Item
1. Consolidated Financial Statements (Unaudited)
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
$
|
37,985,136
|
|
|
$
|
36,162,881
|
|
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
|
|
Total Assets
|
|
$
|
39,264,978
|
|
|
$
|
37,543,832
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Accounts Payable – Related Parties
|
|
|
69,909
|
|
|
|
96,689
|
|
Dividends Payable
|
|
|
7,500
|
|
|
|
7,500
|
|
Derivative Liability
|
|
|
95,371
|
|
|
|
246,451
|
|
Lease Security Deposit
|
|
|
280,000
|
|
|
|
30,000
|
|
Total Liabilities
|
|
|
35,457,183
|
|
|
|
33,009,517
|
|
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
|
|
Additional Paid-In Capital
|
|
|
9,312,337
|
|
|
|
8,707,116
|
|
Accumulated Deficit
|
|
|
(7,394,698
|
)
|
|
|
(6,021,903
|
)
|
Total Global Healthcare REIT, Inc.
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
4,008,106
|
|
|
|
4,712,576
|
|
Noncontrolling Interests
|
|
|
(200,311
|
)
|
|
|
(178,261
|
)
|
Total Equity
|
|
|
3,807,795
|
|
|
|
4,534,315
|
|
Total Liabilities and Equity
|
|
$
|
39,264,978
|
|
|
$
|
37,543,832
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue
|
|
$
|
2,303,355
|
|
|
$
|
2,310,584
|
|
|
$
|
749,269
|
|
|
$
|
850,520
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
876,623
|
|
|
|
1,616,476
|
|
|
|
313,764
|
|
|
|
734,891
|
|
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
|
|
Total
Expenses
|
|
|
2,171,795
|
|
|
|
2,073,446
|
|
|
|
662,383
|
|
|
|
1,065,535
|
|
Income (Loss) from Operations
|
|
|
131,560
|
|
|
|
237,138
|
|
|
|
86,886
|
|
|
|
(215,015
|
)
|
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
|
|
Total
Other (Income) Expense
|
|
|
1,503,905
|
|
|
|
648,804
|
|
|
|
535,930
|
|
|
|
(528,837
|
)
|
Equity in Income from Unconsolidated Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Income (Loss)
|
|
|
(1,372,345
|
)
|
|
|
(411,666
|
)
|
|
|
(449,044
|
)
|
|
|
313,822
|
|
Net Loss Attributable to Noncontrolling Interests
|
|
|
22,050
|
|
|
|
115,367
|
|
|
|
-
|
|
|
|
42,005
|
|
Net Income (Loss) Attributable to Global Healthcare REIT, Inc.
|
|
|
(1,350,295
|
)
|
|
|
(296,299
|
)
|
|
|
(449,044
|
)
|
|
|
355,827
|
|
Series D Preferred Dividends
|
|
|
(22,500
|
)
|
|
|
(22,500
|
)
|
|
|
(7,500
|
)
|
|
|
(7,500
|
)
|
Net Income (Loss) Attributable to Common Stockholders
|
|
$
|
(1,372,795
|
)
|
|
$
|
(318,799
|
)
|
|
$
|
(456,544
|
)
|
|
$
|
348,327
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Share Attributable to Common Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,697,705
|
|
|
|
22,791,649
|
|
|
|
25,899,337
|
|
|
|
23,802,472
|
|
Diluted
|
|
|
25,697,705
|
|
|
|
22,791,649
|
|
|
|
25,899,337
|
|
|
|
23,377,972
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENT 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
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(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
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
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 September 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 nine months ended September 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.
Basic
and Diluted Earnings per Share
Basic
earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares and dilutive potential
common shares outstanding during 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 nine months ended September 30, 2017, the Company incurred a net loss of $1,372,345, reported net cash provided by operations
of $103,702 and has an accumulated deficit of $7,394,698. 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 September 30, 2017 and
December 31, 2016 are as follows:
|
|
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
|
|
|
|
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 $38,421 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
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 face value of $92,000. This resulted in a gain on extinguishment of debt of $36,193 for the nine months ended
September 30, 2017 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 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 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 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
|
|
|
|
|
|
|
|
|
|
|
(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 September 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 to 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 $4,620 for the nine months ended September 30, 2017.
|
|
|
|
|
(5)
|
Amortization
expense related to loan costs of this loan totaled $19,321 for the nine months ended September 30, 2017.
|
|
|
|
|
(6)
|
Amortization
expense related to loan costs of this loan totaled $3,270 for the nine months ended September 30, 2017.
|
|
|
|
|
(7)
|
Amortization
expense related to loan costs of this loan totaled $8,047 for the nine months ended September 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, 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.
