RHE Regional Health Properties Inc

Notes to Unaudited Consolidated Financial Statements

September 30, 2018

Description of Business

AdCare Health Systems, Inc. (“AdCare”) is the former parent of, and the predecessor issuer to, Regional Health Properties, Inc. (“Regional Health” and, together with its subsidiaries, the “Company” or “we”). On September 29, 2017, AdCare merged (the “Merger”) with and into Regional Health, a Georgia corporation and wholly owned subsidiary of AdCare formed for the purpose of the Merger, with Regional Health continuing as the surviving corporation in the Merger. The Company now has many of the characteristics of a real estate investment trust (“REIT”) and is focused on the ownership, acquisition and leasing of healthcare related properties. For a description of the Merger, see Part II, Item 8, Financial Statements and Supplemental Data , Note 1 – Summary of Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 16, 2018 (the “Annual Report”).

The Company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. The Company’s business primarily consists of leasing and subleasing healthcare facilities to third-party tenants, which operate the facilities. The operators of the Company’s facilities provide a range of healthcare services, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.

As of September 30, 2018, the Company owned, leased, or managed for third parties 30 facilities , primarily in the Southeast United States. Of the 30 facilities, the Company: (i) leased 14 owned facilities and subleased 11 leased skilled nursing facilities to third-party tenants; (ii) leased two owned assisted living facilities to third-party tenants; and (iii) managed on behalf of third-party owners two skilled nursing facilities and one independent living facility (see Note 7 – Leases and Part II, Item 8, Financial Statements and Supplemental Data , Note 7 – Leases in the Annual Report for a more detailed description of the Company’s leases).

The Company leases its currently-owned healthcare properties, and subleases its currently-leased healthcare properties, on a triple-net basis, meaning that the lessee (i.e., the third-party operator of the property) is obligated under the lease or sublease, as a pplicable, for all costs of operating the property , including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual rent escalation clauses.

When used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), unless otherwise specifically stated or the context otherwise requires, the terms:

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. 

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You should read the unaudited consolidated financial statements in this Quarterly Report together with the historical audited consolidated financial statements of the Company for the year ended December 31, 2017, included in the Annua l Report. See Part II, Item 8, Financial Statements and Supplementary Data , Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of all significant accounting policies. During the three and nine months ended September 30 , 2018, there were no material changes to the Company’s policies, except as noted below in Recently Adopted Standards.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue Recognition and Allowances

Triple-Net Leased Properties. The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectability is probable. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in straight-line rent receivable on our consolidated balance sheets. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company’s facilities, rental income for the affected facilities will be recognized only upon cash collection, and any accumulated straight-line rent receivable will be reversed in the period in which the Company deems rent collection no longer probable. Rental revenues for five facilities located in Ohio and one facility in North Carolina are recorded on a cash basis (for additional information with respect to such facilities, see Note 7 – Leases ).

Allowances. The Company assesses the collectability of its rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectability of rent receivables and working capital loans to tenants on several factors, including payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments or payments on a working capital loan, then the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectability of future rent payments required by a lease or required from a working capital loan to a tenant, then the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates, see Note 7 – Leases ).

As of September 30, 2018 and December 31, 2017, the Company reserved for approximately $1.4 million and $2.6 million, respectively, of gross patient care related receivables arising from its legacy operations. Allowances for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types. Any changes in patient care receivable allowances are recognized as a component of discontinued operations. All uncollected patient care receivables were fully reserved at September 30, 2018 and December 31, 2017.  Accounts receivable, net, totaled $0.9 million at September 30, 2018 and $0.9 million at December 31, 2017.

Extinguishment of Debt

The Company recognizes extinguishment of debt when the criteria for a troubled debt restructure are not met and the change in the debt terms is considered substantial. The Company calculates the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt (including deferred finance fees) and recognizes a gain or loss on the income statement of the period of extinguishment.

Pre-paid expenses and other

As of September 30, 2018 and December 31, 2017, the Company had $0.3 million and $0.3 million, respectively, in pre-paid expenses and other, primarily for directors’ and officers’ insurance and mortgage insurance premiums.

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Self-Insurance

The Company has self-insured against professional and general liability claims since it discontinued its healthcare operations during 2014 and 2015 in connection with its transition from an owner and operator of healthcare properties to a healthcare property holding and leasing company (see Part II, Item 8, Financial Statements and Supplementary Data , Note 15 – Commitments and Contingencies in the Annual Report for more information). The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions, including estimated settlement amounts and legal fees and other expenses anticipated to be incurred in such settlement, as applicable; and (v) the venues in which the actions have been filed or will be adjudicated. The Company believes that most of the professional and general liability actions are defensible and intends to defend them through final judgment unless settlement is more advantageous to the Company. Accordingly, the self-insurance reserve reflects the Company's estimate of settlement amounts for the pending actions, if applicable, and legal costs of settling or litigating the pending actions, as applicable. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve may not be sufficient to cover the settlement amounts actually incurred in settling the pending actions, or the legal costs actually incurred in settling or litigating the pending actions. See Note 8 – Accrued Expenses and Other .

