UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from_______ to ______

 

Commission file number 0-15415

 

GLOBAL HEALTHCARE REIT, INC.

(Exact name of Registrant as specified in its Charter)

 

Utah   87-0340206
(State or other jurisdiction of   I.R.S. Employer
incorporation or organization)   Identification number

 

6800 N. 79 th St., Ste. 200,

Niwot, CO 80503

  80503
(Address of principal executive offices)   (Zip Code)

 

Issuer’s telephone number: (303) 449-2100

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller Reporting Company [X]

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ] No [X]

 

As of May 20, 2019, the Registrant had 27,350,131 shares of its Common Stock outstanding.

 

 

 

     
 

 

INDEX

 

    Page No.
     
  PART I — FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements (Unaudited) 3
     
  Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018 3
     
  Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 4
     
  Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 6
     
  Notes to Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 28
     
Item 4. Removed and Reserved 28
     
Item 5. Other Information 28
     
Item 6 . Exhibits 29

 

2

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (Unaudited)

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    March 31, 2019     December 31, 2018  
ASSETS                
Property and Equipment, Net   $ 36,524,474     $ 35,885,145  
Cash and Cash Equivalents     386,124       1,100,218  
Restricted Cash     228,515       206,989  
Accounts Receivable, Net     435,659       166,696  
Investments in Debt Securities     12,134       162,106  
Prepaid Expenses and Other     902,403       774,733  
Total Assets   $ 38,489,309     $ 38,295,887  
                 
LIABILITIES AND EQUITY                
Liabilities                
Debt, Net of discount of $483,590 and $507,829, respectively   $ 35,744,057     $ 35,721,341  
Debt – Related Parties, Net of discount of $0 and $0, respectively     875,000       875,000  
Accounts Payable and Accrued Liabilities     298,886       306,437  
Accounts Payable – Related Parties     93,406       118,230  
Dividends Payable     7,500       7,500  
Derivative Liability     2,682       2,785  
Lease Security Deposit     280,000       280,000  
Total Liabilities     37,301,531       37,311,293  
Commitments and Contingencies Equity                
Stockholders’ Equity                
Preferred Stock:                
Series A - No Dividends, $2.00 Stated Value, Non-Voting; 2,000,000 Shares Authorized, 200,500 Shares Issued and Outstanding     401,000       401,000  
Series D - 8% Cumulative, Convertible, $1.00 Stated Value, Non-Voting; 1,000,000 Shares Authorized, 375,000 Shares Issued and Outstanding     375,000       375,000  
Common Stock - $0.05 Par Value; 50,000,000 Shares Authorized, 27,077,404 and 26,300,317 Shares Issued and Outstanding at March 31, 2019 and December 31, 2018, Respectively     1,353,870       1,340,234  
Additional Paid-In Capital     10,174,041       10,137,148  
Accumulated Deficit     (10,913,810 )     (11,070,606 )
Total Global Healthcare REIT, Inc. Stockholders’ Equity     1,390,101       1,182,776  
Noncontrolling Interests     (202,323 )     (198,182 )
Total Equity     1,187,778       984,594  
Total Liabilities and Equity   $ 38,489,309     $ 38,295,887  

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended March 31,  
    2019     2018  
             
Revenue                
Rental Revenue   $ 895,288     $ 812,065  
Healthcare Revenue     379,791       -  
Total Revenue     1,275,079       812,065  
Expenses                
General and Administrative     193,479       145,155  
Property Taxes, Insurance and Other Operating     349,188       80,816  
Depreciation     322,925       305,410  
Total Expenses     865,592       531,381  
Income from Operations     409,487       280,684  
Other (Income) Expense                
Gain on Warrant Liability     (103 )     (40,423 )
Gain on Extinguishment of Debt     -       (94,925 )
Loss on Settlement of Other Liabilities     -       29,900  
Gain on Sale of Investments     (1,069 )     -  
Gain on Proceeds from Insurance Claim     (270,264 )     -  
Interest Income     (5,467 )     -  
Interest Expense     526,235       598,366  
Total Other (Income) Expense     249,332       492,918  
Net Income (Loss)     160,155       (212,234 )
Net Loss Attributable to Noncontrolling Interests     4,141       7,901  
Net Income (Loss) Attributable to Global Healthcare REIT, Inc.     164,296       (204,333 )
Series D Preferred Dividends     (7,500 )     (7,500 )
Net Income (Loss) Attributable to Common Stockholders   $ 156,796     $ (211,833 )
Per Share Data:                
Net Income (Loss) per Share Attributable to Common Stockholders:                
Basic   $ 0.01     $ (0.01 )
Diluted   $ 0.01     $ (0.01 )
Weighted Average Common Shares Outstanding:                
Basic     26,895,586       26,662,817  
Diluted     26,895,586       26,662,817  

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

 

    Series A Preferred Stock     Series D Preferred Stock     Common Stock     Additional             Global
Healthcare

REIT, Inc.
    Non-          
    Number of Shares     Amount     Number of Shares     Amount     Number of Shares     Amount     Paid-In Capital     Accumulated Deficit     Stockholders’ Equity     controlling Interests     Total Equity  
                                                                   
Balance, December 31, 2018     200,500     $ 401,000       375,000     $ 375,000       26,804,677     $ 1,340,234     $ 10,137,148     $ (11,070,606 )   $ 1,182,776     $ (198,182 )   $ 984,594  
Share Based Compensation – Restricted Stock Awards and Stock Options     -       -       -       -       272,727       13,636       36,893       -       50,529       -       50,529  
Series D Preferred Dividends     -       -       -       -       -       -       -       (7,500 )     (7,500 )     -       (7,500 )
Net Income (Loss)     -       -       -       -       -       -       -       164,296       164,296       (4,141 )     160,155  
Balance, March 31, 2019     200,500     $ 401,000       375,000     $ 375,000       27,077,404     $ 1,353,870     $ 10,174,041     $ (10,913,810 )   $ 1,390,101     $ (202,323 )   $ 1,187,778  

 

    Series A Preferred Stock     Series D Preferred Stock     Common Stock     Additional           Global
Healthcare
REIT, Inc.
    Non-        
    Number of Shares     Amount     Number of Shares     Amount     Number of Shares     Amount     Paid-In Capital     Accumulated Deficit     Stockholders’ Equity     controlling Interests     Total Equity  
                                                                   
Balance, December 31, 2017     200,500     $ 401,000       375,000     $ 375,000       26,300,317     $ 1,315,016     $ 9,422,924     $ (9,048,443 )   $        2,465,497     $ (183,339 )   $ 2,282,158  
Share Based Compensation – Restricted Stock Awards     -       -       -       -       562,500       28,125       16,875       -       45,000       -       45,000  
Series D Preferred Dividends     -       -       -       -       -       -       -       (7,500 )     (7,500 )     -       (7,500 )
Loss on Modification of Warrants Triggering Extinguishment of Debt     -       -       -       -       -       -       29,900       -       29,900               29,900  
Net Loss     -       -       -       -       -       -       -       (204,333 )     (204,333 )     (7,901 )     (212,234 )
Balance, March 31, 2018     200,500     $ 401,000       375,000     $ 375,000       26,862,817     $ 1,343,141     $ 9,469,699     $ (9,260,276 )   $ 2,328,564     $ (191,240 )   $ 2,137,324  

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Three Months Ended March 31,  
    2019     2018  
Cash Flows From Operating Activities:                
Net income (loss)   $ 160,155     $ (212,234 )
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:                
Depreciation     322,925       305,410  
Amortization and Accretion     33,124       45,047  
Increase in Deferred Rent Receivable     (22,089 )     (23,736 )
Stock Based Compensation     50,529       45,000  
Gain on Sale of Investments     (1,069 )     -  
Loss on Extinguishment of Debt     -       29,900  
Gain on Settlement of Debt     -       (94,925 )
Gain on Derivative Liability     (103 )     (40,423 )
Changes in Operating Assets and Liabilities, Net of Assets and Liabilities Acquired:                
Accounts & Rents Receivable     (268,963 )     52,796  
Prepaid Expenses     38,085       (45,979 )
Accounts Payable and Accrued Liabilities     (46,455 )     147,464  
Cash Provided by Operating Activities     266,139       208,320  
                 
Cash Flows From Investing Activities:                
Issuance of Note Receivable     (143,666 )     -  
Purchase of Investments in Debt Securities     -       (34,576 )
Proceeds from Sale of Investments in Debt Securities     151,041       -  
Capital Expenditures on Property and Equipment Additions     (962,254 )     (143,445 )
Cash Used in Investing Activities     (954,879 )     (178,021 )
                 
Cash Flows From Financing Activities:                
Proceeds from Issuance of Debt, Outside Parties     159,875       52,862  
Payments on Debt, Outside Parties     (147,318 )     (132,448 )
Deferred Loan Costs Paid     (8,885 )     -  
Dividends Paid on Preferred Stock     (7,500 )     (7,500 )
Cash Used In Financing Activities     (3,828 )     (87,086 )
                 
Net Decrease in Cash     (692,568 )     (56,787 )
Cash and Cash Equivalent and Restricted Cash at Beginning of the Year     1,307,207       972,148  
Cash and Cash Equivalent and Restricted Cash at End of the Year   $ 614,639     $ 915,361  
                 
Supplemental Disclosure of Cash Flow Information                
Cash Paid for Interest   $ 506,367     $ 453,698  
Cash Paid for Income Taxes   $ -     $ -  
                 
Cash and Cash Equivalent   $ 386,124     $ 105,486  
Restricted Cash     228,515       809,875  
Total Cash and Cash Equivalent and Restricted Cash   $ 614,639     $ 915,361  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities                
Dividends declared on Series D Preferred Stock   $ 7,500     $ 7,500  
Offers from Line of Credit to Settle Bonds Payable   $ -     $ 380,075  

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

GLOBAL HEALTHCARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of the Business

 

Global Healthcare REIT, Inc. (the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT) for the purpose of investing in real estate and other assets related to the healthcare industry. Prior to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as a reverse acquisition whereby WPF was deemed to be the accounting acquirer.

 

The Company intends to make a REIT election under sections 856 through 859 of the Internal Revenue Code of 1986, as amended. Such election will be made by the Board of Directors at such time as the Board determines that we qualify as a REIT under applicable provisions of the Internal Revenue Code.

 

The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. As of 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.

 

7

 

 

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.

 

8

 

 

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.

 

9

 

 

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.

 

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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.

 

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(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  

 

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(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.

 

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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.

 

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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.

 

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(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.

 

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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.

 

17

 

 

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 )

 

12. LEGAL PROCEEDINGS

 

The Company and/or its affiliated subsidiaries are involved in the following litigation:

 

Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.

 

The Company’s wholly owned subsidiary, was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged counsel but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.

 

As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.

 

While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.

 

Southern Tulsa, LLC v. Healthcare Management of Oklahoma, LLC, District Court of Tulsa County, State of Oklahoma, Case No. CJ – 2016- 01781.

 

This matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former operator at that facility. The Court has ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters are pending.

 

Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.

 

This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity; and as a result we believe the likelihood of a material adverse result is remote.

 

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13. SUBSEQUENT EVENTS

 

On April 12, 2019, the Company entered into a definitive Asset Purchase Agreement to acquire the Higher Call Nursing Center in Quapaw, Oklahoma. The transaction is subject to numerous conditions such as completing our due diligence, financing, completion of the operations transfer agreement, and is not closed as of the date of this report.

 

On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Zvi Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a bonus for 2018 services in the amount of $90,000 payable in shares of restricted common stock. The shares were valued at $0.33 per share (the closing price of the Company’s stock on April 2, 2019), resulting in 272,727 shares of Common Stock. The Amendment also defines a Bonus Plan for Mr. Rhine for future periods which provides for additional incentive compensation if certain performance milestones are achieved.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC.

 

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

 

● macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets;

 

● changes in national and local economic conditions in the real estate and healthcare markets specifically;

 

● legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;

 

● the availability of debt and equity capital;

 

● changes in interest rates;

 

● competition in the real estate industry; and,

 

● the supply and demand for operating properties in our market areas.

 

Overview

 

Global Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was organized for the purpose of investing in real estate related to the long-term care industry.

 

We plan to elect to be treated as a real estate investment trust (REIT) in the future; however, we did not make that election for the 2019 fiscal year.

 

We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio will be comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments within our healthcare segments using the following five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA.

 

The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the following:

 

Compelling demographics driving the demand for healthcare services;
Specialized nature of healthcare real estate investing; and
Ongoing consolidation of a fragmented healthcare real estate sector.

 

Acquisitions

 

We did not acquire any properties during the three month periods ended March 31, 2019 and 2018.

 

20

 

 

Properties

 

As of March 31, 2019, we owned eleven long-term care facilities including a campus of three buildings in Tulsa, OK. The following table provides summary information regarding these facilities at March 31, 2019:

 

Property Name   Location   Effective
Percentage
Equity
Ownership
    Date
Acquired
  Gross
Square Feet
    Purchase
Price
    Outstanding
Debt at
March 31, 2019
 
                                 
Middle GA Nursing Home (a/k/a Crescent Ridge)   Eastman, GA     100 %   3/15/2013     28,808     $ 5,000,000     $ 3,533,486  
                                         
Warrenton Health and Rehabilitation   Warrenton, GA     100 %   12/31/2013     26,894     $ 3,500,000     $ 2,270,447  
                                         
Southern Hills Retirement Center   Tulsa, OK     100 %   2/7/2014     104,192     $ 2,000,000     $ 7,105,218  
                                         
Goodwill Nursing Home   Macon, GA     85 %   5/19/2014     46,314     $ 7,185,000     $ 4,355,739  
                                         
Edwards Redeemer Health & Rehab   Oklahoma City, OK     100 %   9/16/2014     31,939     $ 3,142,233     $ 2,118,284  
                                         
Providence of Sparta Nursing Home   Sparta, GA     100 %   9/16/2014     19,441     $ 2,836,930     $ 2,961,250  
                                         
Meadowview Healthcare Center   Seville, OH     100 %   9/30/2014     27,500     $ 3,000,000     $ 2,919,900  
                                         
Grand Prairie Nursing Home   Lonoke, AR     100 %   9/16/2014     40,737     $ 6,742,767     $ 4,618,006  
                                         
Glen Eagle Healthcare & Rehab (Formerly Abbeville Health & Rehab)   Abbeville, GA     100 %   5/25/2016     29,393     $ 2,100,000     $ 3,024,317  

 

Property Name   2019 Base Revenue
Per Lease
    Operating Lease Expiration  
             
Middle Georgia Nursing Home (a/k/a Crescent Ridge)   $ 720,000       October 31, 2022  
Warrenton Health and Rehabilitation   $ 642,846       June 30, 2026  
Southern Hills Retirement Center   $ 78,000       May 31, 2019  
Goodwill Nursing Home   $ 560,138       February 1, 2027  
Edwards Redeemer Health & Rehab   $ 574,958       October 31, 2022  
Providence of Sparta Nursing Home   $ 494,496       June 30, 2026  
Meadowview Healthcare Center   $ -       November 30, 2023  
GL Nursing Home   $ -       -  
Abbeville Health & Rehab   $ -       -  

 

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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.

 

Results of Operations

 

The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Results of Operations - Three months Ended March 31, 2019 Compared to the Three months Ended March 31, 2018

 

Rental revenues for the three month periods ended March 31, 2019 and 2018 totaled $895,288 and $812,065, respectively, an increase of $83,223. The Company also had healthcare revenue of $379,791 for the three months ended March 31, 2019, compared to $0 for the three months ended March 31, 2018, related to the commencement of operations at the Glen Eagle facility in Abbeville, GA. Looking forward, we expect to commence operations at the Southern Hills ILF facility in 2019 which we expect to contribute more meaningfully to healthcare revenues as the year progresses, as we expect to be the operator of that facility with a manager. We also expect Meadowview to begin paying rent in 2019 with material upside if certain occupancy-based escalators are triggered.

 

For the three months ended March 31, 2019, we recognized rental revenues on seven properties, with no revenues recognized from our assisted living facility and independent living facility located in Tulsa, Oklahoma the GL Nursing facility in Lonoke, AR or the Meadowview facility in Seville, OH.

 

General and administrative expenses were $193,479 and $145,155 for the three month periods ended March 31, 2019 and 2018, respectively, an increase of $48,324. For the three months ended March 31, 2019 and March 31, 2018, respectively, general and administrative expenses included $50,529 and $45,000 of share based compensation related to restricted stock and common stock awards.

 

Property taxes, insurance, and other operating expenses totaled $349,188 and $80,816 for the three month periods ended March 31, 2019 and 2018, respectively. Lessees are responsible for the payment of insurance, taxes and other charges while under the lease. Should the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We have been required to cover these expenses at our Abbeville facility as we fund the initial working capital needs to stabilize the operations. We are also responsible for property taxes and insurance related to the ALF and ILF at our Southern Hills Retirement Center.

 

Depreciation expense increased $17,515 from $305,410 for the three months ended March 31, 2018 to $322,925 for three months ended March 31, 2019. We have not recorded depreciation expense on our assisted living facility and independent living facility located at our Southern Hills Retirement Center which will commence once renovations have been completed and the properties are placed in service.

 

The Company had $5,467 interest income for the three months ended March 31, 2019 and no interest income for the three months ended March 31, 2018.

 

Interest expense decreased $72,131 from $598,366 for the three months ended March 31, 2018 to $526,235 for the three months ended March 31, 2019. We capitalized $14,525 of interest during the three months ended March 31, 2019.

 

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Liquidity and Capital Resources

 

Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities.

 

Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from rental revenues received and existing cash on hand. We plan to renew secured obligations that mature during 2019, as our projected cash flow from operations will be insufficient to retire the debt. Our restricted cash approximated $228,515 as of March 31, 2019 and is to be expended on debt service, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home.

 

Cash provided by operating activities was $266,139 for the three months ended March 31, 2019 compared to cash provided by operating activities of $208,320 for the three months ended March 31, 2018. Cash flows from operations were impacted by the decrease in expenses and accounts receivable, and the increase in rental revenues received and accounts payable during the first three months of 2019.

 

Cash used in investing activities was $954,879 for the three-month period ended March 31, 2019 compared to cash used in investing activities of $178,021 for the three month period ended March 31, 2018. The increase reflects increased spending on property renovations and refurbishments.

 

Cash used financing activities was $3,828 for the three months ended March 31, 2019 compared to cash used in financing activities of $87,086 for the three months ended March 31, 2018. During the first three months of 2019, we issued $159,875 in debt and made payments on debt of $147,318. During the first three months of 2018, we issued $52,862 in debt in cash and made cash payments on debt of $132,448.

 

As of March 31, 2019 and December 31, 2018, our debt balances consisted of the following:

 

    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  

 

The weighted average interest rate and term of our fixed rate debt are 6.14% and 3.88 years, respectively, as of March 31, 2019. The weighted average interest rate and term of our variable rate debt are 7% and 18.36 years, respectively, as of March 31, 2019.

 

Mortgage Loans and Lines of Credit Secured by Real Estate

 

Mortgage loans and other debts such as lines 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 or corporate guarantees. Mortgage loans for the periods presented consisted of the following:

 

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    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.

 

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(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.

 

We have $8.9 million of debt maturing and expect principal reduction payments of approximately $391,661 in the year ended December 31, 2019. There is also $10.3 million in debt in technical default maturing after December 31, 2019 but shown due immediately. While we anticipate being able to refinance all the loans at reasonable market terms upon maturity, inability to do so may impact our financial position and results of operations. We expect to refinance $7.4 million in mortgage loans maturing in 2019 as the associated properties meet loan to value requirements currently being employed in commercial lending markets. We have $125,000 in note obligations maturing in 2019. The following is a summary of our subordinated debt and corporate debt at March 31, 2019 and December 31, 2018:

 

Subordinated and Corporate Debt

 

Our subordinated debt 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.

 

Our corporate debt at March 31, 2019 and December 31, 2018 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.

 

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    Face     Principal Outstanding at,     Stated Interest   Maturity  
Series   Amount     March 31, 2019     December, 31, 2018     Rate   Date  
                             
10% Senior Secured Promissory Note   $ 125,000     $ 125,000     $ 125,000     10.0% Fixed     December 31, 2018  
10% Senior Unsecured Promissory Notes     300,000       300,000       300,000     10.0% Fixed     October 31, 2020  
11% Senior Secured Promissory Notes     2,235,000       2,235,000       2,235,000     11.0% Fixed     October 31, 2021  
                                     
            $ 2,660,000     $ 2,660,000              

 

Contractual Obligations

 

As of March 31, 2019, we had the following contractual obligations:

 

    Total     Less Than 1 Year     1 – 3 Years     3 – 5 Years     More Than 5 Years  
Notes and Bonds Payable - Principal   $ 37,102,647     $ 28,239,408     $ 6,076,830     $ 131,824     $ 2,654,585  
Notes and Bonds Payable - Interest     3,760,500       1,228,060       919,692       211,390       1,401,358  
                                         
Total Contractual Obligations   $ 40,863,147     $ 29,467,468     $ 6,996,522     $ 343,214     $ 4,055,943  

 

Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand, combined proceeds from the issuance of our Senior Secured Promissory Notes in the aggregate amount of $1,160,000 during 2018 and revenues generated from operations are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations at Southern Hills Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.

 

Critical Accounting Policies

 

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.

 

Property Acquisitions

 

We allocate the purchase price of acquired properties to net tangible and identified intangible assets and any liabilities based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing and leasing at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the purchase price or fair value of an acquired property.

 

26

 

 

Impairment of Long Lived Assets

 

When circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties using standard industry valuation techniques.

 

Recently Adopted Accounting Pronouncements

 

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 2018. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.

 

Subsequent Events

 

On April 12, 2019, the Company entered into a definitive Asset Purchase Agreement to acquire the Higher Call Nursing Center in Quapaw, Oklahoma. The transaction is subject to numerous conditions such as completing our due diligence, financing, completion of the operations transfer agreement, and is not closed as of the date of this report.

 

On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Zvi Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a bonus for 2018 services in the amount of $90,000 payable in shares of restricted common stock. The shares were valued at $0.33 per share (the closing price of the Company’s stock on April 2, 2019), resulting in 272,727 shares of Common Stock. The Amendment also provides for an incentive bonus program for future periods subject to meeting certain performance milestones.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

 

Our management, including our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were not effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures.

 

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company and/or its affiliated subsidiaries are involved in the following litigation:

 

Bailey v. GL Nursing, LLC, et.al. in the in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151 .

 

The Company’s wholly owned subsidiary, was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel but have no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease. As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.

 

While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.

 

Southern Tulsa, LLC v. Healthcare Management of Oklahoma, LLC, District Court of Tulsa County, State of Oklahoma, Case No. CJ – 2016- 01781.

 

This matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former operator at that facility. The Court has ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters are pending.

 

Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.

 

This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity; and as a result we believe the likelihood of a material adverse result is remote.

 

Item 1A. Risk Factors

 

None, except as previously disclosed.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None, except as previously disclosed, such as the 272,727 shares of restricted common stock granted to Mr. Zvi Rhine as a bonus for services in 2018, and effective March 1, 2019, we issued 90,909 shares of common stock to each of Baller, Desmond and Neuman under the Directors’ Compensation Plan.

 

Item 3. Defaults Upon Senior Securities

 

None, except as disclosed in this Report.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

None.

 

28

 

 

Item 6. Exhibits

 

31.1   Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002*
     
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002*
     
32.   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

101.INS   XBRL Instance Document**
101.SCH   XBRL Schema Document**
101.CAL   XBRL Calculation Linkbase Document**
101.LAB   XBRL Label Linkbase Document**
101.PRE   XBRL Presentation Linkbase Document**
101.DEF   XBRL Definition Linkbase Document**

 

* filed herewith

** furnished, not filed

 

29

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GLOBAL HEALTHCARE REIT, INC.
                             
Date: May 20, 2019 By: /s/ Lance Baller
   

Lance Baller, Interim CEO

(Principal Executive Officer)

 

Date: May 20, 2019 By: /s/ Zvi Rhine
    Zvi Rhine, Chief Financial Officer
    (Principal Accounting Officer)

 

30

 

 

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