See
Subsequent 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
|
|
|
|
|
|
|
|
|
|
(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
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. Subsequent to September 30, 2017, we completed the refinance of the Sparta facility and repaid
the subordinated debt from the proceeds of the new HUD loan.
|
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
|
|
(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 nine
months ended September 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 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 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 September 30, 2017 and December 31, 2016 are summarized below:
|
|
|
|
|
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
|
|
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 nine months ended
September 30, 2017:
|
|
|
|
Beginning Balance January 1, 2017
|
|
$
|
246,451
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
(151,080
|
)
|
|
|
|
|
|
Ending Balance, September 30, 2017
|
|
$
|
95,371
|
|
The
significant assumptions used in the Black-Scholes option pricing model as of September 30, 2017 and December 31, 2016 include
the following:
|
|
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
|
|
10.
LEGAL PROCEEDINGS
The
Company and/or its affiliated subsidiaries are involved in the following litigation:
Southern
Tulsa, LLC v. Healthcare Management of Oklahoma, LLC,
District Court of Tulsa County, State of Oklahoma, Case No. CJ –
2016- 01781.
This
matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former
operator at that facility. The Court has ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters
are pending.
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. 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; and as a result, we believe the likelihood of a material adverse result
is remote.
Verizon
Construction, Inc., v. Southern Tulsa, LLC, et. al.,
District Court of Tulsa County, Oklahoma, Case No. CJ-2015-04326.
This
is a mechanic’s lien foreclosure action on the Southern Hills facility in Tulsa arising from work performed. The Plaintiff
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 $25,000 as a probable loss for this matter in the consolidated financial statements for the year ended December
31, 2016 and nine months ended September 30, 2017, based upon an initial draft settlement agreement but intends to vigorously
defend the matter if a settlement is not achieved. Subsequent to September 30, 2017, this matter was settled in consideration
of payment in the amount of $20,000.
11.
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. 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
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.
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 “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.
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 result 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, 2016 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:
●
|
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.
|
Overview
Global
Healthcare REIT, Inc. was organized for the purpose of investing in real estate related to the long-term care industry.
We
plan to elect to be treated as a real estate investment trust (REIT) 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:
●
|
Compelling
demographics driving the demand for healthcare services;
|
●
|
Specialized
nature of healthcare real estate investing; and
|
●
|
Ongoing
consolidation of a fragmented healthcare real estate sector.
|
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. The following table provides summary information regarding these
facilities at September 30, 2017:
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
|
|
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
|
|
$
|
-
|
|
|
|
-
|
|
(1)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding
the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets
and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed
to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time
as the note is repaid. 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.
|
(2)
|
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. In March 2017, all of the former members of Providence
HR Investors, LLC executed a Forbearance Agreement in which each agreed to (i) waive default interest, (ii) waive any equity
ratchet adjustment and (iii) extend the maturity date of the note to December 31, 2017. Subsequent to September 30, 2017,
the notes were repaid.
|
(3)
|
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 rejected the Goodwill lease and has not made any binding elections, but has verbally
represented that he intends to affirm the leases of Middle Georgia and Edwards Redeemer.
|
(4)
|
Goodwill
was closed by regulators in January 2016 and did not generate any revenue in 2016. 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 operator expended approximately $2.0 million on renovations and in December 2016 took its first patients. In the first
quarter of 2017, the operator completed all relicensing and Medicare/Medicaid reimbursement approvals, at which time the lease
became effective. First residents were admitted in December 2016. Rent for the first year which began February 1, 2017 is
$16,667 per month plus an occupancy rent based on census, payable at the rate of $2,000 per month for every ten residents,
with an annual cap of $312,000.
|
(5)
|
We
executed a new lease in August 2016 with a new operator, which renamed the facility Grand Prairie Nursing Home. Under the
new lease, the operator agreed to undertake significant renovations and we agreed to cover its operating losses during what
was characterized as a “straddle period”. The lease does not formally commence until the end of the straddle period.