Other o p erating expenses and Other expense

Other operating expenses decreased by approximately $0.2 million, or 50.7%, to $0.3 million for the three months ended September 30, 2018, compared with $0.5 million for the same period in 2017. The decrease is due to: (i) a $0.3 million settlement expense related to Mr. McBride, the Company’s former Chief Executive Officer and Chairman of the Board, in the prior year period; and (ii) $0.1 million investigation expense related to an internal investigation in the prior year period, offset by: (i) $0.1 million accrual for property taxes related to facilities whose rent payments are being recognized on a cash received basis; and (ii) approximately $0.1 million increase in contract services.

Other expense decreased by $0.1 million, or 100.0%, for the three months ended September 30, 2018, compared with $0.1 million for the same period in 2017 and decreased by $0.4 million, or 97.4%, for the nine months ended September 30, 2018, compared with $0.4 million for the same period in 2017. The prior period charge was related to expenses for the Merger.

Reclassifications

Certain reclassifications have been made to the 2017 financial information to conform to the 2018 presentation with no effect on the Company's consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities, or stockholders' equity. Reclassifications were made to the consolidated statements of operations for the three and nine months ended September 30, 2017 to conform the presentation of: (i) management fee revenues and its related expense, previously reported as general and administrative expense; and (ii) provision for doubtful accounts previously reported as Other operating expenses. Reclassifications were made to the consolidated statements of cash flows for the nine months ended September 30, 2017 to include restricted cash in cash and restricted cash at the beginning-of-period and end-of-period totals.

Recently Adopted Standards

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers , as codified in Accounting Standards Codification (“ ASC”) 606, which requires a company to recognize revenue when the company transfers control of promised goods and services to a customer. Revenue is recognized in an amount that reflects the consideration to which a company expects to receive in exchange for such goods and services. The new revenue standard does not apply to rental revenues, which are the Company’s primary source of revenue. A company is also required to disclose sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The Financial Accounting Standards Board (“FASB”) has issued several amendments to the standards, which are intended to promote a more consistent interpretation and application of the principals outlined in the standard. The new revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.

The Company has one contract (the “Management Contract”) to manage two skilled nursing facilities and one independent living facility for a third party, with payment for each month of service received in full on a monthly basis.

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Companies are permitted to adopt the standard using a retrospective transition method (i.e., restate all prior periods presented) or a cumulative effect method (i.e., recognize the cumulative effect of initially applying the guidance at the date of initial application with no restatement of prior peri ods). However, both methods allow companies to elect certain practical expedients on transition that will help to simplify how a company restates its contracts. The Company adopted the standard using the cumulative effect method. As a result of the adoptio n of this guidance, for the three and nine months ended September 30 , 2017, the Company reclassified expenses related to the Management Contract from General and administrative expense to Cost of management fees on the consolidated statements of operations .

In August 2016, the FASB issued ASU 2016-1 5, Classification of Certain Cash Receipts and Cash Payments , which clarifies the treatment of several cash flow categories. In addition, the guidance clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the guidance for the three and nine month period ending September 30, 2018 with an effective date of January 1, 2018. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 , Restricted Cash , which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted using a retrospective transition method to each period presented. The Company adopted the guidance with an effective date of January 1, 2018. Given this change, transfers between cash and restricted cash are no longer reported as cash flow activities on the statement of cash flows and hence reclassifications were made to the consolidated statements of cash flows for the three and nine months ended September 30, 2017 to include restricted cash in cash and restricted cash at the beginning-of-period and end-of-period totals.

Recent Significant Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 , Leases , which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which amends ASU 2016-02 , to provide: (i) entities with an additional (and optional) transition method to adopt the new leases standard; and (ii) lessors with a practical expedient option, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if certain criteria are met. ASU 2016-02 and ASU 2018-11 are not effective for the Company until January 1, 2019, with early adoption permitted. Entities currently are required to adopt the new leases standard using either: (i) a modified retrospective transition method, where an entity initially applies the new leases standard (subject to specific transition requirements and optional practical expedients) at the beginning of the earliest period presented in the financial statements; or (ii) to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is evaluating this guidance and the impact to the Company, as both lessor and lessee, on its consolidated financial condition, results of operations and cash flows.

See Part II, Item 8, Financial Statements and Supplementary Data , Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of the other accounting pronouncements the Company is currently evaluating.

