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 March 31, 2019, the Company owned eleven healthcare properties which are leased or managed by third-party operators under
triple-net operating terms.
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 months ended March 31, 2019 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, 2018 filed with the Securities and Exchange Commission.
Recently
Adopted Accounting Pronouncements
Effective
January 1, 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued
to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes
previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.
The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
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 as of January
1, 2019 and adoption requires using a modified retrospective approach with the option to elect certain practical expedients. The
Company has determined that it does not have any leases that fall under the guidance of ASU 2016-02 and it had no impact on its
consolidated financial statements.
Recently
Issued Accounting Pronouncements
The
Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting
guidance during 2019. Management has carefully considered the new pronouncements that altered generally accepted accounting principles
and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial
position or operations in the near term.
2.
GOING CONCERN
The
accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For
the three months ended March 31, 2019, the Company had net income of $160,155 and reported net cash provided by operations of
$266,139. During the years ended December 31, 2018 and December 31, 2017, the Company incurred net losses of $2,007,006 and $3,001,618,
respectively, and as of March 31, 2019 has an accumulated deficit of $10,913,810. 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 March 31, 2019 and December
31, 2018 are as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,597,500
|
|
|
$
|
1,597,500
|
|
Land Improvements
|
|
|
200,000
|
|
|
|
200,000
|
|
Buildings and Improvements
|
|
|
36,126,867
|
|
|
|
36,076,632
|
|
Furniture, Fixtures and Equipment
|
|
|
1,475,923
|
|
|
|
1,469,976
|
|
Construction in Progress
|
|
|
4,822,259
|
|
|
|
3,916,187
|
|
|
|
|
44,222,549
|
|
|
|
43,260,295
|
|
|
|
|
|
|
|
|
|
|
Less Accumulated Depreciation
|
|
|
(6,138,075
|
)
|
|
|
(5,815,150
|
)
|
Less Impairment
|
|
|
(1,560,000
|
)
|
|
|
(1,560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,524,474
|
|
|
$
|
35,885,145
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
$
|
322,925
|
|
|
$
|
305,410
|
|
Cash Paid for Capital Expenditures
|
|
$
|
962,254
|
|
|
$
|
143,445
|
|
4.
INVESTMENTS IN DEBT SECURITIES
At
March 31, 2019 and December 31, 2018, 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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
States and Municipalities
|
|
$
|
12,134
|
|
|
$
|
162,106
|
|
Contractual
maturity of held-to-maturity securities at March 31, 2019 is September 1, 2043, and total value of securities at their respective
maturity dates is $30,000. 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. The Company received proceeds of $151,041 from the sale of
debt securities, and recognized a gain on sale of investments of $1,069 during the three months ended March 31, 2019.
5.
NOTES RECEIVABLE
Note
Receivable – Receiver for Healthcare Management of Oklahoma, LLC
On
May 10, 2016, the Company obtained a Court Order appointing a receiver to control and operate the skilled nursing facility in
Southern Hills, Tulsa. 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 transition to the receiver was part of a turnaround
effort to restore viable operations at the facility. The Court ordered the Company to provide the receiver a revolving line of
credit not to exceed $250,000 of which the Company advanced $150,000 during 2016. The receiver is to repay the revolving unsecured
line of credit from the operation or sale of the facility or other sources. The Company has determined the note as no longer being
collectible based on the ability to repay and has recorded bad debt expense of $150,000 in the consolidated statements of operations
for the year ended December 31, 2016. During November 2017, the Company made a short-term loan in the amount of $84,000 to the
operator with the understanding that it would be repaid immediately; the loan was repaid during 2018.
Note
Receivable: Accounts Receivable Line of Credit (“ARLOC”) – Infinity Health Interests, LLC
As
part of the transition to a new tenant at High Street Nursing facility, the Company committed a $250,000 Accounts Receivable Line
of Credit (“ARLOC”) to an affiliate of Infinity Health Interests, LLC (“Infinity”) in order to ensure
that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables of the facility
as well as a personal guarantee from the two principals of Infinity. The Company expects facility level operational performance
to improve under Infinity’s stewardship and commitment to the surrounding community.