During the straddle period the operator does not have an obligation to pay rent, and any operating profits must be paid to
us as reimbursement for our advances to cover the tenant’s operating losses. By lease amendment executed subsequent
to June 30, 2017, the Straddle Period will end the earlier of (i) the date we have recouped all advances made during the Straddle
Period or (ii) February 28, 2018. If we have not recouped all of our advances by February 28, 2018, either party may terminate
the lease.
|
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 Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Rental
revenues for the nine-month periods ended September 30, 2017 and 2016 totaled $2,303,355 and $2,310,584, respectively, a decrease
of $7,229. On January 22, 2016, the lease operator that leased our Middle Georgia, Edwards Redeemer, Golden Years and Goodwill
properties filed a voluntary petition in bankruptcy under Chapter 11 of the U.S Bankruptcy Code, 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 to
our assisted living facility in Tulsa, Oklahoma which were to have begun April 1, 2015; however, additional renovations are required
to open the facility. The senior lender for Grand Prairie (formerly Golden Years Manor) has agreed 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.
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 and $1,616,476 for the nine-month periods ended September 30, 2017 and 2016, respectively,
a decrease of $739,853. The decrease was predominantly due to reductions 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.
Property
taxes, insurance, and other operating expenses totaled $375,171 and $202,635 for the nine-month periods ended September 30, 2017
and 2016, respectively. The increase of $172,536 is predominantly due to advances of $267,198 to the operator of GL Nursing 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 insurance related
to the ALF and ILF at our Southern Hills Retirement Center.
Depreciation
expense decreased $262,848 from $1,182,849 for the nine months ended September 30, 2016 to $920,001 for the nine months ended
September 30, 2017. The decrease is predominantly due to an adjustment in March 2016 that increased accumulated depreciation by
$269,075, and the sale 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.
Interest
income decreased $32,148 from $32,149 for the nine months ended September 30, 2016 to $1 recognized for the nine 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 $1,971,025 for the nine months ended September 30, 2016 to $1,723,252 for the nine months ended
September 30, 2017 as a result of repayment in full of Wash / Greene senior and subordinated 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, the Company had cash and cash equivalents of $105,485 on hand. 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 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 rental revenues received and existing cash on hand. We have refinanced
or plan to renew senior debt that mature during 2017, as 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.
Cash
provided by operating activities was $ 103,702 for the nine months ended September 30, 2017 compared to cash used in operating
activities of $506,278 for the nine months ended September 30, 2016. Cash flows from operations were primarily impacted by the
increase in rental revenues received during the first quarter of 2017 as well as lease security deposits received during 2017.
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 for the nine-month period ended September 30, 2017, compared to cash provided by investing activities
of $2,672,738 for the nine-month period ended September 30, 2016. For the nine 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.
Cash
used in financing activities was $176,280 for the nine months ended September 30, 2017. For the nine months ended September
30, 2016, cash used in financing activities was $885,500. During the nine months ended September 30, 2017, we issued $425,000
in debt and made payments on debt of $399,876. During the nine months ended September 30, 2016, we did not issue any new debt
and made payments on debt of $829,688.
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
|
|
|
|
|
|
(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 September 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.
|
(3)
|
The
$80,193 debt at Goodwill Nursing Home was incurred to pay off accrued interest on the original primary note.
|
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.
|
(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)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, all of the holders
of the Goodwill subordinated note executed an Agreement Among Lenders pursuant to which they (i) waived all equity ratchets
and (ii) extended the maturity date of their notes to June 30, 2017. In exchange, Goodwill Hunting LLC agreed to pay the investors
a one-time premium equal to 5% of the principal amount of each individual note (approximately $64,000) as such time as the
note is repaid. For the year ended December 31, 2016, a premium of $64,000 has been recognized into earnings. 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.
|
|
(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
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. Subsequent to September 30, 2017, the senior and subordinated debt was repaid from the proceeds
of a new HUD loan.
|
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 that 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 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.
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.
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.
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.