Basic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the respective period. Diluted earnings per share is similar to basic earnings per share except: (i) net income or loss is adjusted by the impact of the assumed conversion of convertible debt into shares of common stock; and (ii) the weighted-average number of shares of common stock outstanding includes potentially dilutive securities (such as options, warrants, non-vested common stock and additional shares of common stock issuable under convertible debt outstanding during the period) when such securities are not anti-dilutive. Potentially dilutive securities from options, warrants and unvested restricted shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from convertible debt are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For the three and nine months ended September 30, 2018 and 2017, approximately 1.2 million and 2.4 million shares, respectively, of potentially dilutive securities were excluded from the diluted loss per share calculation because including them would have been anti-dilutive for such periods.

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The following tables provide a reconciliation of net income ( loss ) for continuing and discontinued oper ations and the number of shares of common stock used in the computation of both basic and diluted earnings per share:

The Company plans to undertake measures to grow its operations, streamline its cost infrastructure and otherwise increase liquidity by: (i) replacing certain tenants who are in default of their lease payment terms; (ii) increasing future lease revenue through acquisitions and investments in existing properties; (iii) modifying the terms of existing leases; (iv) refinancing or repaying debt classified as current and longer term debt to reduce interest costs and mandatory principal repayments; and (v) reducing general and administrative expenses.

Management anticipates access to several sources of liquidity, including cash on hand, cash flows from operations (assuming that new tenants, for five of the Company’s facilities located in Ohio, are in place by December 31, 2018), and debt refinancing during the twelve months from the date of this filing. At September 30, 2018, the Company had $1.9 million in unrestricted cash. During the nine months ended September 30, 2018, the Company generated positive cash flow from continuing operations of $1.3 million and anticipates continued positive cash flow from operations in the future.

On June 8, 2018, the Board indefinitely suspended dividend payments with respect to the Series A Preferred Stock. Such dividends are currently in arrears for the fourth quarter 2017 and the first, second and third quarter 2018 dividend periods. The Board plans to revisit the dividend payment policy with respect to the Series A Preferred Stock on an ongoing basis. The Board believes that the dividend suspension will provide the Company with additional funds to meet its ongoing liquidity needs.

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As of September 30, 2018, the Co mpany had total current liabilities of $ 34.5 million and total current assets of $ 5.0 million, resulting in a working capital deficit of approximately $29.5 million. Included in current liabilities at September 30, 2018 is the $ 25.7 million current portion of the Company’s $ 80.9 million in indebtedness. The current portion of such indebtedness is comprised of approximately : (i) $1 9 . 3 million of long term- debt (including a $0.5 million “ tail fee ” ) under the Pinecone Credit Facility (as defined below) , net of $0.1 associated deferred financing costs , classified as current due to the Company’s short-term forbearance agreement pursuant to noncompliance with certain covenants under the Pinecone Credit Facility and the lender’s ability to exercise default- related rights and remedies, including the accelerati on of the maturity of such debt ( as d iscussed below in this note) ; (ii) $ 4. 1 million of senior debt associated with one facility in Oklahoma as describ ed below maturing in April 2019, which we intend to seek to refinance as described below; (iii) $1. 4 million of mortgage indebtedness included in the Company’s senior guaranteed debt; and (i v ) other mortgage indebtedness of approximately $ 0. 9 million. The Company anticipates net principal repayments of appr oximately $ 2. 4 million (excluding the potential acceleration of the $1 9 . 3 million debt under the Pinecone Credit Facility and the $4. 1 million associated with one facility located in Oklahoma maturing in April 2019 ) during the next twelve-month period and approximately $0. 8 million of payments on other non-routine debt .

The Company intends to seek to refinance the Company’s credit facility with Housing & Healthcare Finance, LLC (the “Quail Creek Credit Facility”), which is secured by a first mortgage on the real property and improvements constituting the Nursing & Rehabilitation Center located in Oklahoma City, Oklahoma and currently has a maturity date of April 30, 2019. There is no assurance that the Company will be able to do so on terms that are favorable to the Company or at all.

On February 15, 2018, (the “Closing Date”) the Company entered into a debt refinancing (“Pinecone Credit Facility”) with Pinecone Realty Partners II, LLC (“Pinecone”), with an aggregate principal amount of $16.25 million, which refinanced existing mortgage debt in an aggregate amount of $8.7 million on three skilled nursing properties known as Attalla, College Park and Northwest (the “Facilities”), and provided additional surplus cash flow of $6.3 million for general corporate needs (see Note 9 – Notes Payable and Other Debt ). Regional Health is a guarantor of the Pinecone Credit Facility. Certain of the notes under the Pinecone Credit Facility are also guaranteed by certain wholly-owned subsidiaries of Regional Health. The surplus cash flow from the Pinecone Credit Facility was used to fund $2.4 million of self-insurance reserves for professional and general liability claims with respect to 25 professional and general liability actions, and to fund repayment of $1.5 million in convertible debt. The remaining $2.4 million in surplus cash proceeds from the Pinecone Credit Facility is used for general corporate purposes.