As
of March 31, 2019 and December 31, 2018 the Company had lent $250,000 and $106,334, respectively, to Infinity under this agreement.
6.
DEBT AND DEBT-RELATED PARTIES
The
following is a summary of the Company’s debt outstanding as of March 31, 2019 and December 31, 2018:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Senior Secured Promissory Notes
|
|
$
|
1,485,000
|
|
|
$
|
1,485,000
|
|
Senior Unsecured Promissory Notes
|
|
|
300,000
|
|
|
|
300,000
|
|
Senior Secured Promissory Notes - Related Parties
|
|
|
875,000
|
|
|
|
875,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
20,902,663
|
|
|
|
21,049,981
|
|
Variable-Rate Mortgage Loans
|
|
|
4,618,006
|
|
|
|
4,618,006
|
|
Line of Credit
|
|
|
7,385,978
|
|
|
|
7,240,183
|
|
Other Debt
|
|
|
1,536,000
|
|
|
|
1,536,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,102,647
|
|
|
|
37,104,170
|
|
|
|
|
|
|
|
|
|
|
Premium, Unamortized Discount and Debt Issuance Costs
|
|
|
(483,590
|
)
|
|
|
(507,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,619,057
|
|
|
$
|
36,596,341
|
|
|
|
|
|
|
|
|
|
|
As presented in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, Net
|
|
$
|
35,744,057
|
|
|
$
|
35,721,341
|
|
|
|
|
|
|
|
|
|
|
Debt - Related Parties, Net
|
|
|
875,000
|
|
|
|
875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,619,057
|
|
|
$
|
36,596,341
|
|
Corporate
Senior and Senior Secured Promissory Notes
From
November through December 2016, the Company undertook a private offering of its 10% Senior Secured Promissory Notes. 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 initially bore interest at a rate of 10% payable monthly with principal and unpaid
interest due at maturity, originally January 13, 2018. The notes were issued with 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.
The
notes are secured by all assets of the Company not serving as collateral for other notes. As of December 31, 2017, $500,000 in
notes had their maturity date extended to December 31, 2018, and all notes’ maturity dates were extended prior to their
original maturity. The maturity date of the 600,000 warrants issued along with the notes was extended to December 31, 2018 as
well. The transaction was accounted for as a debt extinguishment with a loss on modification of warrant in the amount of $62,696
recorded in the consolidated statement of operations for the year ended December 31, 2017.
In
2017, an additional $600,000 in notes were sold and issued, of which $425,000 were to related parties. At December 31, 2017, there
were outstanding an aggregate of $1.2 million in senior secured notes. The maturity date of all the senior secured notes was extended
to December 31, 2018 prior to their original maturity date, $225,000 of which occurred in 2018. During 2018, among the $225,000
senior secured notes that were extended to December 31, 2018, $125,000 were to related parties. For every $1.00 in principal amount
of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise price
of $.75 per share. The warrants have a cashless exercise provision and were valued using the Black-Scholes pricing model. The
maturity date of the 1.2 million warrants issued along with the notes was extended to December 31, 2018 as well, 225,000 warrants
of which occurred in 2018.
In
October 2017, the Company sold an aggregate of $300,000 in senior unsecured notes. The notes bear interest at the rate of 10%
per annum and are due in 2020. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year
to purchase an additional share of common stock at an exercise price of $.75 per share. The warrants have a cashless exercise
provision.
In
October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited
investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, (October 31, 2021) and Warrant for
each $1.00 in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of
$0.50 per share.
