptions used in the Black-Scholes option pricing model as of June 30, 2017 and December 31, 2016 include the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
86.5%
- 144.8%
|
|
|
|
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
|
|
$
|
0.5
|
|
|
$
|
0.57
|
|
Expected Life
|
|
|
0.3
– 1.5 years
|
|
|
|
0.1
– 2.7 years
|
|