On May 10, 2018, Pinecone notified the Company in writing (the “Default Letter”) that the Company was in default under certain financial covenants of the loan documents evidencing the Pinecone Credit Facility (the “Pinecone Loan Documents”).  On May 18, 2018, the Company and certain of its subsidiaries entered into a Forbearance Agreement with Pinecone with respect to the specified events of default set forth therein (the “Original Forbearance Agreement”), pursuant to which, among other things,  additional fees in the amount of $0.4 million were added to the outstanding principal balance under the Pinecone Credit Facility. The forbearance period under the Original Forbearance Agreement terminated on July 6, 2018 because the Company did not satisfy conditions in the Original Forbearance Agreement that required the Company to enter into an agreement with Pinecone to support a transaction or series of transactions to remedy the defaults specified in the Default Letter and the Original Forbearance Agreement.

On September 6, 2018, the Company and certain of its subsidiaries entered into a new Forbearance Agreement (the “New Forbearance Agreement”) with Pinecone pursuant to which Pinecone agreed, subject to the terms and conditions set forth in the New Forbearance Agreement, to forbear for a specified period of time from exercising its default-related rights and remedies (including the acceleration of the outstanding loans and charging interest at the specified default rate) with respect to specified events of default (the “Specified Defaults”) under the Pinecone Loan Documents.

The forbearance period under the New Forbearance Agreement is from September 6, 2018, the date on which certain conditions set forth in the New Forbearance Agreement were satisfied, to December 31, 2018, unless the forbearance period is earlier terminated as a result of specified termination events, including a default or event of default under the Pinecone Loan Documents (other than any Specified Defaults) or any failure by the Company or its subsidiaries to comply with the New Forbearance Agreement.

Pursuant to the New Forbearance Agreement, the Company and Pinecone agreed to amend certain provisions of the Pinecone Loan Documents. Such amendments, among other things: (i) remove the restriction on prepaying the loans during the thirteen (13) month-period after the Closing Date; (ii) provide a thirty (30)-day cure period for certain events of default and a fifteen (15)-day cure period for certain failures to provide information or materials pursuant to the Pinecone Loan Documents; (iii) increase the finance fee payable on repayment or acceleration of the loans, depending on the time at which the loans are repaid ($0.25 million prior to December 31, 2018 and $0.5 million thereafter); and (iv) increase the outstanding principal balance owed by (a) approximately $0.7 million to reimburse Pinecone for its accrued and unpaid expenses and to pay outstanding interest payments for prior interest periods and (b) $1.5 million fee described as a non-refundable payment of additional interest. During the forbearance period under the New Forbearance Agreement, the interest rate will revert from the default rate of 18.5% per annum to the ongoing rate of 13.5% per annum.

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Upon the occurrence of an event of de fault (other than the Specified Defaults), or the expiration or termination of the forbearance period under the New Forbearance Agreement , Pinecone may declare the entire unpaid principal balance under the Pinecone Credit Facility, together with all accrue d interest and other amounts payable to Pinecone thereunder, immediately due and payable. Subject to the terms of the Pinecone Loan D ocuments, Pinecone may foreclose on the c ollateral securing the Pinecone Credit Facility (the “Collateral”) . The Collateral includes, among other things, the Facilities and all assets of the borrowers owning the Facilities, the leases associated with the Facilities and all revenue generated by the Facilities, and rights under a promissory note in the amount of $ 5.2 million, is sued by Regional Health pursuant to the Pinecone Credit Facility in favor of one of its subsidiaries, which subsidiary is a borrower and guarantor under the Pinecone Credit Facility.

In addition, the equity interests in substantially all of Regional Health’s direct and indirect, wholly-owned subsidiaries (the “Pledged Subsidiaries”) have been pledged to Pinecone as part of the Collateral. The assets and operations of the Pledged Subsidiaries constitute substantially all of the Company’s assets and operations. Upon the occurrence of an event of default (other than the Specified Defaults) or the expiration or termination of the forbearance period under the New Forbearance Agreement, Pinecone may, in addition to its other rights and remedies, remove any or all of the managers of the Pledged Subsidiaries and appoint its own representatives as managers of such Pledged Subsidiaries. If Pinecone elects to appoint its own representatives as managers of the Pledged Subsidiaries, then such managers would control such subsidiaries and their assets and operations and could potentially restrict or prevent such subsidiaries from paying dividends or distributions to Regional Health. As a holding company with no significant operations, Regional Health relies primarily on dividends and distributions from the Pledged Subsidiaries to meet its obligations and pay dividends on its capital stock (when and as declared by the Board.)

The Pinecone Loan Documents provide that Pinecone’s rights and remedies upon an event of default are cumulative, and that Pinecone may exercise (although it is not obligated to do so) all or any one or more of the rights and remedies available to it under the Pinecone Loan Documents or applicable law. The Company does not know which rights and remedies, if any, Pinecone may choose to exercise under the Pinecone Loan Documents upon the occurrence of an event of default (other than the Specified Defaults) or the expiration or termination of the forbearance period under the New Forbearance Agreement. If Pinecone elects to appoint its own representatives as managers of the Pledged Subsidiaries, to accelerate the indebtedness under the Pinecone Credit Facility, or to foreclose on significant assets of the Company (such as the Facilities and/or the equity interests in the Pledged Subsidiaries), then it will have a material adverse effect on the Company’s liquidity, cash flows, financial condition and results of operations, and the Company’s ability to continue operations will be materially jeopardized.