The Company and the Placement Agent completed the Offering in December
2018 having sold an aggregate of $1,160,000 in Notes and Warrants. The net proceeds to the Company were $1,092,400, after deducting
Placement Agent fees of $67,600, and issued 111,000 warrants to the Placement Agent with $21,453 of the fair value of the warrants
recorded as loan cost. The Offering also included the exchange of an aggregate of $1.075 million in outstanding senior secured
10% Notes and Warrants for Units in the Offering. No proceeds were realized from the exchange and no fees were paid to the Placement
Agent for such exchanges. During 2018, among the $1.075 million senior secured notes that were extended to October 31, 2021 by
virtue of the exchange, $875,000 were to related parties. As of March 31, 2019 the Company had not renewed or repaid $125,000
in 10% notes with a maturity date of December 31, 2018, and those notes were technically in default.
The
value of the warrants issued to the note holders was calculated using the Black-Scholes pricing model using the following significant
assumptions:
|
|
December
31, 2018
|
|
|
|
|
|
Volatility
|
|
|
122%
- 123
|
%
|
Risk-free
Interest Rate
|
|
|
2.76%
- 2.94
|
%
|
Exercise
Price
|
|
$
|
0.50
|
|
Fair
Value of Common Stock
|
|
$
|
0.30
- $0.35
|
|
Expected
Life
|
|
|
2.9
– 3.0 years
|
|
During
the year ended December 31, 2017, the Company issued 900,000 warrants in connection with its note offerings with a value on the
issue date estimated to be $121,435, bifurcated from the value of the note. As of December 31, 2017, the unamortized balance of
discount on notes was $77,105. During the year ended December 31, 2018, the Company issued 1,160,000 warrants with a value on
the issue date estimated to be $207,025 bifurcated from the value of the note and exchanged 1,075,000 existing warrants for new
ones in connection with its note offerings. As a result of the modification the Company recognized a loss on extinguishment of
$248,346. As of March 31, 2019, the unamortized balance of discount on notes was $196,908. Amortization expense was $16,261 and
$19,568 for the three months ended March 31, 2019 and 2018, respectively.
Mortgage
Loans and Lines of Credit Secured by Real Estate
Mortgage
loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an assignment
of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for
the periods presented consisted of the following:
|
|
Face
|
|
|
Principal Outstanding at
|
|
|
Stated Interest
|
|
Maturity
|
|
Property
|
|
Amount
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Rate
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Hills Retirement Center Line of Credit
(1)(2)
|
|
$
|
7,229,052
|
|
|
$
|
7,105,218
|
|
|
$
|
7,119,743
|
|
|
5.25% Fixed
|
|
April 28, 2019
|
|
Middle Georgia Nursing Home
(2,3)
|
|
|
3,570,000
|
|
|
|
3,533,486
|
|
|
|
3,561,461
|
|
|
5.50% Fixed
|
|
October 26, 2021
|
|
Goodwill Nursing Home
(2)
|
|
|
5,005,000
|
|
|
|
4,355,739
|
|
|
|
4,390,082
|
|
|
5.50% Fixed
|
|
March 19, 2020
|
|
Warrenton Nursing Home
(4)
|
|
|
2,720,000
|
|
|
|
2,270,447
|
|
|
|
2,287,323
|
|
|
5.50% Fixed
|
|
January 20, 2020
|
|
Edward Redeemer Health & Rehab
|
|
|
2,303,815
|
|
|
|
2,118,284
|
|
|
|
2,138,128
|
|
|
5.50% Fixed
|
|
January 16, 2020
|
|
Glen Eagle Health & Rehab
(5)
|
|
|
2,761,250
|
|
|
|
2,743,557
|
|
|
|
2,761,250
|
|
|
5.50% Fixed
|
|
May 25, 2021
|
|
Glen Eagle Health and Rehab Line of Credit
(2)(5)
|
|
|
400,000
|
|
|
|
280,760
|
|
|
|
120,440
|
|
|
6.50% Fixed
|
|
September 30, 2019
|
|
Providence of Sparta Nursing Home
(6)
|
|
|
3,039,300
|
|
|
|
2,961,250
|
|
|
|
2,975,337
|
|
|
3.88% Fixed
|
|
November 1, 2047
|
|
Meadowview Healthcare Center
(7)
|
|
|
3,000,000
|
|
|
|
2,919,900
|
|
|
|
2,936,400
|
|
|
6.00% Fixed
|
|
October 30, 2022
|
|
GL Nursing Home
(8)
|
|
|
5,000,000
|
|
|
|
4,618,006
|
|
|
|
4,618,006
|
|
|
Prime Plus 1.50%/ 5.75% Floor
|
|
August 3, 2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,906,647
|
|
|
$
|
32,908,170
|
|
|
|
|
|
|
(1)
On 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 Southern Bank (formerly First Commercial Bank) pursuant to a Promissory Note in the principal
amount of $7,229,052 (the “Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on
its skilled nursing facility in Tulsa for $1,546,801,funded open market and tender offer purchases of its Industrial Revenue Bonds
covering the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of December 31, 2018, a total
of $7,119,743 was drawn under the Line of Credit, and as of March 31, 2019, a total of $7,105,218 was drawn under the Line of
Credit.