The current forbearance period under the New Forbearance Agreement expires on December 31, 2018, unless earlier terminated upon the occurrence of specified termination events under the New Forbearance Agreement. As of such date, Pinecone will no longer be required to forbear from exercising its default-related rights and remedies with respect to the Specified Defaults and may exercise all of its rights and remedies with respect to the Pinecone loan Documents at that time.

As of September 30, 2018, eight of the Company’s facilities were in arrears’ on their rent payments. Combined cash rental payments for all eight facilities total $0.4 million per month, or approximately 21% of our anticipated total monthly rental receipts. As of September 30, 2018 the facilities in Ohio owe in aggregate approximately $1.8 million and the Symmetry related facilities owe in aggregate approximately $0.6 million. Five of these facilities located in Ohio and leased to affiliates of Beacon Health Management, LLC (“Beacon”) and the Company has issued default notices to the operators of such facilities. Of the remaining three facilities in arrears on their rental payments, one such facility is located in North Carolina and two such facilities are located in South Carolina and all three of such facilities are leased to affiliates of Symmetry Healthcare Management, LLC (“Symmetry”) (for additional information with respect to such facilities, see Note 7 – Leases ).

On September 20, 2018, the Company reached an agreement with Symmetry, pursuant to which Symmetry agreed to a payment plan for rent arrears and the Company agreed to an aggregate reduction of approximately $0.6 million in annualized rent with respect to the three facilities leased to Symmetry and waived approximately $0.2 million in rent that was in arrears with respect to such facilities, upon which Symmetry recommenced monthly rent payments with respect to such facilities of $0.1 million in the aggregate, starting with the September 1, 2018 amounts due.

Management is currently in negotiations with the operators of the facilities located in Ohio to obtain payment of all unpaid rents and to implement plans to ensure the future payment of rent. Such plans may include replacing one or more of the current operators or negotiating a new agreement with one or more of the current operators to resume rent payments. If the Company agrees to additional or revised terms with any current operator, such terms may be less favorable to the Company than the terms provided in the current lease. Management believes that the Company will attain a resolution that allows for the resumption of rent at the remaining five facilities within a relatively short time frame. If the Company is unable to resume collection of rent with respect to the five facilities, it will hinder the Company’s ability to meet its obligations arising within one year of the date of issuance of these consolidated financial statements.

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On August 28, 2018, the Company received a deficiency letter (the “Letter”) from NYSE American LLC (“NYSE American” or the “Exchange”) stating that the Company is not in compliance with the continued listing standards as set forth in Section 1003(f)(v) of the NYSE American Company Guide (the “Company Guide”).  Specifically, the Letter informed the Company that the Exchange has determined that shares of the Company’s securities have been selling for a low price per share for a substantial period of time and, pursuant to Section 1003(f)(v) of the Company Guide, the Company’s continued listing is predicated on the Company effecting a reverse stock split of the common stock or otherwise demonstrating sustained price improvement within a reasonable period of time , which the Exchange determined to be no later than February 27, 2019. As a result of such noncompliance, the Company has become subject to the procedures and requirements of Section 1009 of the Company Guide.

The Company intends to regain compliance with the continued listing standards set forth in the Company Guide by undertaking a measure or measures that are in the best interests of the Company and its shareholders. In connection with such efforts, the Company is submitting for approval at the Company’s 2018 annual meeting of shareholders a proposal to amend the Company’s Amended and Restated Articles of Incorporation to effect a reverse stock split of the common stock at a ratio of between one-for-six and one-for-twelve, as determined by the Board in its sole discretion.  The common stock and Series A Preferred Stock will continue to be listed on the NYSE American while the Company seeks to regain compliance with the continued listing standard noted, subject to the Company’s compliance with other continued listing requirements. If the Company fails to demonstrate a sustained price improvement or effect a reverse stock split of its common stock by February 27, 2019, then the Exchange may commence delisting procedures. The Company does not expect the Letter to affect the Company’s business operations, or its reporting obligations under the Securities and Exchange Commission regulations and rules, however management’s ability to raise additional capital through the issuance of equity securities and the terms upon which we are able to raise such capital may be adversely affected if we are unable to maintain the listing of the common stock and the Series A Preferred Stock on the NYSE American.

Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of the Company’s consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. The Company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

In applying applicable accounting guidance, management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company’s obligations due over the next twelve months, the likelihood that the Company will be able to comply with the requirements in the Pinecone Loan Documents, including the New Forbearance Agreement, and Pinecone’s remedies in the event of non-compliance, as well as the Company’s recurring business operating expenses.

There is no assurance that the Company will be able to comply with all of the requirements under the Pinecone Loan Documents, including the New Forbearance Agreement. Such compliance depends, in part, on the Company’s ability to work with outside parties, which is not within the Company’s exclusive control. If the Company is unable to comply with all the requirements under the Pinecone Loan Documents, including the New Forbearance Agreement, and Pinecone were to accelerate all obligations under the Pinecone Loan Documents or otherwise exercise its default-related rights or foreclose on the Collateral, then it would have a material adverse consequence on the Company’s ability to meet its obligations arising within one year of the date of issuance of these consolidated financial statements.

The Company plans to continue to undertake measures to refinance certain loans, including the Pinecone Credit Facility, and to streamline its cost infrastructure. There is no assurance however, that these efforts will be successful. Due to the inherent risks, unknown results, and significant uncertainties associated with each of these matters along with the direct correlation between these matters and the Company’s ability to satisfy the financial obligations that may arise over the applicable one-year period, the Company is unable to conclude that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance.

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Cash collateral —In securing mortgage financing from certain lending institutions, the Company and certain of its wholly-owned subsidiaries are required to deposit cash to be held as collateral in accordance with the terms of such loan agreements.

Replacement reserves —Cash reserves set aside for non-critical building repairs for completion within the next 12 months, pursuant to loan agreements.

Escrow deposits —In connection with financing secured through the Company’s lenders, several wholly-owned subsidiaries of the Company are required to make monthly escrow deposits for taxes and insurance.

Restricted cash for other debt obligations —In compliance with certain financing and insurance agreements, the Company and certain wholly-owned subsidiaries of the Company are required to deposit cash held as collateral by the lender or in escrow with certain designated financial institutions.

HUD and other replacement reserves —The regulatory agreements entered into in connection with the financing secured through the U.S. Department of Housing and Urban Development (“HUD”) require monthly escrow deposits for replacement and improvement of the HUD project assets.

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The following table summarizes total depreciation and amortization expense for the three and nine months ended September 30, 2018 and 2017:

The following table summarizes amortization expense for the three and nine months ended September 30, 2018 and 2017:

Expected amortization expense for all definite-lived intangibles for each of the years ended December 31 is as follows: 

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The following table summarizes the carrying amount of goodwill:

The Company does not amortize indefinite-lived intangibles, which consist of separable bed licenses and goodwill.

Operating Leases

The Company leases eleven skilled nursing facilities from unaffiliated owners under non-cancelable leases, all of which have rent escalation clauses and provisions requiring payment of real estate taxes, insurance and maintenance costs by the lessee. Each of the skilled nursing facilities that are leased by the Company are subleased to and operated by third-party tenants. The Company also leases certain office space located in Suwanee, Georgia and Atlanta, Georgia. The Atlanta office space is subleased to a third-party tenant.

As of September 30, 2018, the Company is in compliance with all operating lease financial covenants, except with respect to the leases for two facilities located in Georgia (the “Omega Facilities). Pursuant to the leases for the Omega Facilities, the Company is required to maintain a minimum tangible net worth of $5.0 million As of the date of filing, the Company’s tangible net worth is approximately $2.7 million, and the Company has not obtained a waiver with respect to the applicable financial covenant. The Company’s annual cash inflow from the Omega Facilities is approximately $2.2 million, with associated rent expense outflow being approximately $2.0 million, such leases expire in 2025.

Leased and Subleased Facilities to Third-Party Operators

The Company leases or subleases 27 facilities (16 owned by the Company and 11 leased to the Company) to third-party tenants on a triple net basis, meaning that the lessee (i.e., the third-party tenant of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.

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Arkansas Leases and Facilities .  Until February 3, 2016, the Company subleased nine facilities located in Arkansas (the “Arkansas Facilities”) to affiliates of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated each Aria Sublease due to the a pplicable Aria affiliate’s failure to pay rent pursuant to the terms of such sublease. From April 1, 2016 to October 6, 2016, the Company leased the Arkansas Facilities to Skyline Healthcare LLC (“Skyline”), pursuant to a Master Lease Agreement, dated Febr uary 5, 2016 (the “Skyline Lease”). The term of the Skyline Lease commenced on April 1, 2016. In connection with the Skyline Lease, the Company entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million, consisting of cash consideration in the amount of $52.0 mil lion and a promissory note with a principal amount of $3.0 million and a maturity date of March 31, 2022 (the “Skyline Note”). The Company completed the sale of the Arkansas Facilities to the Purchaser on October 6, 2016. The Skyline Note is guaranteed by Joseph Schwartz and Roselyn Schwartz (collectively, the “Guarantors”), pursuant to a Guaranty Agreement, dated September 30, 2016 (the “Guaranty”), executed by the Guarantors in favor of the Company (see Part II, Item 8, Financial Statements and Supplement ary Data Note 10 – Acquisitions and Dispositions included in the Annual Report).