The
interest rate on the Line of Credit is 5.25%. Monthly payments of interest began on November 30, 2017 and continue until the Promissory
Note is paid in full on the Maturity Date. On May 3, 2018 the Maturity Date was extended from April 30, 2018 to October 30, 2018.
The Maturity Date was further extended to February 28, 2019 and subsequently to April 28, 2019, with the intent to convert to
an amortizing loan thereafter. 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. With the retirement of the
Tulsa Industrial Authority Bonds effective November 1, 2018, Southern Bank (formerly First Commercial Bank) moved into a senior
position on the ALF and ILF properties.
(2)
Mortgage loans are non-recourse to the Company except for (i) the senior loan held by ServisFirst Bank on Meadowview (Ohio), (ii)
the loan held by Colony Bank on Middle Georgia and Glen Eagle, and (iii) the Southern Hills line of credit and Goodwill loan owed
to Southern Bank (formerly First Commercial Bank).
(3)
The loan at Middle Georgia was renewed on November 26, 2018 with the maturity extended to October 26, 2021.
(4)
The loan was extended on January 19, 2019 to January 20, 2020 and the Company capitalized $8,885 in loan costs paid, amortized
over the term of the extension. Amortization expense related to loan costs of this loan totaled $2,050 for the three months ended
March 31, 2019. The Company has incurred $43,681 in unamortized loan costs to refinance this debt with another lender.
(5)
Amortization expense related to loan costs of this loan totaled $219 for the three months ended March 31, 2019. Amortizing payments
began in January 2019. In June 2018 the Company converted the original note to a fixed note which qualified as debt extinguishment,
unamortized debt discount on the original note was expensed as a loss on extinguishment of $27,794. In April 2018, the Company
capitalized $22,800 in fees and interest and added it to principal. The Company is subject to financial covenants and customary
affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of March 31, 2019,
the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default
as defined in the note agreement, but the Company believes that it is in good standing with the Lender. In October 2018 the Lender
extended the Company a line of credit with a limit of $200,365 to provide working capital to scale operations at the facility.
As of December 31, 2018 the Company had drawn $120,440 on the line. The line of credit was expanded in February 2019 to $400,000
with a maturity of September 30, 2019. As of March 31, 2019, the Company had drawn $280,760 on the line.
(6)
The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during
2017. Amortization expense related to loan costs totaled $1,246 for the three months ended March 31, 2019.
(7)
Amortization expense related to loan costs of this loan totaled $2,326 for the three months ended March 31, 2019. The Company
is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of
all other notes and bonds. As of March 31, 2019, the Company was not in compliance with some unrelated notes and bonds, which
is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good
standing with the Lender.
(8)
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 GL 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 March 31, 2019, 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. The Company is
also delinquent in installment payments due under the mortgage. 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 been notified by the
lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr.
Brogdon has assumed operations of the facility and is dealing with the lender. The Company is in negotiations with Mr. Brogdon
to sell him the facility.
Other
mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some
instances or in an untimely manner. These mortgage loans are technically in default.
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 consisted
of $5,075,000 of principal in Series 2014A First Mortgage Revenue Bonds and $625,000 of principal in Series 2014B Taxable First
Mortgage Revenue Bonds. During the year ended December 31, 2017, $127,000 of Series 2014B Taxable First Mortgage Revenue Bond
were retired with $60,000 in cash payments and 67,000 in non-cash payments; $452,000 of Series 2014A First Mortgage Revenue Bonds
were retired with non-cash payments. Deferred loan costs incurred of $478,950 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 $4,704 and $761, respectively, for the three months ended March 31, 2018. The loan agreement
includes certain financial covenants required to be maintained by the Company, with which we were not in compliance as of March
31, 2019. There is $5,061,000 in voluntary non-cash principal reduction payments during the year ended December 31, 2018. As of
March 31, 2019 and December 31, 2018, restricted cash of $1,179 and $1,179, respectively is related to these bonds.
Other
Debt
Other
debt due at March 31, 2019 and December 31, 2018 includes unsecured notes payable issued to entities controlled by the Company
used to facilitate the acquisition of the nursing home properties.
|
|
Face
|
|
|
Principal Outstanding at
|
|
|
Stated Interest
|
|
Maturity
|
|
Property
|
|
Amount
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Rate
|
|
Date
|
|
Goodwill Nursing Home
|
|
$
|
2,180,000
|
|
|
$
|
1,536,000
|
|
|
$
|
1,536,000
|
|
|
13%
(1)
Fixed
|
|
December 31, 2019
|
|
(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.
For
the three months ended March 31, 2019 and 2018, the Company received proceeds from the issuance of debt of $159,875 and $52,862,
respectively. Cash payments on debt totaled $147,318 and $132,448 for the three months ended March 31, 2019 and 2018, respectively.
Amortization expense for deferred loan costs totaled $33,124 and $45,047 for the three months ended March 31, 2019 and 2018, respectively.
Future
maturities and principal reduction payments of all notes and bonds payable listed above for the next five years and thereafter
are as follows:
Years
|
|
|
|
2019
|
|
$
|
19,659,755
|
(1)
|
2020
|
|
|
9,013,714
|
|
2021
|
|
|
5,626,986
|
|
2022
|
|
|
64,013
|
|
2023
|
|
|
66,541
|
|
2024 and after
|
|
|
2,671,638
|
|
|
|
|
|
|
|
|
$
|
37,102,647
|
|
(1)
Any note or bond that is not in compliance with all financial and non-financial covenants is considered to have an immediate maturity,
including those that require compliance with covenants on any and all other notes. The notes secured by the facilities at Meadowview
and Abbeville have such covenants which were in technical non-compliance at March 31, 2019, but the Company believes that its
relationships with these lenders is good.
7.
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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, the Company had 375,000 shares of Series D preferred stock outstanding.
During
the three months ended March 31, 2019 and 2018, the Company paid $7,500 and $7,500, respectively, for Series D preferred stock
dividends. Dividends of $7,500 and $7,500 were declared during the three months ended March 31, 2019 and 2018, respectively, with
dividends of $7,500 accrued and payable as of March 31, 2019 and 2018. All quarterly dividends previously declared have been paid.
Restricted
Stock Awards
The
following table summarizes the restricted stock unit activity during the three months ended March 31, 2019 and 2018.
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Beginning
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
272,727
|
|
|
|
562,500
|
|
Vested
|
|
|
(68,182
|
)
|
|
|
(140,625
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Ending
|
|
|
204,545
|
|
|
|
421,875
|
|
In
connection with these director and executive restricted stock grants, the Company recognized stock-based compensation of $22,500
and $45,000 for the three months ended March 31, 2019 and 2018, respectively.
Common
Stock Warrants
As
of March 31, 2019 and December 31, 2018, the Company had 2,714,918 and 3,142,586, respectively, of outstanding warrants to purchase
common stock at a weighted average exercise price of $0.57 and $0.60, respectively. During the three month period ended March
31, 2019 and 2018, an aggregate of 427,668 and 71,250 warrants with a weighted average exercise price of $0.75 and $0.60, respectively,
expired. The aggregate intrinsic value of the common stock warrants outstanding at March 31, 2019 was $0.
Common
Stock Options
As
of March 31, 2019 and December 31, 2018, the Company had 600,000 and 600,000, respectively, of outstanding options to purchase
common stock at a weighted average exercise price of $0.36. During the three month period ended March 31, 2019 and 2018, no options
expired. The aggregate intrinsic value of the common stock options outstanding at March 31, 2019 was $0.
8.
RELATED PARTIES
Clifford
Neuman provides office space for the Company’s Controller at no charge. As of March 31, 2019 and December 31, 2018, the
Company owed Mr. Neuman for legal services rendered $93,406 and $118,230, respectively.
Creative
Cyberweb developed and maintains the Company’s website, and is affiliated with CFO Zvi Rhine’s family. The ongoing
upkeep is $450 per month.
In
January 2018, the Directors modified the Directors’ Compensation Plan to provide the annual grants be subject to ratable
vesting over 12 months. In March 2019, The Board approved an annual grant to three of its Directors without other compensation
plans, restricted stock awards of 90,909 shares each, subject to vesting. In connection with these director restricted stock grants,
the Company recognized stock-based compensation of $22,500 and $45,000 for the three months ended March 31, 2019 and 2018, respectively.
In
May 2018, the Company approved a compensation agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year (which
accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000 shares
of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000 of the
Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter
each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the three months ended March 31, 2019 the Company
has accrued $58,750 in salaries, and recognized $22,500 in stock-based compensation for Directors and $28,029 for Mr. Rhine. Effective
April 1, 2019, the Company and Mr. Rhine entered into an Amendment No. 1 to the Employment Agreement. See Subsequent Events for
details.
9.
FACILITY LEASES
The
following table summarizes our leasing arrangements related to the Company’s healthcare facilities at March 31, 2019:
Facility
|
|
Monthly Lease
Income
(1)
|
|
|
Lease Expiration
|
|
|
Renewal Option, if any
|
Middle Georgia
|
|
$
|
60,000
|
|
|
October 31, 2022
|
|
|
None
|
Warrenton
|
|
$
|
55,724
|
|
|
June 30, 2026
|
|
|
Term may be extended for one additional ten-year term.
|
Goodwill
(2)
|
|
$
|
40,125
|
|
|
February 1, 2027
|
|
|
Term may be extended for one additional five-year term.
|
Edwards Redeemer
|
|
$
|
48,728
|
|
|
October 31, 2022
|
|
|
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
(3)
|
|
$
|
-
|
|
|
October 31, 2023
|
|
|
Term may be extended for one additional five-year term.
|
GL Nursing
(4)
|
|
$
|
-
|
|
|
-
|
|
|
None
|
Glen Eagle
(5)
|
|
$
|
-
|
|
|
-
|
|
|
None
|
Southern Hills SNF
(6)
|
|
$
|
37,000
|
|
|
May 31, 2019
|
|
|
Term may be extended for one additional five-year term.
|
Southern Hills ALF
(7)
|
|
|
-
|
|
|
-
|
|
|
None
|
Southern Hills ILF
(8)
|
|
|
-
|
|
|
-
|
|
|
None
|
(1)
Monthly lease income reflects rent income on a straight-line basis over, where applicable, the term of each lease.
(2)
In January 2016, the Goodwill facility was closed by Georgia regulators and all residents were removed. In a transaction related
to the sale of the Greene Point facility, an affiliate of the buyer of Greene Point executed a ten year operating lease covering
Goodwill. After investing approximately $2.0 million in capital improvements in the property, the lease operator obtained all
regulatory approvals and began admitting patients in December 2016. The lease became effective on February 1, 2017, and the facility
began generating rental revenue thereafter.
(3)
The lease was generating $33,000 in monthly gross rent; however, the operator experienced adverse results in late 2017 and throughout
2018. In April 2018 the Company recognized a bad debt expense of $56,000 related to rent receivables previously booked in 2018
at the Meadowview facility. Effective December 1, 2018, the Company completed the operations transfer to an affiliate of Infinity
Health Interests, LLC (“Infinity”). The lease is structured with a lower base rent component than the prior operator
but also includes occupancy-based escalators that will better align facility operations with future rental payments.
(4)
Effective January 1, 2016, the GL Nursing 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. The lease term was to commence at the end of a straddle period. During the straddle period, the Company
made working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the facility.
Prior to the end of the straddle period, the lease operator informed the Company that it would vacate the facility. An entity
affiliated with Mr. Brogdon, who is a guarantor of the mortgage, assumed operations of the facility in March 2018 under an OTA.
We do not expect the facility to generate any future revenue for the Company.
(5)
The Company entered into a management agreement with Cadence Healthcare Solutions to operate Glen Eagle after expending approximately
$1.0 million in capital improvements. The facility passed its licensure survey and began admitting patients in June 2018. Effective
October 12, 2018, the facility gained its certification and started collecting revenues from Medicare and Medicaid in April 2019.
(6)
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. In
October 2017, the Receiver engaged a new manager for the facility at the request of the Company.
(7)
The Company plans to operate the Southern Hills ALF through a third-party manager once construction is complete and a state license
is secured.
(8)
The Company plans to operate the Southern Hills ILF through a third-party manager once renovations are complete. The first residents
are expected in July 2019.
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, or if there is no tenant, the Company may become liable for such operating expenses. We have been
required to cover those expenses at Glen Eagle as well as the 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 Abbeville, Southern Tulsa ALF and Southern Tulsa ILF due to property being non-operating, and GL Nursing):
Years
|
|
|
|
|
|
|
|
2018
|
|
$
|
2,345,240
|
|
2019
|
|
|
3,126,946
|
|
2020
|
|
|
3,183,242
|
|
2021
|
|
|
3,015,544
|
|
2022
|
|
|
1,922,794
|
|
2023 and Thereafter
|
|
|
5,120,111
|
|
|
|
|
|
|
|
|
$
|
18,713,877
|
|
10.
FAIR VALUE MEASUREMENTS
Financial
assets and liabilities recorded at fair value in our 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 deposit. We consider the carrying values of our short-term
financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the
short period of time between origination of the financial assets and liabilities and their expected settlement, or because of
their proximity to acquisition date fair values. The carrying value of 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 March 31, 2019 and December 31, 2018 are summarized below:
|
|
|
|
|
Fair Value Measurement
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
2,682
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,682
|
|
Investment in Debt Securities
|
|
|
12,134
|
|
|
|
12,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at March 31, 2019
|
|
$
|
14,816
|
|
|
$
|
12,134
|
|
|
$
|
-
|
|
|
$
|
2,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
2,785
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,785
|
|
Investment in Debt Securities
|
|
|
162,106
|
|
|
|
162,106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018
|
|
$
|
164,891
|
|
|
$
|
162,106
|
|
|
$
|
-
|
|
|
$
|
2,785
|
|
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 three months
ended March 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Beginning Balance January 1
|
|
$
|
2,785
|
|
|
$
|
95,371
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
(103
|
)
|
|
|
(40,423
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance, March 31
|
|
$
|
2,682
|
|
|
$
|
54,948
|
|
The
significant assumptions used in the Black-Scholes option pricing model as of March 31, 2019 and December 31, 2018 include the
following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
147.43
|
%
|
|
|
63.58%
- 91.93
|
%
|
Risk-free Interest Rate
|
|
|
2.44
|
%
|
|
|
2.36% - 2.59
|
%
|
Exercise Price
|
|
$
|
1.37
|
|
|
$
|
0.75 - 1.37
|
|
Fair Value of Common Stock
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
Expected Life
|
|
|
0.49 years
|
|
|
|
0.45 – 0.99 years
|
|
11.
SEGMENT REPORTING
The
Company had two primary reporting segments during the three months ended March 31, 2019, which include real estate services and
healthcare services. The Company reports segment information based on the “management approach” defined in
ASC
280, Segment Reporting.
The management approach designates the internal reporting used by management for making decisions
and assessing performance as the source of our reportable segments.
Total
assets for the healthcare services and real estate services segments were $561,376 and $37,927,933, respectively, as of March
31, 2019 and $145,260 and $38,150,627, respectively, as of December 31, 2018.
|
|
Statements of Operations Items for the Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
Real Estate Services
|
|
|
Healthcare Services
|
|
|
Consolidated
|
|
|
Real Estate Services
|
|
|
Healthcare Services
|
|
|
Consolidated
|
|
Rental Revenue
|
|
$
|
895,288
|
|
|
$
|
-
|
|
|
$
|
895,288
|
|
|
$
|
812,065
|
|
|
$
|
-
|
|
|
$
|
812,065
|
|
Healthcare Revenue
|
|
|
-
|
|
|
|
379,791
|
|
|
|
379,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
895,288
|
|
|
|
379,791
|
|
|
|
1,275,079
|
|
|
|
812,065
|
|
|
|
-
|
|
|
|
812,065
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
112,215
|
|
|
|
81,264
|
|
|
|
193,479
|
|
|
|
104,926
|
|
|
|
40,229
|
|
|
|
145,155
|
|
Property Taxes, Insurance and Other Operating
|
|
|
62,655
|
|
|
|
286,533
|
|
|
|
349,188
|
|
|
|
22,203
|
|
|
|
58,613
|
|
|
|
80,816
|
|
Depreciation
|
|
|
319,456
|
|
|
|
3,469
|
|
|
|
322,925
|
|
|
|
305,410
|
|
|
|
-
|
|
|
|
305,410
|
|
Total Expenses
|
|
|
494,326
|
|
|
|
371,266
|
|
|
|
865,592
|
|
|
|
432,539
|
|
|
|
98,842
|
|
|
|
531,381
|
|
Income (Loss) from Operations
|
|
|
400,962
|
|
|
|
8,525
|
|
|
|
409,487
|
|
|
|
379,526
|
|
|
|
(98,842
|
)
|
|
|
280,684
|
|
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Warrant Liability
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
(40,423
|
)
|
|
|
-
|
|
|
|
(40,423
|
)
|
Gain on Extinguishment of Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(94,925
|
)
|
|
|
-
|
|
|
|
(94,925
|
)
|
(Gain) Loss on Settlement of Other Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,900
|
|
|
|
-
|
|
|
|
29,900
|
|
Gain on Sale of Investments
|
|
|
(1,069
|
)
|
|
|
-
|
|
|
|
(1,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from Insurance Claim
|
|
|
(270,264
|
)
|
|
|
-
|
|
|
|
(270,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
(5,467
|
)
|
|
|
-
|
|
|
|
(5,467
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest Expense
|
|
|
526,235
|
|
|
|
-
|
|
|
|
526,235
|
|
|
|
598,366
|
|
|
|
-
|
|
|
|
598,366
|
|
Total Other (Income) Expense
|
|
|
249,332
|
|
|
|
-
|
|
|
|
249,332
|
|
|
|
492,918
|
|
|
|
-
|
|
|
|
492,918
|
|
Net Income (Loss)
|
|
|
151,630
|
|
|
|
8,525
|
|
|
|
160,155
|
|
|
|
(113,392
|
)
|
|
|
(98,842
|
)
|
|
|
(212,234
|
)
|
Net Loss Attributable to Noncontrolling Interests
|
|
|
4,141
|
|
|
|
-
|
|
|
|
4,141
|
|
|
|
7,901
|
|
|
|
-
|
|
|
|
7,901
|
|
Net Income (Loss) Attributable to Global Healthcare REIT, Inc.
|
|
$
|
155,771
|
|
|
$
|
8,525
|
|
|
$
|
164,296
|
|
|
$
|
(105,491
|
)
|
|
$
|
(98,842
|
)
|
|
$
|
(204,333
|
)
|