In connection with the closing of the sale of the Arkansas Facilities, the Company entered into a Subordination and Standstill Agreement, dated September 26, 2016 (the “Subordination Agreement”), with the Canadian Imperial Bank of Commerce (formerly the PrivateBank and Trust Company), as agent for the lenders specified therein (collectively, the “Lenders”). Pursuant to the Subordination Agreement, the Company agreed to subordinate its claims and rights to receive payment under the Skyline Note or any document which may evidence or secure the indebtedness evidenced by such note, other than the Guaranty (collectively, the “Subordinated Debt”), to the claims and rights of the Lenders to receive payment under certain revolving loans, with an initial aggregate principal amount of $6.0 million, and certain term loans, with an aggregate principal amount of $45.6 million (collectively, the “Loans”), each extended by certain of the Lenders to affiliates of Skyline (collectively, the “Skyline Borrowers”). Pursuant to the Subordination Agreement, the Company may not accept payment of the Subordinated Debt, or take any action to collect such payment, if: (i) the Company has received notice from the Lenders that the Skyline Borrowers have failed to meet a specified financial covenant with respect to the Loans; or (ii) a default has occurred or is continuing with respect to the Loans. Pursuant to the Guaranty, the Guarantors have agreed to pay the outstanding principal amount of the Skyline Note, together with all accrued and unpaid interest: (x) on the date on which the Skyline Borrowers or an affiliate thereof repays or refinances any of the Loans; (y) on the date on which the Skyline Borrowers or its affiliates sells any of the Arkansas Facilities which the Skyline Borrowers or its affiliates purchased with proceeds from the Loans; or (z) upon written notice from the Company to the Guarantors any time on or after the two year anniversary of the Skyline Note. As of the date of filing, the Company has not received written notice from the Lenders regarding conditions prohibiting repayment of the Skyline Note.

On April 24, 2018, Skyline entered into a management contract with a third party to manage the Arkansas Facilities. On October 12, 2018, the Company accepted a payment of approximately $1.0 million from such third party in full satisfaction of the Skyline Note, which represents a discount from the full amount of $3.0 million outstanding thereunder. In connection with such payment, the Company agreed to release the Guarantors from their obligations under the Guaranty.

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Beacon. On August 1, 2015, the Company entered into a lease inducement fee agreement with certain affiliates (collectively, the "Beacon Affiliates") of Beacon, pursuant to which the Company paid a fee of $0.6 million as a lease inducement for certain Beacon Affiliates to enter into sublease agreements and to commence such subleases and transfer operations thereunder (the “Beacon L ease Inducement”). As of September 30, 2018, the balance of the Beacon Lease Inducement was approximately $0.5 million. On April 24, 2018, five Beacon affiliates (the “Ohio Beacon Affiliates”) informed the Company in writing that they would no longer be op erating five (four owned and one leased by the Company) of the Company’s facilities located in Ohio (the “Ohio Beacon Facilities”) and that they would surrender operation of such facilities to the Company on June 30, 2018. As of the date of filing, the Ohi o Beacon Affiliates have not surrendered possession of the Ohio Beacon Facili ties and are nine months in arrears on rental payments . The Company intends to enforce its rights under the applicable sublease agreements for the Ohio Beacon Facilities and pursu e all remedies available to it under such sublease agreements and applicable law. There is no assurance that the Company will be able to obtain payment of all unpaid rents under the leases for the Ohio Beacon Facilities. The Company is recognizing revenue on a cash basis with respect to the Ohio Beacon Facilities. During the first quarter of 2018, the Company expensed approximately $0.7 million straight-line rent asset, recorded an allowance of $0.5 million against the Beacon Lease Inducement and recorded a pproximately $0.3 million allowance for other receivables. The Company is in negotiations with suitably qualified replacement operators , who are undergoing the HUD approval process, for such facilities .

The annualized 2018 cash rent under the lease agreements for the Ohio Beacon Facilities is shown below:

Symmetry. Affiliates of Symmetry (the “Symmetry Tenants”) lease the following facilities from the Company, pursuant to separate lease agreements which expire in 2030 (the “Symmetry Leases”): (i) the Company’s 106 bed, skilled nursing facility located in Sylvia, North Carolina (the “Mountain Trace Facility”); (ii) the Company’s 96-bed, skilled nursing facility located in Sumter, South Carolina (the “Sumter Facility”); and (iii) the Company’s 84-bed, skilled nursing facility located in Georgetown, South Carolina (the “Georgetown Facility”). On June 27, 2018, the Company notified Blue Ridge of Sumter, LLC, the tenant with respect to the Sumter Facility (the “Sumter Tenant”), and Blue Ridge on the Mountain, LLC, the tenant with respect to the Mountain Trace Facility (the “Mountain Trace Tenant”), that continued breach of the payment terms of the applicable Symmetry Lease would constitute an event of default. The Symmetry Tenants had alleged that the Company was in material breach of each of the Symmetry Leases with regard to deferred maintenance and were withholding rental payments on the basis of such allegations.  

The Mountain Trace Tenant has not paid approximately $0.2 million in rent owned for April through August 2018, the Sumter Tenant has not paid approximately $0.3 million in rent owed for May through August 2018, and Blue Ridge in Georgetown, LLC, the tenant with respect to the Georgetown Facility (the “Georgetown Tenant”), has not paid $0.05 million in rent owed for July and August 2018.  

On September 20, 2018, the Company reached an agreement with the Symmetry Tenants with respect to the Symmetry Leases, pursuant to which the Symmetry Tenants agreed to a payment plan for the rent arrears and the Company agreed to a reduction in annualized rent of approximately $0.6 million (the “Rent Concession”) and waived approximately $0.2 million in rent arrears, upon which the Symmetry Tenants recommenced monthly rent payments of $0.1 million starting with the September 1, 2018 amounts due under the Symmetry Leases.

The Company intends to enforce its rights under the lease agreement for the Mountain Trace Facility and pursue all remedies available to it under such lease agreement and applicable law. The Company is currently in negotiations with a suitably qualified replacement operator to take possession of the Mountain Trace Facility on December 1, 2018. There is no assurance that the Company will be able to execute a new lease with respect to the Mountain Trace Facility on substantially equivalent terms to the current lease agreement or at all or that, if a new lease is executed, the new tenant will be able to take possession of the Mountain Trace Facility on December 1, 2018. Consequently, the Company is recognizing revenue on a cash basis with respect to the Mountain Trace Facility and has expensed approximately $0.5 million of straight-line rent asset for the nine month period ended September 30, 2018.

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There is no assurance that the Company will be able to obtain payment of all unpaid rents and the collection of approximately $1.3 million (of asset balances shown in the table below) could be at risk.

Balances, net of allowances as of September 30, 2018 and annualized cash rent under the lease agreements for the Symmetry affiliated facilities is shown below:

*Effective September 1, 2018.

** Excludes concession granted

Peach Health. On June 18, 2016, the Company entered into a master sublease agreement, as amended on March 30, 2018, (the “Peach Health Sublease”) with affiliates (collectively, “Peach Health Sublessee”) of Peach Health Group, LLC (“Peach Health”), providing that Peach Health Sublessee would take possession of and operate three facilities located in Georgia (the “Peach Facilities”) as subtenant. The Peach Facilities are comprised of: (i) an 85-bed skilled nursing facility located in Tybee Island, Georgia (the “Oceanside Facility”); (ii) a 50-bed skilled nursing facility located in Tybee Island, Georgia (the “Savannah Beach Facility”); and (iii) a 131-bed skilled nursing facility located in Jeffersonville, Georgia (the “Jeffersonville Facility”).

In connection with the Peach Health Sublease, the Company extended a line of credit to Peach Health Sublessee for up to $1.0 million for operations at the Peach Facilities (the “Peach Line”), with an initial interest rate of 13.5% per annum, which increases by 1% per annum. The Peach Line had a maturity date one year from the date of the first disbursement and is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable. On April 6, 2017, the Company modified certain terms of the Peach Line in connection with Peach Health Sublessee securing a $2.5 million revolving working capital loan from a third party lender (the “Peach Working Capital Facility”), subsequently capped at $1.75 million, which matures April 5, 2020.  The Peach Working Capital Facility is secured by Peach Health Sublessee’s eligible accounts receivable, and all collections on the eligible accounts receivable are remitted to a lockbox controlled by the lender. The modifications of the Peach Line include: (i) reducing the loan balance to $0.8 million and restricting further borrowings; (ii) extending the maturity date to October 1, 2020 and adding a six month extension option by Peach Health Sublessee, subject to certain conditions; (iii) increasing the interest rate from 13.5% per annum by 1% per annum; and (iv) establishing a four-year amortization schedule. Payment of principal and interest under the Peach Line is governed by certain financial covenants limiting distributions under the Peach Working Capital Facility. Furthermore, the Company guaranteed Peach Health Sublessee’s borrowings under the Peach Working Capital Facility subject to certain burn-off provisions (i.e., the Company’s obligations under such guaranty cease after the later of 18 months or achievement of a certain financial ratio by Peach Health Sublessee). The Company is obligated to pay the outstanding balance on the Peach Working Capital Facility (after application of all eligible accounts receivable collections by the lender) if Peach Health Sublessee fails to comply with the Peach Working Capital Facility obligations and covenants. Fair value of the liability using the expected present value approach is immaterial.

At September 30, 2018, there was approximately $1.0 million outstanding on the Peach Line.

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Future minimum lease receivables from the Company’s facilities leased and subleased to third party tenants for each of the next five years ending December 31, are as follows: