NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AdCare Health Systems, Inc. (“AdCare”), through its subsidiaries (together, the “Company” or “we”), is a self-managed real estate investment company that invests primarily in real estate purposed for long-term healthcare and senior living. Our business primarily consists of leasing and subleasing such facilities to third-party tenants, which operate the facilities. As of
December 31, 2016
, the Company owned, leased, or managed for third parties
29
facilities primarily in the Southeast. The operators of the Company's facilities provide a range of health care services to patients and residents, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.
The Company was incorporated in Ohio on August 14, 1991, under the name Passport Retirement, Inc. In 1995, the Company acquired substantially all of the assets and liabilities of AdCare Health Systems, Inc. and changed its name to AdCare Health Systems, Inc. AdCare completed its initial public offering in November 2006. Initially based in Ohio, the Company expanded its portfolio through a series of strategic acquisitions to include properties in a number of other states, primarily in the Southeast. In 2012, the Company relocated its executive offices and accounting operations to Georgia, and AdCare changed its state of incorporation from Ohio to Georgia on December 12, 2013.
Historically, the Company's business focused on owning and operating skilled nursing and assisted living facilities. The Company also managed facilities on behalf of unaffiliated owners with whom the Company entered into management contracts. In July 2014, the Company's Board of Directors (the “Board”) approved a strategic plan to transition (the “Transition”) the Company to a healthcare property holding and leasing company through a series of leasing and subleasing transactions. As of December 31, 2015, the Company completed the Transition through: (i) leasing to third-party operators all of the healthcare properties which it owns and previously operated; (ii) subleasing to third-party operators all of the healthcare properties which it leases (but does not own) and previously operated; and (iii) continuing the
one
remaining management agreement to manage
two
skilled nursing facilities and
one
independent living facility for third parties.
The Company leases its currently-owned healthcare properties, and subleases its currently-leased healthcare properties, on a triple-net basis, meaning that the lessee (
i.e
., the third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the properties including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual escalation clauses. As a result of the Transition, the Company now has many of the characteristics of a real estate investment trust ("REIT") and is now focused on the ownership, acquisition and leasing of healthcare related properties. The Board is analyzing and considering: (i) whether and, if so, when, we could satisfy the requirements to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”); (ii) the structural and operational complexities which would need to be addressed before we could qualify as a REIT, including the disposition of certain assets or the termination of certain operations which may not be REIT compliant; and (iii) if we were to qualify as a REIT, whether electing REIT status would be in the best interests of the Company and its shareholders in light of various factors, including our significant consolidated federal net operating loss carryforwards of approximately
$65.1 million
as of December 31, 2016. There is no assurance that the Company will qualify as a REIT in future taxable years or, if it were to so qualify, that the Board would determine that electing REIT status would be in the best interests of the Company and its shareholders.
As of
December 31, 2016
, the Company owns, leases, or manages
29
facilities primarily in the Southeast. Of the
29
facilities, the Company: (i) leased
14
owned and subleased
11
leased skilled nursing facilities to third-party tenants; (ii) leased
one
owned assisted living facilities to third-party tenants; and (iii) managed on behalf of third-party owners
two
skilled nursing facilities and
one
independent living facility (see Note 7
- Leases
for a full description of the Company's leases).
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP") in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC").
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported results of operations during the reporting period. Examples of significant estimates include the self-insurance reserve for professional and general liability, allowance for doubtful accounts, contractual allowances for Medicaid, Medicare, and managed care reimbursements, deferred tax valuation allowance, fair value of employee and nonemployee stock based awards, fair value estimation methods used to determine the assigned fair value of assets and liabilities acquired in acquisitions, valuation of goodwill and other long-lived assets, and cash flow projections. Actual results could differ materially from those estimates.
Principles of Consolidation
The consolidated financial statements include the Company's majority owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated through consolidation. For subsidiaries that are not wholly owned by the Company, the portions not controlled by the Company are presented as non-controlling interests in the consolidated financial statements.
Arrangements with other business enterprises are evaluated, and those in which AdCare is determined to have controlling financial interest are consolidated. Guidance is provided by FASB ASC Topic 810-10, "
Consolidation—Overall",
which includes consolidation of business enterprises to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This guidance includes controlling financial interests that may be achieved through arrangements that do not involve voting interests. In absences of clear control through voting interests, a company's exposure (variable interest) to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. If an enterprise holds the power to direct and right to receive benefits of an entity, it would be considered the primary beneficiary. The primary beneficiary is required to consolidate the assets, liabilities and results of operations of the variable interest entity in its financial statements.
The Company has evaluated and concluded that as of
December 31, 2016
, they have no relationship with a variable interest entity ("VIE") in which they are the primary beneficiary required to consolidate the entity.
Reclassifications
Certain reclassifications have been made to the
2015
financial information to conform to the
2016
presentation with no effect on the Company's consolidated financial position or results of operations. Reclassifications were made to the Balance Sheet as of
December 31, 2015
to reflect adoption of Accounting Standards Update ("ASU") 2015-03, which requires debt issuance costs to be presented as a direct reduction from the carrying debt amount, and consolidated statements of cash flows for the year ended
December 31, 2015
to reflect the 2016 presentation of items within "Changes in operating assets and liabilities".
Cash, Cash Equivalents, and Restricted Cash and Investments
The Company considers all unrestricted short-term investments with original maturities less than three months, which are readily convertible into cash, to be cash equivalents. Certain cash, cash equivalents and investment amounts are restricted for specific purposes such as mortgage escrow requirements, reserves for capital expenditures on United States Housing and Urban Development ("HUD") insured facilities and collateral for other debt obligations.
Revenue Recognition
Triple-Net Leased Properties.
The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our consolidated balance sheets.
Management Fee Revenue and Other.
The Company recognizes management fee revenues as services are provided. Further, the Company recognizes interest income from lease inducements receivables and loans made to tenants.
Allowances.
The Company assesses the collectibility of our rent receivables, including straight-line rent receivables. The Company bases its assessment of the collectibility of rent receivables on several factors, including, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments, the Company provides a reserve against the recognized straight-line rent receivable asset for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease, the Company
may adjust its reserve to increase or reduce the rental revenue recognized in the period the Company makes such change in its assumptions or estimates.
At
December 31, 2016
, the Company allowed for approximately
$7.5 million
on approximately
$8.4 million
of gross patient care related receivables primarily from our operations before completion of our Transition. Allowance for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types. All patient care receivables exceeding 365 days are fully allowed at
December 31, 2016
. The increase in the reserves for patient care is primarily included in discontinued operations.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, restricted investments, accounts receivable and straight-line rent receivables. Cash and cash equivalents, restricted cash and restricted investments are held with various financial institutions. From time to time, these balances exceed the federally insured limits. These balances are maintained with high quality financial institutions which management believes limits the risk.
Accounts receivable are recorded at net realizable value. The Company performs ongoing evaluations of its tenants and significant third-party payors with which they contract, and generally does not require collateral. The Company maintains an allowance for doubtful accounts which management believes is sufficient to cover potential losses. Delinquent accounts receivable are charged against the allowance for doubtful accounts once collection has been determined to be unlikely. Accounts receivable are considered past due and placed on delinquent status based upon contractual terms as well as how frequently payments are received, on an individual account basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for major improvements are capitalized. Depreciation commences when the assets are placed in service. Maintenance and repairs which do not improve or extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded. Depreciation is recorded on a straight-line basis over the estimated useful lives of the respective assets. Property and equipment also includes bed license intangibles for states other than Ohio (where the building and bed license are deemed complimentary assets) and are amortized over the life of the building. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable.
Leases and Leasehold Improvements
The Company leases certain facilities and equipment in the normal course of business. At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating lease or capital lease. As of
December 31, 2016
, all of the Company's leased facilities are accounted for as operating leases. For operating leases that contain scheduled rent increases, the Company records rent expense on a straight-line basis over the term of the lease. The lease term is also used to provide the basis for establishing depreciable lives for leasehold improvements.
Intangible Assets and Goodwill
Intangible assets consist of finite lived and indefinite lived intangibles. The Company's finite lived intangibles include lease rights and certain certificate of need ("CON") and bed licenses that are not separable from the associated buildings. Finite lived intangibles are amortized over their estimated useful lives. For the Company's lease related intangibles, the estimated useful life is based on the terms of the underlying facility leases averaging approximately
ten
years. For the Company's CON/bed licenses that are not separable from the buildings, the estimated useful life is based on the building life when acquired with an average estimated useful life of approximately
32
years. The Company evaluates the recoverability of the finite lived intangibles whenever an impairment indicator is present.
The Company's indefinite lived intangibles consist primarily of values assigned to CON/bed licenses that are separable from the buildings. The Company does not amortize goodwill or indefinite lived intangibles. On an annual basis, the Company evaluates the recoverability of the indefinite lived intangibles and goodwill by performing an impairment test. The Company performs its annual test for impairment during the fourth quarter of each year. For the year ended
December 31, 2016
the test results indicated no impairment necessary.
Deferred Financing Costs
The Company records deferred financing costs associated with debt obligations as direct reduction from the carrying amount of the debt liability. Costs are amortized over the term of the related debt using the straight-line method and are reflected as interest expense. The straight-line method yields results substantially similar to those that would be produced under the effective interest rate method.
Income Taxes and Uncertain Tax Positions
Deferred tax assets or liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that included the enactment date. Deferred tax assets are also recognized for the future tax benefits from net operating loss and other carry forwards. Valuation allowances are recorded for deferred tax assets when the recoverability of such assets is not deemed more likely than not.
Judgment is required in evaluating uncertain tax positions. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is measured to determine the amount of benefit to recognize in the financial statements. The Company classifies unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the consolidated balance sheets. The Company is subject to income taxes in the U.S. and numerous state and local jurisdictions. In general, the Company's tax returns filed for the 2013 through
2016
tax years are still subject to potential examination by taxing authorities.
In early 2014, the Internal Revenue Service ("IRS") initiated an examination of the Company's income tax return for the 2011 income tax year. On May 7, 2014, the IRS completed and closed the examination and no changes were required to the Company's 2011 income tax return.
In October 2014, the Georgia Department of Revenue ("GDOR") initiated an examination of the Company's Georgia income tax returns and net worth returns for the 2010, 2011, 2012, and 2013 income tax years, which was closed during 2016, with no adjustments required to the filed tax returns. The Company is not currently under examination by any other major income tax jurisdiction.
The Company is not currently under examination by any other major income tax jurisdiction.
Stock Based Compensation
The Company follows the provisions of ASC topic 718 “
Compensation - Stock Compensation
”, which requires the use of the fair-value based method to determine compensation for all arrangements under which employees, non-employees, and others receive shares of stock or equity instruments (options, warrants or restricted shares). All awards are amortized on a straight-line basis over their vesting terms.
Fair Value Measurements and Financial Instruments
Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1— Quoted market prices in active markets for identical assets or liabilities
Level 2— Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3— Significant unobservable inputs
The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.
Self-Insurance
The Company was self-insured for employee medical claims (in all states except for Oklahoma, where the Company participates in the Oklahoma state subsidy program) and had a large deductible workers' compensation plan (in all states except for Ohio, where workers' compensation is covered under a premium-only policy provided by the Ohio Bureau of Workers' Compensation). Additionally, the Company maintains insurance programs, including general and professional liability, property, casualty, directors' and officers' liability, crime, automobile and employment practices liability.
In July 2014, the Board approved and commenced the Transition. In 2015, the insurance programs described above changed in order to address the different needs of the Company as a result of the Transition. The Company's workers compensation plan transitioned from a high deductible to a guaranteed cost program in February 2015. As of
December 31, 2016
, claims incurred but not reported or unsettled claims for the legacy self-insured employee medical plan and the large deductible workers' compensation plan are recognized as a liability in the consolidated financial statements.
Professional liability insurance was provided to facilities operations up until the date of transfer. Claims which were associated with prior operations of the Company but not reported as of the transition date were self-insured.
The Company has self-insured against professional and general liability claims since it discontinued its healthcare operations in connection with the Transition. The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (v) the status and likely success of any mediation or settlement discussions; and (vi) the venues in which the actions have been filed or will be adjudicated. The Company currently believes that most of the professional and general liability actions, and particularly many of the most recently filed actions, are defensible and intends to defend them through final judgment. Accordingly, the self-insurance reserve primarily reflects the Company's estimated legal costs of litigating the pending actions accordingly. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve may not be sufficient to cover the legal costs actually incurred in litigating the pending actions. Since these reserves are based on estimates the actual expenses we incur may differ from the amount reserved. See Note 8
- Accrued Expenses
.
Recently Issued Accounting Pronouncements
Except for rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws, FASB ASC is the sole source of authoritative GAAP literature applicable to the Company. The Company has reviewed the FASB accounting pronouncements and ASU interpretations that have effectiveness dates during the periods reported and in future periods.
In April 2014, the FASB issued
ASU 2014-08
, which amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU should be applied prospectively and is effective for the Company for the 2015 annual and interim reporting periods. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The Company adopted this ASU as of January 1, 2015.
In May 2014, the FASB issued
ASU 2014-09,
guidance which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. The new standard requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The new guidance does not affect the recognition of revenue from leases. In August 2015, the FASB delayed the effective date of the new revenue standard by one year. As a result, this new revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the impact on the Company's financial position and results of operations and related disclosures.
In August 2014, the FASB issued
ASU 2014-15
, which provides guidance regarding an entity’s ability to continue as a going concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has not yet determined the impact, if any, that the adoption of this new standard will have on its consolidated financial statements.
In April 2015, the FASB issued
ASU 2015-03
, which requires debt issuance costs to be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The new standard is to be applied on a retrospective basis and reported as a change in an accounting principle. In August 2015, the FASB released clarifying guidance for debt issuance costs related to line-of-credit arrangements, which permits debt issuance costs to be presented as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Debt issuance costs associated with a line of credit can be amortized ratably over the term of the line-of-credit arrangement. This standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures..
In September 2015, the FASB issued
ASU 2015-16
, which
requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance the acquirer recognizes, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. New disclosures are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recognized in current-period earnings by line item that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At adoption, the new guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company is currently evaluating changes in its accounting required by this new standard and the impact to the Company's financial position and related disclosures.
In November 2015, the FASB issued
ASU 2015 - 17,
under the simplification and productivity initiative for presentation of deferred income tax liabilities and assets. This guidance simplifies the presentation of deferred income taxes such that deferred tax liabilities and assets are to be classified as noncurrent in a classified balance sheet. The update does not amend the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual reporting period and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has elected to early adopt, prospectively, the new guidance as of the balance sheet date. At December 31, 2015, the adoption resulted in a reclassification from current to noncurrent deferred tax assets of
$6.2 million
before consideration of the related valuation allowance, with the net amount presented as noncurrent deferred tax liability. The Company did not have any reclassifications of the deferred tax liability amounts. Prior periods are not retrospectively adjusted under the prospective adoption.
In January 2016, the FASB issued
ASU 2016-01,
which provides revised accounting guidance related to the accounting for and reporting of financial instruments. This guidance significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.
In February 2016, the FASB issued
ASU 2016-02,
as a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance,
ASC 840,
Leases
.
ASU 2016-02
creates a new Topic,
ASC 842, Leases
. This new topic retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash flows.
In March 2016, the FASB issued
ASU 2016-09
, which amends the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016,
with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.
In June 2016, the FASB issued
ASU 2016-13
, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15
, which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be applied prospectively as of the earliest date practicable. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our Consolidated Statements of Cash Flows.
In November 2016, the FASB issued
ASU 2016-18
, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted using a retrospective transition method to each period presented. We are currently evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share except net income or loss is adjusted by the impact of the assumed issuance of convertible shares and the weighted-average number of shares of common stock outstanding (which includes potentially dilutive securities, such as options, warrants, non-vested shares, and additional shares issuable under convertible notes outstanding during the period when such potentially dilutive securities are not anti-dilutive). Potentially dilutive securities from options, warrants and unvested restricted shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from convertible promissory notes are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For
2016
and
2015
, potentially dilutive securities of
4.4 million
and
4.5 million
, respectively, were excluded from the diluted loss per share calculation because including them would have been anti-dilutive in both periods.
The following table provides a reconciliation of net loss for continuing and discontinued operations and the number of shares used in the computation of both basic and diluted earnings per share:
|
|
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|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
(Amounts in 000's, except per share data)
|
|
Income (loss)
|
|
Shares
(1)
|
|
Per
Share
|
|
Loss
|
|
Shares
(1)
|
|
Per
Share
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
5,966
|
|
|
|
|
|
|
$
|
(17,811
|
)
|
|
|
|
|
Preferred stock dividends
|
|
(7,335
|
)
|
|
|
|
|
|
(5,208
|
)
|
|
|
|
|
Basic loss from continuing operations
|
|
$
|
(1,369
|
)
|
|
19,892
|
|
|
$
|
(0.07
|
)
|
|
$
|
(23,019
|
)
|
|
19,680
|
|
|
$
|
(1.17
|
)
|
Diluted loss from continuing operations
|
|
$
|
(1,369
|
)
|
|
19,892
|
|
|
$
|
(0.07
|
)
|
|
$
|
(23,019
|
)
|
|
19,680
|
|
|
$
|
(1.17
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(13,428
|
)
|
|
|
|
|
|
$
|
(4,892
|
)
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
—
|
|
|
|
|
|
|
815
|
|
|
|
|
|
Basic Loss from discontinued operations attributable to the Company
|
|
$
|
(13,428
|
)
|
|
19,892
|
|
|
$
|
(0.67
|
)
|
|
$
|
(5,707
|
)
|
|
19,680
|
|
|
$
|
(0.29
|
)
|
Diluted Loss from discontinued operations attributable to the Company
|
|
$
|
(13,428
|
)
|
|
19,892
|
|
|
$
|
(0.67
|
)
|
|
$
|
(5,707
|
)
|
|
19,680
|
|
|
$
|
(0.29
|
)
|
Net Loss Attributable to AdCare:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss
|
|
$
|
(14,797
|
)
|
|
19,892
|
|
|
$
|
(0.74
|
)
|
|
$
|
(28,726
|
)
|
|
19,680
|
|
|
$
|
(1.46
|
)
|
Diluted loss
|
|
$
|
(14,797
|
)
|
|
19,892
|
|
|
$
|
(0.74
|
)
|
|
$
|
(28,726
|
)
|
|
19,680
|
|
|
$
|
(1.46
|
)
|
|
|
(1)
|
Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Amounts in 000’s)
|
|
2016
|
|
2015
|
Stock options
|
|
355
|
|
|
267
|
|
Common stock warrants - employee
|
|
1,450
|
|
|
1,559
|
|
Common stock warrants - nonemployee
|
|
437
|
|
|
492
|
|
Shares issuable upon conversion of convertible debt
|
|
2,165
|
|
|
2,165
|
|
Total shares
|
|
4,407
|
|
|
4,483
|
|
NOTE 3. LIQUIDITY AND PROFITABILITY
Sources of Liquidity
The Company continues to undertake measures to grow its operations and to streamline its cost infrastructure by: (i) increasing future lease revenue through acquisitions and investments in existing properties; (ii) modifying the terms of existing leases; (iii) refinancing or repaying debt to reduce interest costs and mandatory principal repayments; and (iv) reducing general and administrative expenses.
At
December 31, 2016
, the Company had
$14.0 million
in cash and cash equivalents as well as restricted cash of
$5.5 million
. Management anticipates access to several sources of liquidity, including cash flows from operations and cash on hand. Management holds routine ongoing discussions with existing lenders and potential new lenders to refinance current debt on a longer term basis and, in recent years, has refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, many of which have been executed under government guaranteed lending programs. Historically, the Company has raised capital through other sources of unsecured debt and junior forms of capital, including issuances of preferred stock and convertible debt.
On April 13, 2015 and June 2, 2015, the Company issued
575,000
and
588,235
shares, respectively, of the Company's
10.875%
Series A Cumulative Redeemable Preferred Stock, no par value per share and a liquidation preference of
$25.00
per share (the “Series A Preferred Stock”), at a public offering of
$25.75
and
$25.50
per share respectively, in "best-efforts" underwritten registered public offerings. In connection therewith, the Company received net cash proceeds of approximately
$13.5 million
and
$14.1 million
, respectively, after the payment of underwriting commissions and discounts and other offering expenses payable by the Company.
On July 21, 2015, the Company entered into At Market Issuance Sales Agreements with two agents, pursuant to which the Company may offer and sell, from time to time, up to
800,000
shares of the Series A Preferred Stock, in an “at-the-market” offering program ("ATM"). As of December 31, 2015, the Company sold
313,695
shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately
$6.7 million
.
During the year ended
December 31, 2016
, the Company sold
336,905
shares of the Series A Preferred Stock, generating net proceeds to the Company of approximately
$6.8 million
and sold no shares of Series A Preferred Stock under the ATM during the fourth quarter of 2016. Since the inception of the ATM in July 2015 and through
December 31, 2016
, the Company sold
650,600
shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately
$13.5 million
(see Note 12
-
Common and Preferred Stock
). The Company ceased sales under the ATM in September 2016, and will not engage in any additional sales of the Series A Preferred Stock while any preferred share repurchase program is in effect (see Note 19
- Subsequent Events
).
The Company routinely has discussions with existing and new potential lenders to refinance current debt on a long-term basis and, in recent periods, has refinanced short-term acquisition-related debt with traditional long-term mortgage notes, some of which have been executed under government guaranteed lending programs.
On July 30, 2015, the Company amended the terms of that certain
8%
subordinated convertible note, issued by the Company to Cantone Asset Management, LLC ("CAM") and due July 31, 2015, with a principal payment amount as of such date of
$4.8 million
to: (i) extend the maturity date with respect to
$1.5 million
of the principal amount of the such note to October 31, 2017; (ii) increase the interest rate from 8.0% to
10.0%
per annum; and (iii) increase the conversion price from
$3.97
to
$4.25
per share (see Note 9
- Notes Payable and Other Debt
).
On September 19, 2016, the Company obtained an option to extend the maturity date of the credit facility entered into in September 2013 between a certain wholly-owned subsidiary of the Company and Housing & Healthcare Funding, LLC (the "Quail Creek Credit Facility") from September 2017 to September 2018, which option management intends to exercise. There is no assurance that we will be able to refinance or further extend the maturity date of this credit facility on terms that are favorable to the Company or at all.
On September 29, 2016, the Company closed on HUD-guaranteed financing in the amount of
$3.7 million
, which refinanced approximately
$3.1 million
in debt previously owed by a certain-wholly owned subsidiary of the Company to The PrivateBank and Trust Company (the "PrivateBank"), with respect to the Company’s facility located in Georgetown, South Carolina (the “Georgetown Facility”)
On October 6, 2016, the Company completed the sale of
nine
facilities located in Arkansas (the "Arkansas Facilities") for a total sales price of
$55.0 million
, which sale price consisted of: (i) cash consideration of
$52.0 million
(of which
$35.2 million
was accounted for as a net cashless transfer of assets for debt liabilities); and (ii) a promissory note in the amount of
$3.0 million
(the “Skyline Note”). Proceeds to the Company from the sale of the Arkansas Facilities exceeded related obligations by approximately
$23.0 million
.
On October 6, 2016, in conjunction with the sale of the Arkansas Facilities, the Company repaid
$2.4 million
of debt associated with the Company’s facility located in College Park, Georgia (the “College Park Facility”).
On December 14, 2016, the Company closed on HUD-guaranteed financing in the amount of
$5.9 million
, which refinanced approximately
$5.9 million
in debt previously owed by a certain-wholly owned subsidiary of the Company to the PrivateBank (the “Sumter Credit Facility”) with respect to the Company’s facility located in Sumter, South Carolina (the “Sumter Facility”).
On June 18, 2016, a subsidiary of the Company entered into a new master sublease agreement (the “Peach Health Sublease”) with affiliates (collectively, “Peach Health Sublessee”) of Peach Health Group, LLC (“Peach Health”), providing that Peach Health Sublessee would take possession of the facilities (the “Peach Facilities”) subleased to affiliates of New Beginnings Care, LLC (“New Beginnings”) prior to their bankruptcy. The Peach Facilities are comprised of: (i) an
85
-bed skilled nursing facility located in Tybee Island, Georgia (the “Oceanside Facility”); (ii) a
50
-bed skilled nursing facility located in Tybee Island, Georgia (the
“Savannah Beach Facility”); and (iii) a
131
-bed skilled nursing facility located in Jeffersonville, Georgia (the “Jeffersonville Facility”). Rent for the Savannah Beach Facility, the Oceanside Facility, and the Jeffersonville Facility is
$0.3 million
,
$0.4 million
and
$0.6 million
per annum, respectively; but such rent is only
$1
per month for the Oceanside and Jeffersonville Facilities until the date such facilities are recertified by the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) or April 1, 2017, whichever first occurs (the “Rent Commencement Date”). The Oceanside and Jeffersonville Facilities were recertified by CMS in February 2017 and December 2016, respectively. In addition, with respect to the Oceanside and Jeffersonville Facilities, Peach Health Sublessee is entitled to three months of
$1
per month rent following the Rent Commencement Date and, following such three-month period, five months of rent discounted by
50%
. In the event that the Savannah Beach Facility is decertified due to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to
$1
a month until it is recertified along with the other facilities. The Company also provided Peach Health with a
$1.0 million
line of credit to be used for working capital and capital expenditure needs (the “Peach Line” or "Peach Note"). As of December 31, 2016, Peach Health had borrowed approximately
$0.7 million
under the Peach Line.
On January 10, 2017, the Company repurchased
$6.7 million
of its
10%
convertible subordinated notes due April 30, 2017 pursuant to a cash tender offer for any and all of such outstanding convertible promissory notes (the "Tender Offer"). (See Note 19 -Subsequent Events).
Cash Requirements
At
December 31, 2016
, the Company had
$80.0 million
in indebtedness of which the current portion is
$13.2 million
. This current portion is comprised of the following components: (i) convertible debt of
$9.2 million
; and (ii) remaining debt of approximately
$4.1 million
which includes senior debt - bond and mortgage indebtedness (for a complete listing of our debt see Note 9 - Notes Payable and Other Debt). Subsequent to December 31, 2016, the Company repurchased
$6.7 million
in convertible debt pursuant to the Tender Offer using proceeds from the sale of the Arkansas Facilities.
The Company anticipates net principal disbursements of approximately
$13.2 million
, which includes
$9.1 million
of convertible debt (
$6.7 million
of which was repaid as part of the Tender Offer in January 2017), approximately
$0.5 million
of payments on shorter term vendor notes,
$1.8 million
of routine debt service amortization, and a
$1.7 million
payment of other debt which is inclusive of anticipated proceeds on refinancing of one facility in Oklahoma of approximately
$1.2 million
. Based on the described sources of liquidity, the Company expects sufficient funds for its operations and scheduled debt service, at least through the next twelve months. On a longer term basis, at
December 31, 2016
, the Company has approximately
$19.3 million
of debt maturities due over the next
two
year period ending December 31, 2018. These debt maturities include the aforementioned
$9.1 million
of convertible promissory notes, which are convertible into shares of the common stock as well as
$1.2 million
for current maturities with respect to
one facility located in Oklahoma. The Company believes its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.
In November 2016, the Board approved two share repurchase programs (collectively, the "November 2016 Repurchase Program"), pursuant to which AdCare was authorized to repurchase up to
1.0 million
shares of the common stock and
100,000
shares of the Series A Preferred Stock during a twelve-month period. As of
December 31, 2016
, the Company had repurchased
2,300
shares of Series A Preferred Stock for approximately
$48,000
, including commissions and customary business expenses, at an average price of
$20.97
(excluding commissions) per share and
133,316
shares of the common stock for
$0.3 million
at an average price of
$1.54
per share. The Company suspended the November 2016 Repurchase Program in February 2017.
In the
twelve months ended
December 31, 2016
, the Company repurchased
150,000
shares of common stock pursuant to the share repurchase program announced on November 12, 2015 (the “November 2015 Repurchase Program”) at an average purchase price of approximately
$2.05
per share, exclusive of commissions and related fees, for a net disbursement of approximately
$0.2 million
. Pursuant to the November 2015 Repurchase Program, the Company was authorized to repurchase up to
500,000
shares of its outstanding common stock during a
twelve
-month period. The Repurchase Program expired in accordance with its terms upon completion of such twelve-month period on November 12, 2016.
The Company is a defendant in a total of
44
professional and general liability cases. The claims generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured or died while patients of facilities operated by the Company due to professional negligence or understaffing. The Company established a self-insurance reserve for these professional and general liability claims, included within “Accrued expenses and other” in the Company’s unaudited consolidated balance sheets, of
$6.9 million
and
$0.2 million
at December 31, 2016, and December 31, 2015, respectively. The Company currently believes that most of the professional and general liability actions, and particularly many of the most recently filed actions, are defensible and intends to defend them through final judgement. Accordingly, the self-insurance reserve primarily reflects the Company's estimated legal costs of litigating the pending actions accordingly. Anticipated costs associated
with such litigation are reflected in the
$6.9 million
accrual and are expected to be paid over time as litigation continues. The duration of such legal proceedings could be greater than one year subsequent to the year ended December 31, 2016, however management cannot reliably estimate the exact timing of payments. The Company expects to finance litigation and potential indemnity costs through cash on hand as well as other sources as described above.
During the twelve months ended December 31, 2016, the Company generated negative cash flow from operations and anticipates positive cash flow from operations in 2017. In order to satisfy the Company’s capital needs, the Company seeks to: (i) refinance debt where possible to obtain more favorable terms; (ii) raise capital through the issuance of debt or equity securities; and (iii) increase operating cash flows through acquisitions. The Company anticipates that these actions, if successful, will provide the opportunity to maintain its liquidity, thereby permitting the Company to better meet its operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful. Management’s ability to raise additional capital through the issuance of equity securities and the terms upon which we are able to raise such capital may be adversely affected if we are unable to maintain the listing of the common stock and Series A Preferred Stock on the NYSE MKT.
NOTE 4. RESTRICTED CASH AND INVESTMENTS
The following presents the Company's various restricted cash, escrow deposits and investments:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Amounts in (000's)
|
|
2016
|
|
2015
|
Cash collateral and certificates of deposit
|
|
$
|
260
|
|
|
$
|
7,687
|
|
Replacement reserves
|
|
811
|
|
|
950
|
|
Escrow deposits
|
|
529
|
|
|
532
|
|
Total current portion
|
|
1,600
|
|
|
9,169
|
|
|
|
|
|
|
Restricted investments for debt obligations
|
|
2,274
|
|
|
2,264
|
|
HUD and other replacement reserves
|
|
1,590
|
|
|
1,294
|
|
Total noncurrent portion
|
|
3,864
|
|
|
3,558
|
|
Total restricted cash and investments
|
|
$
|
5,464
|
|
|
$
|
12,727
|
|
Cash collateral and certificates of deposit
—In securing mortgage financing from certain lending institutions, the Company and certain of its wholly-owned subsidiaries are required to deposit cash and/or certificates of deposit to be held as collateral in accordance with the terms of the loan agreements.
Replacement reserves
—Cash reserves set aside for non-critical building repairs to be completed within the next 12 months, pursuant to loan agreements.
Escrow deposits
—In connection with financing secured through our lenders, several wholly-owned subsidiaries of the Company are required to make monthly escrow deposits for taxes and insurance.
Restricted investments for debt obligations
—In compliance with certain financing and insurance agreements, the Company and certain wholly-owned subsidiaries of the Company are required to deposit cash held as collateral by the lender or in escrow with certain designated financial institutions.
HUD and other replacement reserves
—The regulatory agreements entered into in connection with the financing secured through HUD require monthly escrow deposits for replacement and improvement of the HUD project assets.
NOTE 5. PROPERTY AND EQUIPMENT
The following table sets forth the Company’s property and equipment excluding
$1.2 million
classified as assets held for sale at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Amounts in 000's)
|
|
Estimated Useful
Lives (Years)
|
|
2016
|
|
2015
|
Buildings and improvements
|
|
5 - 40
|
|
$
|
84,108
|
|
|
$
|
128,912
|
|
Equipment and computer related
|
|
2 - 10
|
|
12,286
|
|
|
16,469
|
|
Land
|
|
—
|
|
3,988
|
|
|
7,128
|
|
Construction in process
|
|
—
|
|
602
|
|
|
390
|
|
|
|
|
|
100,984
|
|
|
152,899
|
|
Less: accumulated depreciation and amortization
|
|
|
|
(21,816
|
)
|
|
(26,223
|
)
|
Property and equipment, net
|
|
|
|
$
|
79,168
|
|
|
$
|
126,676
|
|
For the twelve months ended
December 31, 2016
and
2015
, total depreciation and amortization expense was
$5.3 million
and
$7.3 million
, respectively. There were no amounts of total depreciation and amortization expense recognized in Loss from discontinued operations, net of tax during the twelve month period ended
December 31, 2016
. Total depreciation and amortization expense excludes
$0.1 million
during the twelve month period ended
December 31, 2015
, that is recognized in Loss from discontinued operations, net of tax.
During the twelve months ended
December 31, 2016
, the Company recorded no impairments in Property and equipment, net. We recognized approximately
$21.0 thousand
impairment for an office located in Roswell, Georgia as part of the sale from amounts previously recorded in Assets of disposal group held for sale (see Note 11
- Discontinued Operations
).
On October 6, 2016, the Company completed the sale of the Arkansas Facilities, together with substantially all of the fixtures, equipment, furniture and other assets relating to such facilities (see Note 11
- Discontinued Operations
).
During the twelve months ended
December 31, 2015
, the Company recognized impairment charges of approximately
$0.5 million
and
$0.1 million
to write down the carrying value of its
two
office buildings located in Roswell, Georgia and one office building located in Rogers, Arkansas, respectively. The assets and liabilities of the office buildings are included in Assets and Liabilities Held for Sale as of
December 31, 2015
, with all sales completed during 2016 (see Note 11
- Discontinued Operations
).
NOTE 6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000's)
|
|
Bed Licenses
(included in
property and
equipment)
|
|
Bed Licenses—
Separable
|
|
Lease
Rights
|
|
Total
|
Balances, January 1, 2015
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
35,690
|
|
|
$
|
2,471
|
|
|
$
|
7,406
|
|
|
$
|
45,567
|
|
Accumulated amortization
|
|
(3,587
|
)
|
|
—
|
|
|
(3,319
|
)
|
|
(6,906
|
)
|
Net carrying amount
|
|
$
|
32,103
|
|
|
$
|
2,471
|
|
|
$
|
4,087
|
|
|
$
|
38,661
|
|
|
|
|
|
|
|
|
|
|
Dispositions
|
|
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
—
|
|
|
(525
|
)
|
|
(525
|
)
|
Accumulated amortization
|
|
—
|
|
|
—
|
|
|
525
|
|
|
525
|
|
Amortization expense
|
|
(1,173
|
)
|
|
—
|
|
|
(667
|
)
|
|
(1,840
|
)
|
Reclass to held for sale
|
|
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated amortization
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
|
|
|
|
|
|
|
|
Gross
|
|
35,690
|
|
|
2,471
|
|
|
6,881
|
|
|
45,042
|
|
Accumulated amortization
|
|
(4,760
|
)
|
|
—
|
|
|
(3,461
|
)
|
|
(8,221
|
)
|
Net carrying amount
|
|
30,930
|
|
|
2,471
|
|
|
3,420
|
|
|
36,821
|
|
|
|
|
|
|
|
|
|
|
Dispositions
|
|
|
|
|
|
|
|
|
Gross
|
|
(12,879
|
)
|
|
—
|
|
|
—
|
|
|
(12,879
|
)
|
Accumulated amortization
|
|
2,123
|
|
|
—
|
|
|
—
|
|
|
2,123
|
|
Amortization expense
|
|
(846
|
)
|
|
—
|
|
|
(666
|
)
|
|
(1,512
|
)
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2016
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
22,811
|
|
|
$
|
2,471
|
|
|
$
|
6,881
|
|
|
$
|
32,163
|
|
Accumulated amortization
|
|
(3,483
|
)
|
|
—
|
|
|
(4,127
|
)
|
|
(7,610
|
)
|
Net carrying amount
|
|
$
|
19,328
|
|
|
$
|
2,471
|
|
|
$
|
2,754
|
|
|
$
|
24,553
|
|
Amortization expense for bed licenses is included in property and equipment depreciation and amortization expense (see Note 5
- Property and Equipment
).
Estimated amortization expense for all finite-lived intangibles for each of the future years ending December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
Amounts in (000's)
|
|
Bed
Licenses
|
|
Lease
Rights
|
2017
|
|
$
|
683
|
|
|
$
|
667
|
|
2018
|
|
683
|
|
|
667
|
|
2019
|
|
683
|
|
|
667
|
|
2020
|
|
683
|
|
|
482
|
|
2021
|
|
683
|
|
|
203
|
|
Thereafter
|
|
15,913
|
|
|
68
|
|
Total
|
|
$
|
19,328
|
|
|
$
|
2,754
|
|
The following table summarizes the changes in the carrying amount of goodwill for the years ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
(Amounts in 000's)
|
Balances, January 1, 2015
|
|
|
Goodwill
|
|
$
|
5,023
|
|
Accumulated impairment losses
|
|
(799
|
)
|
Total
|
|
$
|
4,224
|
|
|
|
|
Impairment losses
|
|
(41
|
)
|
Net change during year
|
|
(41
|
)
|
|
|
|
Balances, December 31, 2015
|
|
|
Goodwill
|
|
$
|
5,023
|
|
Accumulated impairment losses
|
|
(840
|
)
|
Total
|
|
$
|
4,183
|
|
|
|
|
Disposals
|
|
(2,078
|
)
|
Net change during year
|
|
(2,078
|
)
|
|
|
|
Balances, December 31, 2016
|
|
|
Goodwill
|
|
$
|
2,945
|
|
Accumulated impairment losses
|
|
(840
|
)
|
Total
|
|
$
|
2,105
|
|
On July 1, 2015, the Company completed the sale of its Bentonville Manor Nursing Home,
83
-bed skilled nursing facility located in Bentonville, Arkansas ("Bentonville") for approximately
$3.4 million
net of closing costs. The Company wrote off the remaining goodwill of
$0.04 million
at the time of sale. For the year ended
December 31, 2016
, the Company determined that no other impairment adjustments were necessary for goodwill. The Company does not amortize goodwill or indefinite lived intangibles, which consist of separable bed licenses.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities and disposed of
$2.1 million
of goodwill (see Note 11
- Discontinued operations).
NOTE 7. LEASES
Operating Leases
The Company leases a total of
eleven
skilled nursing facilities from unaffiliated owners under non-cancelable leases, most of which have rent escalation clauses and provisions for payments of real estate taxes, insurance and maintenance costs; each of the skilled nursing facilities that are leased by the Company are subleased to and operated by third-party tenants. The Company also leases certain office space located in Atlanta and Suwanee, Georgia. The Atlanta office space is subleased to a third-party entity.
Foster Prime Lease.
Eight
of the Company's skilled nursing facilities (collectively, the "Georgia Facilities") are leased under a single master indivisible arrangement, by and between ADK Georgia, LLC, a Georgia limited liability company and subsidiary of the Company (“ADK”), and William M. Foster ("Lessor"), as landlord (the "Prime Lease"). Under the Prime Lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. In addition, other potential defaults related to an individual facility may cause a default of the entire Prime Lease. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.
On August 14, 2015, ADK and Lessor entered into an amendment to the Prime Lease (the “Second Amendment”) whereby the parties amended the Prime Lease to extend its initial term by
seven
years, resulting in a new lease termination date of August 31, 2027. In consideration for the extension, among other things, the Company agreed to: (i) pay to Lessor a fee of
$575,000
; (ii) release to Lessor upon the earlier of January 1, 2016 or the termination of the Prime Lease
one
month of pre-paid rent in the amount of
$398,000
; (iii) release to Lessor upon the earlier of January 1, 2017 or the termination of the Prime Lease the security deposit paid under the Prime Lease in the amount of
$500,000
; and (iv) pay to Lessor within
ten
days of the end of each quarter a payment of
$26,000
. The annual base rent due in the first year immediately following the execution of the Second Amendment is approximately
$5.3 million
.
Under the Second Amendment, the Company (and not Lessor) is responsible for the cost of maintaining the Georgia Facilities, including the cost to repair or replace all structural or capital items due to ordinary wear and tear.
Pursuant to the Second Amendment: (i) Lessor consented to ADK’s sublease of the Georgia Facilities to a third-party tenant and ADK agreed to obtain Lessor’s consent prior to any future sublease of any of the Georgia Facilities; and (ii) the Company executed a lease guaranty for the benefit of Lessor whereby the Company guaranteed the performance of all of ADK’s obligations under the Prime Lease. In connection with such guaranty, the Company also consented to being primarily responsible for all of ADK’s obligations under the Prime Lease, thereby allowing Lessor to proceed directly against the Company, without having taken any prior action against ADK, should ADK be in default under the Prime Lease.
On September 9, 2015 ADK and Lessor entered into a third amendment to the Prime Lease whereby commencing on July 1, 2016 and continuing during lease years two through five, rent increases at
2.0%
annually and then increases at
2.5%
annually for the remainder of the lease term.
Bonterra/Parkview Master Lease.
Two
of the Company's facilities are leased under a single indivisible agreement (the "Bonterra/Parkview Master Lease"); therefore, a breach at a single facility could subject the second facility to the same default risk. On September 1, 2015, the Bonterra/Parkview Master Lease was amended (the "Bonterra/Parkview Master Lease Amendment"), whereby the parties agreed to: (i) extend its initial term by
three
years, resulting in a new lease termination date of August 31, 2025; (ii) provide consent to the sublease of the
two
facilities to a third-party operator; and (iii) extend the optional renewal terms to
two
separate
twelve
-year renewal periods. In consideration for the amended terms, among other things, the Company agreed to a monthly increase in base rent equal to
37.5%
of the difference between the base rent owed by the Company under the Bonterra/Parkview Master Lease and the base rent owed to the Company by the new sublease operator. The annual base rent due in the first year immediately following the execution of the Bonterra/Parkview Master Lease Amendment is approximately
$1.9 million
.
Covington Prime Lease.
One of the Company's facilities is leased under an agreement dated August 26, 2002, as subsequently amended (the "Covington Prime Lease"), by and between the Company and Covington Realty, LLC. On August 1, 2015, the Covington Prime Lease was amended (the "Covington Prime Lease Amendment"), whereby the parties agreed to: (i) provide consent to the sublease of the facility to a third-party operator; (ii) extend the term of the lease to expire on April 30, 2025; and (iii) set the annual base rent, effective May 1, 2015 and continuing throughout the lease term, equal to
102%
of the immediately preceding lease year's base rent. The annual base rent due in the first year immediately following the execution of the Covington Prime Lease Amendment is approximately
$0.6 million
.
Future Minimum Lease Payments
Future minimum lease payments for each of the next five years ending December 31 are as follows:
|
|
|
|
|
|
|
|
(Amounts in
000's)
|
2017
|
|
$
|
8,126
|
|
2018
|
|
8,308
|
|
2019
|
|
8,492
|
|
2020
|
|
8,671
|
|
2021
|
|
8,830
|
|
Thereafter
|
|
46,456
|
|
Total
|
|
$
|
88,883
|
|
Leased and Subleased Facilities to Third-Party Operators
In connection with the Company's transition to a self-managed real estate investment company,
26
facilities (
15
owned by us and
11
leased to us) are leased or subleased on a triple net basis, meaning that the lessee (i.e., the new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Termination of Arkansas Leases
. Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”) the Arkansas Facilities to affiliates (the “Aria Sublessees”) of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated each Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease. The term of each Aria Sublease was approximately
fifteen
(15) years, and the annual aggregate base and special rent payable to the Company under the Aria Subleases was approximately
$4.2 million
in the first year of such subleases and the base rent was subject to specified annual rent escalators.
On July 17, 2015, the Company made a short-term loan to Highlands Arkansas Holdings, LLC, an affiliate of Aria (“HAH”), for working capital purposes, and, in connection therewith, HAH executed a promissory note (the “ HAH Note”) in favor of the Company. Since July 17, 2015, the HAH Note has been amended from time to time and at December 31, 2015 and December 31, 2016, had an outstanding principal amount of
$1.7 million
and
$1.0 million
respectively and matured on December 31, 2015. The Company received
$0.7 million
in partial repayment of the HAH Note during the second quarter of 2016. The Company is currently seeking the repayment of the remaining balance of the HAH Note and expects repayment.
Lease of Arkansas Facilities.
From February 5, 2016 to October 6, 2016,
nine
wholly-owned subsidiaries of the Company (each, a “Skyline Lessor”) leased the Arkansas Facilities to Skyline Healthcare LLC (“Skyline”), or an affiliate of Skyline (the “Skyline Lessee”), pursuant to a Master Lease Agreement, dated February 5, 2016 (the “Skyline Lease”). The term of the Skyline Lease commenced on April 1, 2016. The initial lease term of the Skyline Lease was
fifteen
(15) years with
two
(2) separate renewal terms of
five
(5) years each. The Skyline Lease provided for annual rent in the first year of
$5.4 million
, and an annual rent escalator of
2.5%
each year during the initial term and any subsequent renewal terms. Skyline guaranteed the obligations of its affiliates.
Sale of Arkansas Facilities.
In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of
$55.0 million
, which the Purchaser could exercise in accordance with such agreement until May 1, 2016.
On April 22, 2016, the Purchaser delivered notice to the Company of its intent to exercise its option to purchase the Arkansas Facilities. Pursuant to such purchase option, on May 10, 2016, the Skyline Lessors and the Purchaser entered into a Purchase and Sale Agreement (the “Purchase Agreement”) whereby the Skyline Lessors agreed to sell, and the Purchaser agreed to buy, the Arkansas Facilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the nursing home business at such facilities, for an aggregate purchase price of
$55.0 million
. Pursuant to the Purchase Agreement the purchase price consisted of: (i) a deposit of
$1.0 million
deposited by the Purchaser with an escrow agent at the time of the Purchaser’s exercise of the purchase option; (ii) cash consideration of
$51.0 million
to be paid at closing; and (iii) the Skyline Note from the Purchaser in favor of the Skyline Lessors with a principal amount of
$3.0 million
, to be executed and delivered at closing. For further information, see Note 3 -
Liquidity and Profitability
.
On July 14, 2016, August 26, 2016 and September 29, 2016, the Skyline Lessors entered into separate letter agreements with Skyline and the Purchaser, which in the aggregate amended the Purchase Agreement to extend the date by which the purchase and sale of the Arkansas Facilities was required to close from August 1, 2016 to October 6, 2016 and increased the deposit payable by the Purchaser from
$1.0 million
to
$1.8 million
.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities to the Purchaser pursuant to the Purchase Agreement, as amended (see Note 11
- Discontinued Operations
).
New Beginnings.
On January 22, 2016, New Beginnings filed petitions to reorganize its finances under the U.S. Bankruptcy Code. New Beginnings operated the Oceanside Facility, the Savannah Beach Facility and the Jeffersonville Facility (collectively, the “New Beginnings Facilities”) pursuant to a master lease dated November 3, 2015, with the Company. The Jeffersonville Facility was decertified by CMS in February 2016 for deficiencies related to its operations and maintenance of the facility and in May 2016, a Notice of Involuntary Termination from CMS was issued to New Beginnings indicating that its operations at the Oceanside Facility were not in substantial compliance with CMS Requirements. From January 1, 2016 until June 4, 2016, New Beginnings paid de minimis rent for the Oceanside and Savannah Beach Facilities and did not pay rent for the Jeffersonville Facility.
On March 4, 2016, due to defaults by New Beginnings, the Company petitioned the Bankruptcy Court to lift the automatic stay to enable the Company to regain possession of the New Beginnings Facilities. Prior to the court ruling on the motion, the Company entered into a consent order (the “Consent Order”) with New Beginnings, the debtors’ creditors’ committee, which represents the unsecured creditors in the proceedings, and Gemino Healthcare Finance, LLC (the debtors’ secured lender), in which the Company agreed to give the creditors’ committee until June 4, 2016 to sell all of New Beginnings’ assets, including the leasehold interests and personal property for the New Beginnings Facilities. The Consent Order further provided that if the creditors’ committee was unable to sell the assets by such date, the automatic stay would be lifted and the Company would be allowed to reclaim possession of the New Beginnings Facilities. The court signed the Consent Order on May 9, 2016, and it was entered on the docket on May 10, 2016. The automatic stay was lifted as of June 4, 2016, thereby allowing the Company to take possession of the New Beginnings Facilities from New Beginnings.
Peach Health.
On June 18, 2016, ADK entered into the Peach Health Sublease with Peach Health Sublessee, providing that Peach Health Sublessee would take possession of the Peach Facilities and operate them as a subtenant.
The Peach Health Sublease became effective for the Jeffersonville Facility, on June 18, 2016 and for the Savannah Beach and Oceanside Facilities on July, 13, 2016 (the date on which ADK accepted possession of the facilities from New Beginnings).
The Peach Health Sublease is structured as a triple net lease, except that ADK assumes responsibility for the cost of certain deferred maintenance at the Savannah Beach Facility and capital improvements that may be necessary for Peach Health Sublessee to recertify the Oceanside and Jeffersonville Facilities with CMS so they are eligible for Medicare and Medicaid reimbursement. The term of the Peach Health Sublease for all
three
Peach Facilities expires on August 31, 2027.
As of
December 31, 2016
, the Company has invested
$0.8 million
in the Oceanside and Jeffersonville Facilities.
Rent for the Savannah Beach Facility, the Oceanside Facility and the Jeffersonville Facility is
$0.3 million
,
$0.4 million
and
$0.6 million
per annum, respectively. In addition, with respect to the Oceanside and Jeffersonville Facilities, Peach Health Sublessee is entitled to
$1
per month rent until the first month after recertification by CMS and three months thereafter and, following such
three
-month period,
five
months of rent discounted by
50%
. In addition, in the event that the Savannah Beach Facility is decertified due to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to
$1
a month until it is recertified along with the other facilities. The annual rent for each of the Peach Facilities will escalate at a rate of
3%
each year pursuant to the Peach Health Sublease.
Under the terms of the Peach Health Sublease, Peach Health Sublessee agreed to use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with CMS as soon as possible. In connection therewith, Peach Health Sublessee created an operating plan for such recertification, including a timetable and estimate of funds required from ADK for capital improvements for each such facility and submitted such plan to ADK for approval within
sixty
days of the commencement date of the Peach Health Sublease (a “Recertification Plan”). During the third quarter of 2016, the parties reached agreement on the terms of the Recertification Plan for both facilities.
On December 20, 2016, the Jeffersonville Facility was recertified by CMS and received a new Medicare/Medicaid provider contract. For further information regarding the recertification of the Oceanside Facility, see Note 19
- Subsequent Events.
In connection with the Peach Health Sublease, the Company has extended to Peach Health Sublessee a working capital line of credit of up to
$1.0 million
for operations at the Peach Facilities (the “Peach Line”), with interest accruing on the unpaid balance under the Peach Line at an interest rate of
13.5%
per annum. The entire principal amount due under the Peach Line, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The Peach Line is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Peach Health Sublessee. At
December 31, 2016
, there was a
$0.7 million
outstanding balance on the Peach Line. On April 7, 2017, the Company modified certain terms of the Peach Note in connection with the Peach Health Sublesses’ securing a
$2.5 million
working capital loan from a third party lender (see Note 19
- Subsequent Events).
Future Minimum Lease Receivables
Future minimum lease receivables for each of the next five years ending December 31 are as follows:
|
|
|
|
|
|
|
|
(Amounts in
000's)
(a)
|
2017
|
|
$
|
20,744
|
|
2018
|
|
21,824
|
|
2019
|
|
22,299
|
|
2020
|
|
22,825
|
|
2021
|
|
23,402
|
|
Thereafter
|
|
132,193
|
|
Total
|
|
$
|
243,287
|
|
(a)
R
ecertification of the Jeffersonville and Oceanside Facilities occurred on December 20, 2016 and February 7, 2017, respectively.
The following is a summary of the Company's leases to third-parties and which comprise the future minimum lease receivables of the Company. The terms of each lease are structured as "triple-net" leases. Each lease contains specific rent escalation amounts ranging from
2.0%
to
3.0%
annually. Further, each lease has one or more renewal options. For those facilities where the Company subleases, the renewal option in the sublease agreement is dependent on the Company's renewal of its lease agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Lease Term
|
|
|
|
|
|
|
Commencement
|
|
Expiration
|
|
Initial
|
Facility Name
|
|
Operator Affiliation
(1)
|
|
Date
|
|
Date
|
|
Annual Rent
|
|
|
|
|
|
|
|
|
(Thousands)
|
Owned
|
|
|
|
|
|
|
|
|
Eaglewood ALF
|
|
Beacon Health Management
|
|
8/1/2015
|
|
7/31/2025
|
|
$
|
720
|
|
Eaglewood Care Center
|
|
Beacon Health Management
|
|
8/1/2015
|
|
7/31/2025
|
|
720
|
|
H&C of Greenfield
|
|
Beacon Health Management
|
|
8/1/2015
|
|
7/31/2025
|
|
360
|
|
Southland Healthcare
|
|
Beacon Health Management
|
|
11/1/2014
|
|
10/31/2024
|
|
900
|
|
The Pavilion Care Center
|
|
Beacon Health Management
|
|
8/1/2015
|
|
7/31/2025
|
|
360
|
|
Attalla Health Care
|
|
C.R. Management
|
|
12/1/2014
|
|
8/31/2030
|
|
1,080
|
|
Autumn Breeze
|
|
C.R. Management
|
|
9/30/2015
|
|
9/30/2025
|
|
840
|
|
College Park
|
|
C.R. Management
|
|
4/1/2015
|
|
3/31/2025
|
|
600
|
|
Coosa Valley Health Care
|
|
C.R. Management
|
|
12/1/2014
|
|
8/31/2030
|
|
900
|
|
Glenvue H&R
|
|
C.R. Management
|
|
7/1/2015
|
|
6/30/2025
|
|
1,140
|
|
NW Nursing Center
|
|
Southwest LTC
|
|
12/31/2015
|
|
11/30/2025
|
|
300
|
|
Quail Creek
|
|
Southwest LTC
|
|
12/31/2015
|
|
11/30/2025
|
|
660
|
|
Georgetown Health
|
|
Symmetry Healthcare
|
|
4/1/2015
|
|
3/31/2030
|
|
288
|
|
Mountain Trace Rehab
|
|
Symmetry Healthcare
|
|
6/1/2015
|
|
5/31/2030
|
|
648
|
|
Sumter Valley Nursing
|
|
Symmetry Healthcare
|
|
4/1/2015
|
|
3/31/2030
|
|
770
|
|
Subtotal Owned Facilities (15)
|
|
|
|
|
|
$
|
10,286
|
|
Leased
|
|
|
|
|
|
|
|
|
Covington Care
|
|
Beacon Health Management
|
|
8/1/2015
|
|
4/30/2025
|
|
$
|
780
|
|
Lumber City
|
|
Beacon Health Management
|
|
11/1/2014
|
|
8/31/2027
|
|
840
|
|
LaGrange
|
|
C.R. Management
|
|
4/1/2015
|
|
8/31/2027
|
|
960
|
|
Thomasville N&R
|
|
C.R. Management
|
|
7/1/2014
|
|
8/31/2027
|
|
324
|
|
Jeffersonville
|
|
Peach Health
|
|
6/18/2016
|
|
8/31/2027
|
|
636
|
|
Oceanside
|
|
Peach Health
|
|
7/13/2016
|
|
8/31/2027
|
|
432
|
|
Savannah Beach
|
|
Peach Health
|
|
7/13/2016
|
|
8/31/2027
|
|
252
|
|
Bonterra
|
|
Wellington Health Services
|
|
9/1/2015
|
|
8/31/2025
|
|
1,020
|
|
Parkview Manor/Legacy
|
|
Wellington Health Services
|
|
9/1/2015
|
|
8/31/2025
|
|
1,020
|
|
Powder Springs
|
|
Wellington Health Services
|
|
4/1/2015
|
|
8/31/2027
|
|
2,100
|
|
Tara
|
|
Wellington Health Services
|
|
4/1/2015
|
|
8/31/2027
|
|
1,800
|
|
Subtotal Leased Facilities (11)
|
|
|
|
|
|
$
|
10,164
|
|
Total (26)
|
|
|
|
|
|
|
|
$
|
20,450
|
|
(1)
Represents the number of facilities which are leased or subleased to separate tenants, which tenants are affiliates of the entity named in the table above.
Our leases and subleases are by facility with tenants that are separate legal entities affiliated with the above operators. All facilities are skilled nursing facilities except for Eaglewood ALF which is an assisted living facility. All facilities have renewal provisions of
one
term of
five
years except facilities (Mountain Trace, Quail Creek, NW Nursing, Sumter Valley, and Georgetown) which have
two
renewal terms with each being
five
years. The leases also contain standard rent escalations that range from
2.0%
to
3.0%
annually.
NOTE 8. ACCRUED EXPENSES AND OTHER
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Amounts in (000's)
|
|
2016
|
|
2015
|
Accrued employee benefits and payroll related
|
|
$
|
442
|
|
|
$
|
1,332
|
|
Real estate and other taxes
|
|
557
|
|
|
411
|
|
Self-insured reserve
(1)
|
|
6,924
|
|
|
221
|
|
Accrued interest
|
|
251
|
|
|
484
|
|
Other accrued expenses
|
|
903
|
|
|
677
|
|
Total
|
|
$
|
9,077
|
|
|
$
|
3,125
|
|
(1)
The Company self-insures against professional and general liability cases and uses a third party administrator and outside counsel to manage and defend the claims (see Note 15
-
Commitments and Contingencies
).
NOTE 9. NOTES PAYABLE AND OTHER DEBT
Notes payable and other debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Amounts in (000's)
|
|
2016
|
|
2015
|
Senior debt—guaranteed by HUD
(a)
|
|
34,473
|
|
|
25,469
|
|
Senior debt—guaranteed by USDA
(a)
|
|
22,518
|
|
|
26,463
|
|
Senior debt—guaranteed by SBA
(a)
|
|
2,319
|
|
|
3,548
|
|
Senior debt—bonds
|
|
7,145
|
|
|
7,230
|
|
Senior debt—other mortgage indebtedness
|
|
5,639
|
|
|
51,128
|
|
Other debt
|
|
1,063
|
|
|
2,638
|
|
Convertible debt
(c)
|
|
9,200
|
|
|
9,200
|
|
Sub Total
|
|
82,357
|
|
|
125,676
|
|
Deferred financing costs
|
|
(2,196
|
)
|
|
(2,712
|
)
|
Unamortized discounts on bonds
|
|
(191
|
)
|
|
(205
|
)
|
Total
|
|
79,970
|
|
|
122,759
|
|
Less current portion
|
|
13,154
|
|
|
50,960
|
|
Less: portion included in liabilities of disposal group held for sale
(b)
|
|
—
|
|
|
958
|
|
Notes payable and other debt, net of current portion
|
|
$
|
66,816
|
|
|
$
|
70,841
|
|
(a)
HUD, U.S. Department of Agriculture ("USDA"), U.S. Small Business Administration ("SBA").
(b)
Includes no deferred financing costs at
December 31, 2016
and December 31, 2015 respectively.
(c)
On December 8, 2016, the Company announced the Tender Offer for any and all of its
$7.7 million
convertible subordinated notes due April 30, 2017. On January 10, 2017, the Company accepted for payment
$6.7 million
pursuant to the Tender Offer, (see Note 19 -
Subsequent events)
.
The following is a detailed listing of the debt facilities that comprise each of the above categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate
(a)
|
|
December 31, 2016
|
|
December 31, 2015
|
Senior debt - guaranteed by HUD
|
|
|
|
|
|
|
|
|
|
|
The Pavilion Care Center
|
|
Red Mortgage
|
|
12/01/2027
|
|
Fixed
|
|
4.16%
|
|
$
|
1,434
|
|
|
$
|
1,534
|
|
Hearth and Care of Greenfield
|
|
Red Mortgage
|
|
08/01/2038
|
|
Fixed
|
|
4.20%
|
|
2,191
|
|
|
2,251
|
|
Woodland Manor
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
5,447
|
|
|
5,556
|
|
Glenvue
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
8,457
|
|
|
8,628
|
|
Autumn Breeze
|
|
KeyBank
|
|
01/01/2045
|
|
Fixed
|
|
3.65%
|
|
7,352
|
|
|
7,500
|
|
Georgetown
(c)
|
|
Midland State Bank
|
|
01/10/2046
|
|
Fixed
|
|
2.98%
|
|
3,723
|
|
|
—
|
|
Sumter Valley
(d)
|
|
Key Bank
|
|
01/01/2047
|
|
Fixed
|
|
3.70%
|
|
5,869
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
34,473
|
|
|
$
|
25,469
|
|
Senior debt - guaranteed by USDA
(e)
|
|
|
|
|
|
|
|
|
Attalla
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
$
|
7,189
|
|
|
$
|
7,400
|
|
Coosa
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
6,483
|
|
|
6,671
|
|
Mountain Trace
|
|
Community B&T
|
|
01/24/2036
|
|
Prime + 1.75%
|
|
5.75%
|
|
4,384
|
|
|
4,507
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 1.50%
|
|
6.00%
|
|
4,462
|
|
|
4,576
|
|
Homestead
(b)
|
|
Square 1
|
|
10/14/2036
|
|
Prime + 1.00%
|
|
5.75%
|
|
—
|
|
|
3,309
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
22,518
|
|
|
$
|
26,463
|
|
Senior debt - guaranteed by SBA
|
|
|
|
|
|
|
|
|
College Park
|
|
CDC
|
|
10/01/2031
|
|
Fixed
|
|
2.81%
|
|
$
|
1,611
|
|
|
$
|
1,697
|
|
Stone County
(b)
|
|
CDC
|
|
07/01/2032
|
|
Fixed
|
|
2.42%
|
|
—
|
|
|
1,123
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 2.25%
|
|
5.75%
|
|
708
|
|
|
728
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,319
|
|
|
$
|
3,548
|
|
|
|
(a)
|
Represents cash interest rates as of
December 31, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
(b)
On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see Note 11
- Discontinued Operations).
(c)
On September 29, 2016, the Company closed a HUD-guaranteed financing in the amount of
$3.7 million
, maturing in
2046
and bearing an interest rate of
2.98%
(interest rate excludes annual mortgage insurance premiums), which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Georgetown Facility.
(d)
On December 14, 2016, the Company refinanced the Sumter Credit Facility with
$5.9 million
of new mortgage debt maturing in
2047
and bearing an interest rate of
3.70%
(interest rate excludes annual mortgage insurance premiums). The HUD-guaranteed mortgage refinances
$5.9 million
of short term debt that bore an interest rate of
4.71%
at September 30, 2016.
|
|
(e)
|
For the five skilled nursing facilities, the Company has term loans insured
70%
to
80%
by the USDA with financial institutions. The loans have an annual renewal fee for the USDA guarantee of
0.25%
of the guaranteed portion. The loans have prepayment penalties of
4%
to
6%
through 2016, which decline
1%
each year capped at
1%
for the remainder of the term.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate
(a)
|
|
December 31, 2016
|
|
December 31, 2015
|
Senior debt - bonds
|
|
|
|
|
|
|
|
|
|
|
Eaglewood Bonds Series A
|
|
City of Springfield, Ohio
|
|
05/01/2042
|
|
Fixed
|
|
7.65%
|
|
$
|
6,610
|
|
|
$
|
6,610
|
|
Eaglewood Bonds Series B
|
|
City of Springfield, Ohio
|
|
05/01/2021
|
|
Fixed
|
|
8.50%
|
|
535
|
|
|
620
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
7,145
|
|
|
$
|
7,230
|
|
|
|
(a)
|
Represents cash interest rates as of
December 31, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
December 31,
|
|
December 31,
|
Facility
|
Lender
|
Maturity
|
|
Interest Rate
(a)
|
|
2016
|
|
2015
|
Senior debt - other mortgage indebtedness
|
|
|
|
|
|
|
|
|
Sumter Valley
(c)
|
PrivateBank
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
4.71%
|
|
$
|
—
|
|
|
$
|
5,123
|
|
Georgetown
(g)
|
PrivateBank
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
4.71%
|
|
—
|
|
|
4,026
|
|
Northridge
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
—
|
|
|
4,230
|
|
Woodland Hills
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
—
|
|
|
3,557
|
|
Abington/Cumberland
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
—
|
|
|
4,029
|
|
Heritage Park
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 3.50%
|
|
6.00%
|
|
—
|
|
|
3,370
|
|
River Valley
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 3.50%
|
|
6.00%
|
|
—
|
|
|
3,989
|
|
Little Rock/West Markham
(b), (f)
|
PrivateBank
(d)
|
12/31/2016
|
|
LIBOR + 4.00%
|
|
6.00%
|
|
—
|
|
|
11,399
|
|
Quail Creek
(e)
|
Congressional Bank
|
09/30/2017
|
|
LIBOR + 4.75%
|
|
5.75%
|
|
4,432
|
|
|
5,000
|
|
Northwest
|
First Commercial
|
12/31/2017
|
|
Prime
|
|
5.00%
|
|
1,207
|
|
|
1,285
|
|
Stone County
(b)
|
Metro City
|
06/08/2022
|
|
Prime + 2.25%
|
|
6.25%
|
|
—
|
|
|
1,697
|
|
College Park
(f)
|
Bank of Las Vegas
|
05/01/2031
|
|
Prime + 2.00%
|
|
6.25%
|
|
—
|
|
|
2,465
|
|
Hembree Rd. Building
(h)
|
Fidelity Bank
|
12/01/2017
|
|
Fixed
|
|
5.50%
|
|
—
|
|
|
958
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
5,639
|
|
|
$
|
51,128
|
|
|
|
(a)
|
Represents cash interest rates as of
December 31, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
|
|
(b)
|
On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see Note 11
- Discontinued Operations).
|
|
|
(c)
|
On
March 24, 2016
, the Company obtained a lender commitment to extend the maturity date of the Sumter Credit Facility with PrivateBank from September 2016 to June 2017, subject to definitive documentation and certain closing conditions, which commitment expired on November 30, 2016. On June 13, 2016, the Company received a commitment to refinance the Sumter Credit Facility, subject to definitive documentation and certain closing conditions. On December 14, 2016, the Company refinanced existing mortgage debt with Key Bank on the Sumter Facility with
$5.9 million
of new mortgage debt maturing in
2047
and bearing an interest rate of
3.70%
(interest rate excludes annual mortgage insurance premiums). The HUD-guaranteed mortgage refinances $5.9 million of short term debt that bore an interest rate of
4.71%
at September 30, 2016.
|
|
|
(d)
|
On March 24, 2016, the Company obtained the release of approximately
$3.9 million
of restricted cash funds and applied the amounts as additional principal payments related to certain of the above debt facilities with the PrivateBank.
|
|
|
(e)
|
On September 19, 2016, the Company obtained an option to extend the maturity date of the Quail Creek Credit Facility from September 2017 to September 2018, which management intends to exercise.
|
(f)
On October 6, 2016, the related debt was repaid with a portion of the net proceeds from the sale of the Arkansas Facilities (see Note 11
- Discontinued Operations
).
(g)
On September 29, 2016, the Company closed a HUD-guaranteed financing with Midland State Bank in the amount of
$3.7 million
, maturing in 2046 and bearing an interest rate of
2.98%
(interest rate excludes annual mortgage insurance premiums), which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Georgetown Facility.
|
|
(h)
|
Debt included in liabilities of disposal group held for sale. On April 25, 2016, the Company completed the sale of the related office building located in Roswell, Georgia (see Note 11
- Discontinued Operations
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Maturity
|
|
Interest Rate
|
|
December 31, 2016
|
|
December 31, 2015
|
Other debt
|
|
|
|
|
|
|
|
|
|
|
First Insurance Funding
|
|
02/28/2017
|
|
Fixed
|
|
3.99%
|
|
$
|
20
|
|
|
$
|
14
|
|
Key Bank
|
|
10/17/2017
|
|
Fixed
|
|
0.00%
|
|
496
|
|
|
680
|
|
Reliant Rehabilitation
|
|
11/15/2016
|
|
Fixed
|
|
7.00%
|
|
—
|
|
|
944
|
|
Pharmacy Care of Arkansas
|
|
02/08/2018
|
|
Fixed
|
|
2.00%
|
|
547
|
|
|
1,000
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,063
|
|
|
$
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Facility
|
Conversion price
|
|
Maturity
|
|
Interest Rate
(a)
|
|
December 31, 2016
|
|
December 31, 2015
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
Issued July 2012
|
$
|
4.25
|
|
|
10/31/2017
|
|
Fixed
|
|
10.00%
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
Issued March 2015
(b)
|
$
|
4.25
|
|
|
04/30/2017
|
|
Fixed
|
|
10.00%
|
|
7,700
|
|
|
7,700
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
9,200
|
|
|
$
|
9,200
|
|
(a)
Represents cash interest rates as of
December 31, 2016
. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
(b)
On December 8, 2016, the Company announced the Tender Offer for any and all of its
$7.7 million
convertible subordinated notes due April 3, 2017. On January 10, 2017, the Company accepted for payment
$6.7 million
pursuant to the Tender Offer (see Note 19 -
Subsequent Events)
.
Scheduled Maturities
The schedule below summarizes the scheduled maturities as of
December 31, 2016
for each of the next
five
years and thereafter.
|
|
|
|
|
|
|
|
Amounts in (000's)
|
2017
|
|
$
|
13,218
|
|
2018
|
|
6,108
|
|
2019
|
|
1,844
|
|
2020
|
|
1,937
|
|
2021
|
|
2,030
|
|
Thereafter
|
|
57,220
|
|
Subtotal
|
|
82,357
|
|
Less: unamortized discounts
|
|
(191
|
)
|
Less: deferred financing costs
(1)
|
|
(2,196
|
)
|
Total notes and other debt
|
|
$
|
79,970
|
|
(1)
Approximately
$0.1 million
of deferred financing is recorded in "Current portion of convertible debt, net" on the Consolidated Balance sheets.
Debt Covenant Compliance
As of
December 31, 2016
, the Company has approximately
thirty-eight
credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on subsidiary level (i.e. facility, multiple facilities or a combination of subsidiaries comprising less than the Company's consolidated financial measurements). The subsidiary level requirements are as follows: (i) financial covenants measured against subsidiaries of the Company; and (ii) financial covenants measured against third-party operator performance. Some covenants are based on annual financial metric measurements whereas others are based on quarterly
financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of
December 31, 2016
, the Company has not been in compliance with certain financial and administrative covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including as necessary modifications to future covenant requirements or the elimination of certain requirements in future periods.
The Company’s credit-related instruments were all in financial compliance as of
December 31, 2016
.
Included in several of the Company’s various loan agreements are administrative covenants requiring that a set of audited financial statements be provided of the guarantor within
90
days of the end of each fiscal year (the “Administrative Covenants”). For the year ended
December 31, 2016
, management has either received a waiver for all such Administrative Covenants or has applied a
30
-day cure provision, as provided in the loan agreements.
Revolving Credit Facilities and Lines of Credit
Contemporary Healthcare
On August 17, 2012, in conjunction with the acquisition of the Companions Specialized Care Center, a 121-bed skilled nursing facility located in Tulsa, Oklahoma (“Companions”), a wholly owned subsidiary of the Company entered into a Loan Agreement with Contemporary Healthcare Capital LLC ("Contemporary") and issued a promissory note in favor of Contemporary with a principal amount of
$0.6 million
maturing on August 20, 2015 with an annual interest rate of
9.0%
. On May 14, 2015, the outstanding principal amount of
$0.2 million
under loan was repaid in full.
Gemino-Northwest Credit Facility
On May 30, 2013, NW 61st Nursing, LLC (“Northwest”), a wholly owned subsidiary of the Company, entered into a senior-secured revolving credit facility with Gemino Healthcare Finance, LLC with principal amount of
$1.0 million
. Interest accrued on the principal balance thereof at an annual rate of
4.75%
plus the current LIBOR rate. Northwest also paid to Gemino: (i) a collateral monitoring fee equal to
1.0%
per annum of the daily outstanding balance of the facility; and (ii) a fee equal to
0.5%
per annum of the unused portion of the facility. The facility was secured by a security interest in the accounts receivable of the Northwest facility. AdCare had unconditionally guaranteed all amounts owing under the Northwest Credit Facility. On April 30, 2015, the outstanding principal amount of
$1.0 million
under the facility was repaid in full.
Gemino-Bonterra Credit Facility
On April 27, 2011, ADK Bonterra/Parkview, LLC, a wholly owned subsidiary of the Company entered into a senior secured credit facility for up to
$2.0 million
with Gemino. Interest accrued on the principal balance outstanding at an annual rate equal to the LIBOR rate plus an applicable margin of
4.75%
to
5.00%
, which fluctuated depending upon the principal amount outstanding. On July 1, 2015, the outstanding principal amount of
$0.4 million
under the facility was repaid in full.
PrivateBank Credit Facility
During 2015, certain wholly owned subsidiaries (the “PrivateBank Borrowers”) the Company entered into a number of loan modifications with the PrivateBank, which modified that certain Loan Agreement, dated September 20, 2012, between the certain affiliates of the Company, PrivateBank and the Company, as guarantor (as amended, the “PrivateBank Credit Facility”). Under these modifications :(i) PrivateBank consented to the transfer of operations to new operators and the amendment of the related leases; (ii) the outstanding amount owing under the PrivateBank Credit Facility was reduced from
$8.8 million
to
$1.8 million
. In December 2015, the PrivateBank Credit Facility was repaid in full and as of December 31, 2016: (i) there were
no
cash borrowings outstanding under the PrivateBank Credit Facility and (ii) the Company had
$0.4 million
of outstanding letters of credit related to this credit facility.
PrivateBank-Woodland Nursing and Glenvue Nursing Credit Facility
On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Loan and Security Agreement with PrivateBank. The facility provided for a
$1.5 million
principal amount senior secured revolving credit facility. In the fourth quarter of 2015, the Woodland Nursing and Glenvue Nursing Credit Facility was repaid in full and the Company terminated and closed the facility.
Senior Debt-Guaranteed by HUD
Autumn Breeze
On December 17, 2014, Mt. Kenn Property Holdings, LLC (“Mt. Kenn”), a wholly owned subsidiary of the Company, entered into a Mortgage and Deed of Trust Agreement (the “Mt. Kenn Credit Facility”), with KeyBank National Association ("KeyBank"). The Mt. Kenn Credit Facility provides for a
$7.6 million
principal amount secured credit facility.
The Mt. Kenn Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Mt. Kenn Facility. HUD has insured all amounts owing under the Mt. Kenn Credit Facility. The Mt. Kenn Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, and failure to perform or comply with certain agreements. Upon the occurrence of certain events of default, KeyBank may, after receiving the prior written approval of HUD, terminate the Mt. Kenn Credit Facility and all amounts under the Mt. Kenn Credit Facility will become immediately due and payable. In connection with entering into the Mt. Kenn Credit Facility, Mt. Kenn entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Glenvue
On September 24, 2014, a wholly owned subsidiary of the Company entered into a Mortgage and Deed of Trust Agreement (the “Glenvue Credit Facility”), with Housing & Healthcare Finance, LLC ("H&H") in connection with the refinancing of the skilled nursing facility known as Glenvue Health and Rehabilitation ("Glenvue"). The Glenvue Credit Facility provides for an $
8.8 million
principal amount secured credit facility.
The Glenvue Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to Glenvue. HUD has insured all amounts owing under the Glenvue Credit Facility. The Glenvue Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Glenvue Credit Facility and all amounts under the Glenvue Credit Facility will become immediately due and payable. In connection with entering into the Glenvue Credit Facility, a wholly owned subsidiary of the Company entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Hearth and Care of Greenfield
On October 1, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with Red Mortgage Capital, Inc. ("Red Capital") and HUD which modified the loan agreement, dated July 29, 2008, by and between a wholly-owned subsidiary of the Company and Red Capital, which matures in 2038. The modification, among other things: (i) reduced the rate of interest therein provided from
6.50%
per annum to
4.20%
per annum, effective as of November 1, 2014; (ii) revised the amount of monthly installments of interest and principal payable on and after December 1, 2014, so as to re-amortize in full the loan over the remaining term thereof; and (iii) modified the prepayment provision of the loan.
The Pavilion Care Center
On October 1, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with Red Capital and HUD which modified the loan agreement, dated November 27, 2007, by and between a wholly-owned subsidiary of the Company and Red Capital, which matures in 2027. The modification, among other things: (i) reduced the rate of interest therein provided from
5.95%
per annum to
4.16%
per annum, effective as of November 1, 2014; (ii) revised the amount of monthly installments of interest and principal payable on and after December 1, 2014, so as to re-amortize in full the loan over the remaining term thereof; and (iii) modified the prepayment provision of the loan.
Woodland Manor
On September 24, 2014, a wholly owned subsidiary of the Company ("Woodland"), entered into a Mortgage and Deed of Trust Agreement (the “Woodland Credit Facility”), with H&H in connection with the refinancing of the skilled nursing facility known
as Eaglewood Care Center ("Eaglewood"). The Woodland Credit Facility provides for a
$5.7 million
principal amount secured credit facility.
The Woodland Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to Eaglewood. HUD has insured all amounts owing under the Woodland Credit Facility. The Woodland Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Woodland Credit Facility and all amounts under the Woodland Credit Facility will become immediately due and payable. In connection with entering into the Woodland Credit Facility, Woodland entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Georgetown and Sumter Valley
On September 29, 2016, the Company closed a HUD-guaranteed financing with Midland State Bank (the "Georgetown HUD Credit Facility") in the amount of
$3.7 million
, maturing in
2046
and bearing an interest rate of
2.98%
(interest rate excludes annual mortgage insurance premiums), which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Georgetown Facility.
On December 14, 2016, the Company refinanced the Sumter Credit Facility with Key Bank (the "Sumter HUD Credit Facility") for
$5.9 million
of new mortgage debt maturing in
2047
and bearing an interest rate of
3.70%
(interest rate excludes annual mortgage insurance premiums). The HUD-guaranteed mortgage refinances
$5.9 million
of short term debt that bore an interest rate of
4.71%
at September 30, 2016.
The Georgetown and Sumter HUD Credit Facilities are secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Georgetown and Sumter Facilities. HUD has insured all amounts owing under the Georgetown and Sumter HUD Credit Facilities. The Georgetown and Sumter HUD Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, and failure to perform or comply with certain agreements. Upon the occurrence of certain events of default, Midland State Bank or KeyBank may, after receiving the prior written approval of HUD, terminate the respective HUD credit facility and all amounts under the respective HUD credit facility will become immediately due and payable. In connection with entering into the Mt. Kenn Credit Facility, Georgetown HC&R Property Holdings, LLC ("Georgetown") and Sumter Valley Property Holdings, LLC ("Sumter") each entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Senior Debt-Guaranteed by SBA
Stone County
In June 2012, Mt. V Property Holdings, LLC, a wholly owned subsidiary of AdCare, entered into a loan agreement with the Economic Development Corporation of Fulton County (the "CDC"), an economic development corporation working with the SBA, in the amount of
$1.3 million
. The CDC loan is payable in equal monthly installments of principal and interest based on a twenty year amortization schedule. The CDC loan may be prepaid, subject to prepayment premiums, during the first ten years. There are also annual fees associated with the CDC loan, including an SBA guarantee fee. The CDC loan is secured by a second-in-priority security deed on the Stone County Nursing and Rehabilitation facility and guarantees from AdCare, the SBA and a wholly owned subsidiary of AdCare. On October 6, 2016, the debt was repaid with a portion of the proceeds from the sale of the Arkansas Facilities.
Other Senior Debt-Guaranteed by SBA
For two facilities, the Company has two term loans insured
75%
by the SBA with a financial institution. The notes mature at various dates starting in 2031 through 2036. For further information refer to the Other Senior Debt-Guaranteed by SBA detail debt table above.
Senior Debt-Bonds
Eaglewood Village Bonds
In April 2012, a wholly-owned subsidiary of the Company entered into a loan agreement with the City of Springfield, Ohio pursuant to which City of Springfield lent to such subsidiary the proceeds from the sale of City of Springfield's Series 2012 Bonds. The Series 2012 Bonds consist of
$6.6 million
in Series 2012A First Mortgage Revenue Bonds and
$0.6 million
in Taxable Series 2012B
First Mortgage Revenue Bonds. The bonds are secured by the Company's assisted living facility located in Springfield, Ohio known as Eaglewood Village and guaranteed by AdCare. There is an original issue discount of
$0.3 million
related to this loan.
Riverchase
Riverchase Village ADK, LLC (“Riverchase”), a consolidated VIE of the Company, financed its acquisition of the Riverchase Village facility, an assisted living facility located in Hoover, Alabama, using the proceeds of revenue bonds (the “Riverchase Bonds”) issued in two series by the Medical Clinical Board of the City of Hoover in the State of Alabama, as to which the Company was a guarantor.
The Series 2010A portion of the Riverchase Bonds of
$5.8 million
was scheduled to mature on June 1, 2039. The Series 2010B portion of
$0.5 million
was scheduled to mature serially beginning on June 1, 2012 through June 1, 2017. Any early redemption after May 31, 2015 is at a redemption price of
100%
of the principal amount plus accrued interest. The Riverchase Bonds paid interest at a weighted average effective interest rate of
7.9%
.
On November 20, 2015, Riverchase completed the previously announced sale to an unrelated third party of the Riverchase Village facility for a purchase price (as subsequently amended) of
$6.9 million
. In connection with the sale of the Riverchase Village facility: (i) the Riverchase Bonds were repaid in full; and (ii) the Company was released from its guaranty of Riverchase’s obligations thereunder.
Senior Debt-Other Mortgage Indebtedness
Bentonville, Heritage Park and River Valley
On May 1, 2015, certain wholly-owned subsidiaries of the Company (collectively, the “Benton Borrower Group”), entered into a Loan Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 1, 2011, as amended, between the Benton Borrower Group and PrivateBank (the "Bentonville, Heritage Park and River Valley Credit Facility"). The Loan Modification, among other things: (i) provided for PrivateBank's consent to the sublease of the Company’s Heritage Park Nursing Center to an affiliate of Aria; and (ii) amended the minimum EBITDA covenant described in the Bentonville, Heritage Park and River Valley Credit Facility to (a) reflect a new facility operator, and (b) change the minimum EBITDA covenant to a “Minimum EBITDAR/Management Fee” covenant, which modifies minimum EBITDAR to take into account management fees equal to the greater of the operator’s actual management fees for such period or imputed management fees equal to
5%
of such operator’s gross income for such period, as determined in accordance with GAAP.
On July 1, 2015, the Company completed the sale of its Bentonville, Arkansas skilled nursing facility consisting of
83
licensed beds for
$3.4 million
net of customary closing and certain real property apportionments. Net proceeds were used to repay certain mortgage indebtedness under the Bentonville, Heritage Park and River Valley Credit Facility.
On October 30, 2015, Benton Borrower Group entered into a Second Modification Agreement with PrivateBank, which modified the Bentonville, Heritage Park and River Valley Credit Facility to, among other things, establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility (as defined below); (b) the Little Rock Credit Facility (as defined below); and (c) Bentonville, Heritage Park and River Valley Credit Facility. On October 6, 2016, the debt was repaid with a portion of the proceeds from the sale of the Arkansas Facilities.
Companions Specialized Care
In August 2012, a wholly owned subsidiary of the Company financed the acquisition of Companions by entering into a loan agreement for
$5.0 million
with Contemporary (the "Contemporary Loan"). The loan was scheduled to mature in August 2015 with a required final payment of
$5.0 million
and paid interest at a fixed rate of
8.5%
per annum. The loan is secured by Companions and guaranteed by AdCare.
On August 12, 2015, a wholly owned subsidiary of the Company entered into a First Amendment with Contemporary, which modified the Contemporary Loan. Under the First Amendment: (i) the outstanding amount owing under the Contemporary Loan was reduced from
$5.0 million
to
$3.0 million
; (ii) restricted assets related to the loan of
$2.0 million
were used to reduce the outstanding amount owing under the Contemporary Loan, thus eliminating all restricted assets related to the loan; and (iii) the maturity date of the Contemporary Loan was extended to November 20, 2015. On October 30, 2015, the Company completed the sale of Companions and repaid in full the outstanding balance under the Contemporary Loan.
Georgetown and Sumter Valley
In December 2013, the Company entered into a Note, Mortgage and Loan Agreement Modification Agreement with Metro City Bank (the "Georgetown and Sumter Valley Modification Agreement") which modified the loan agreement, dated December 31, 2012, by and between Sumter Valley Property Holdings, LLC ("Sumter"), Georgetown HC&R Property Holdings, LLC ("Georgetown") and Metro City Bank. Interest on the loan accrues on the principal balance thereof at an annual rate of
1.5%
per annum plus the prime interest rate (but in no event shall the total interest be less than
5.50%
per annum). The Georgetown and Sumter Valley Modification Agreement, among other things: (i) extended the maturity date from February 1, 2014 to February 1, 2015 and (ii) increased the total amount available from
$6.9 million
to
$9.0 million
.
On January 30, 2015, the outstanding principal and interest of
$9.0 million
owed under Georgetown and Sumter Valley Modification Agreement was repaid in full.
On January 30, 2015, Georgetown and Sumter, entered into a Loan Agreement (the "Georgetown and Sumter Credit Facility") with PrivateBank. The Georgetown and Sumter Credit Facility provided for a
$9.3 million
principal amount secured credit facility.
The Georgetown and Sumter Credit Facility was secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Georgetown and Sumter Facilities. AdCare had unconditionally guaranteed all amounts owing under the Georgetown and Sumter Credit Facility.
On September 29, 2016, the Company closed a HUD-guaranteed financing with Midland State Bank in the amount of
$3.7 million
, maturing in
2046
and bearing an interest rate of
2.98%
(interest rate excludes annual mortgage insurance premiums), which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Georgetown Facility.
On December 14, 2016, the Company refinanced the Sumter Credit Facility with Key Bank for
$5.9 million
of new mortgage debt maturing in
2047
and bearing an interest rate of
3.70%
(interest rate excludes annual mortgage insurance premiums). The HUD-guaranteed mortgage refinances
$5.9 million
of short term debt that bore an interest rate of
4.71%
at September 30, 2016.
Little Rock Credit Facility
On March 30, 2012, subsidiaries of the Company, in connection with the Company's April 2012 acquisition of three skilled nursing facilities located in Arkansas, entered into a loan agreement for
$21.8 million
with PrivateBank (the "Little Rock Credit Facility"). The Little Rock Credit Facility, as amended on December 28, 2012, matured in December 2016 with a required final payment of
$13.7 million
. The Little Rock Credit Facility accrued interest at the LIBOR rate plus
4%
with a minimum rate of
6%
per annum and required monthly principal payments. The Little Rock Credit Facility was secured by the three facilities and guaranteed by AdCare. The Little Rock Credit Facility was also secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Company’s Little Rock Health & Rehabilitation Center. A portion of the Little Rock Credit Facility with respect to the Northridge facility and Woodland Hills facility was paid off and refinanced with a portion of the proceeds from a new credit facility with KeyBank.
On May 1, 2015, AdCare subsidiaries entered into a Fifth Modification Agreement with PrivateBank. The Fifth Modification, among other things: (i) provided for PrivateBank's consent to the sublease of the Company’s Little Rock Health & Rehabilitation Center to an affiliate of Aria; and (ii) amended the minimum EBITDAR covenant to reflect a new facility operator.
On October 30, 2015, AdCare subsidiaries entered into a Sixth Modification Agreement with PrivateBank, which modified among other things establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility (as defined below); (b) the Little Rock Credit Facility; and (c) Bentonville, Heritage Park and River Valley Credit Facility; and (iii) establish an excess rent account to capture monthly cash rent proceeds from operators in excess of the monthly debt payments payable under the Northridge, Woodland Hills and Abington Credit Facility and the Little Rock Credit Facility. On October 6, 2016, the debt was repaid with a portion of the proceeds from the sale of the Arkansas Facilities.
Northridge, Woodland Hills and Abington
On December 28, 2012, the Company's wholly owned subsidiaries which own the Northridge, Woodland Hills and Abington facilities (the "KeyBank Borrowers") entered into a Secured Loan Agreement with KeyBank (the "KeyBank Credit Facility"). The KeyBank Credit Facility provided for a
$16.5 million
principal amount senior secured credit facility and was set to mature on February 27, 2015; provided, however, that the borrowers may extend the maturity date by an additional
six
months if certain closing conditions are met. Interest on the KeyBank Credit Facility accrues on the principal balance thereof at an annual rate of
4.25%
plus the current LIBOR rate. The KeyBank Credit Facility may be prepaid at any time without premium or penalty, provided
that the borrowers pay any costs of KeyBank in re-employing such prepaid funds. AdCare and
two
of its subsidiaries have unconditionally guaranteed all amounts owing under the KeyBank Credit Facility.
On March 28, 2014, the Company entered into a Fourth Amendment with KeyBank. Pursuant to the amendment, among other things: (i) KeyBank waived the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio, implied debt service coverage, and compliance of making a certain sinking fund payment due on March 1, 2014, such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; (ii) modified and amended certain financial covenants regarding the Company’s fixed charge ratio and implied debt service coverage; and (iii) paid down
$3.4 million
of loan principal from the release of
$3.4 million
from a certain collateral account.
On February 25, 2015, the outstanding principal and interest of
$12.0 million
owed under the KeyBank Credit Facility was repaid in full in connection with a refinancing with PrivateBank.
On February 25, 2015,
three
wholly owned subsidiaries of the Company entered into a Loan Agreement (the "Northridge, Woodland Hills and Abington Credit Facility") with PrivateBank, which provides for a
$12.0 million
principal amount secured credit facility. The credit facility is secured by real property and, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Northridge, Woodland Hills and Abington Credit Facilities. AdCare has unconditionally guaranteed all amounts owing under the Northridge, Woodland Hills and Abington Credit Facility.
On October 30, 2015, the Company entered into a Modification Agreement with PrivateBank, which modified the Northridge, Woodland Hills and Abington Credit Facility to, among other things: (i) provide lender consent for the sublease of three skilled nursing facilities to new operators; (ii) establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility; (b) the Little Rock Credit Facility; and (c) Bentonville, Heritage Park and River Valley Credit Facility; and (iii) establish an excess rent account to capture monthly cash rent proceeds from operators in excess of the monthly debt payments payable under the Northridge, Woodland Hills and Abington Credit Facility and the Little Rock Credit Facility. On October 6, 2016, the debt was repaid with a portion of the proceeds from the sale of the Arkansas Facilities.
Northwest
In connection with the acquisition of the Northwest Nursing Center facility, a wholly owned subsidiary of AdCare issued a note pursuant to a Loan Agreement with First Commercial Bank, dated December 31, 2012, for a principal amount of
$1.5 million
. AdCare and certain subsidiaries of the Company have unconditionally guaranteed all amounts owing under the note.
Quail Creek Credit Facility
In September 2013, QC Property Holdings, LLC, a wholly owned subsidiary of the Company, entered into the Quail Creek Credit Facility with Housing & Healthcare Funding, LLC in the amount of
$5.0 million
.
The loan is secured by: (i) a first mortgage on the real property and improvements constituting the Quail Creek facility; (ii) a first priority interest on all furnishing, fixtures and equipment associated with the Quail Creek facility; and (iii) an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Quail Creek facility. AdCare has unconditionally guaranteed all amounts owning under the loan.
The loan agreement originally matured on September 27, 2016 and was modified on September 19, 2016 to: (i) extend the initial maturity date to September 30, 2017 and (ii) provide for a
one
-year extension option.
Stone County
In June 2012, the Company entered into loan agreement with Metro City Bank in the amounts of
$1.8 million
. The loan had a prepayment penalty of
10%
for any prepayment through June 2013 reduced by
1%
each year until the loan maturity date. The loan is secured by the Stone County Nursing and Rehabilitation facility and is guaranteed by AdCare. On October 6, 2016, the debt was repaid with a portion of the proceeds from the sale of the Arkansas Facilities.
Other Debt
KeyBank Promissory Notes
On February 25, 2015, the Company entered into
four
separate unsecured Promissory Note Agreements (the "KeyBank Promissory Notes") with KeyBank for an aggregate principal amount of
$0.7 million
. The indebtedness represents the portion of certain deferred exit fees owed by the Company to KeyBank in connection with the February 2015 repayment of a credit facility with
KeyBank. The KeyBank Promissory Notes mature on August 25, 2016. If, prior to the maturity date, certain refinancing agreements are entered into with KeyBank as lender, affiliate of lender, or by an agency financing originated by KeyBank or any affiliate of KeyBank, then and in such an event the entire remaining principal amount of the KeyBank Promissory Notes shall be forgiven.
On April 3, 2015, the Company entered into
five
separate unsecured Amended and Restated Promissory Note Agreements with KeyBank, which amend the KeyBank Promissory Notes to include a fifth note with the aggregate principal total of
$0.7 million
remaining unaltered. The amendments restate the principal balances on the original notes in order to include a fifth note.
On August 11, 2016, the maturities dates of the KeyBank Promissory Notes were extended to October 10, 2017. On December 14, 2016, one of the KeyBank Promissory Notes was forgiven in the amount of
$0.2 million
.
Pharmacy Care of Arkansas Promissory Note
On February 8, 2016, the Company entered into an unsecured promissory note (the "Pharmacy Care Promissory Note") with Pharmacy Care of Arkansas, LLC for a principal amount of approximately
$1.0 million
. The Pharmacy Care Promissory Note requires monthly payments of principal and interest of
2%
per annum.
Reliant Rehabilitation Promissory Note
On February 25, 2016, the Company entered into an unsecured promissory note (the "Reliant Rehabilitation Promissory Note") with Reliant Pro Rehab, LLC for a principal amount of approximately
$0.9 million
which matures on November 15, 2016. The Reliant Rehabilitation Care Promissory Note requires monthly payments principal and interest with interest of
7%
per annum. In connection with the sale of the Arkansas Facilities on October 6, 2016, the Reliant Rehabilitation Promissory Note was repaid in full.
Convertible Debt
Subordinated Convertible Notes Issued in 2012 (the “2012 Notes”)
In 2012, the Company sold to certain accredited investors an aggregate of
$7.5 million
in principal amount of 2012 Notes. The 2012 Notes initially bore interest at
8%
per annum, with such interest payable quarterly in cash in arrears. The 2012 Notes had an original maturity date of July 31, 2015.
The 2012 Notes are unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company. The 2012 Notes are convertible at the option of the holder into shares of common stock at an original conversion price equal to
$4.17
per share, subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events. The conversion price of the 2012 Notes was adjusted to
$3.97
per share as a result of the
5%
stock dividend paid on October 22, 2012.
During the existence and continuance of an event of default under the 2012 Notes, the outstanding principal amount of the 2012 Notes shall incur interest at a rate of
18%
per annum, and holders of a majority of the 2012 Notes may require the Company to redeem all or any portion of the 2012 Notes at a redemption price in cash equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.
On June 30, 2015, the Company entered into prepayment agreements with Anthony Cantone and CAM, holders of 2012 Notes with an aggregate original principal amount of
$6.4 million
, whereby the Company prepaid the 2012 Note held by Mr. Cantone in its entirety and partially prepaid the 2012 Note held by CAM, leaving a principal balance of approximately
$4.8 million
with respect to such note. All but
$1.5 million
of such principal balance was repaid on the July 31, 2015 maturity date.
On July 30, 2015, the Company and CAM amended the terms of the 2012 Note held by CAM to: (i) extend the maturity date with respect to remaining
$1.5 million
principal amount of the 2012 Note to October 31, 2017; (ii) increase the interest rate from
8.0%
to
10.0%
per annum; and (iii) increase the conversion price from
$3.97
to
$4.25
per share. Additionally, the amendment modifies the Company’s right to prepay the 2012 Note held by CAM so that the Company may prepay at any time, without penalty, upon
60
days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to the 2012 Note; provided, however, that: (i) the shares of the common stock issuable upon conversion of the 2012 Note have been registered for resale under the Securities Act of 1933, as amended (the "Securities Act"); (ii) at any time after the issue date of the 2012 Note, the volume-weighted average price of the common stock for
10
consecutive trading days has equaled or exceeded
150%
of the then-current conversion price; and (iii) such prepayment is not effected prior to July 31, 2016. The amendment also affords each of CAM and the Company the right to cause the redemption of all or any portion of the principal amount of the 2012
Note held by CAM upon a change of control (as defined in the 2012 Note) at a redemption price equal to
115%
of the sum of (i) outstanding principal amount to be redeemed, plus (ii) the amount of accrued and unpaid interest thereon.
As of December 31, 2016 and December 31, 2015, the outstanding principal amount of the 2012 Notes is $1.5 million.
Subordinated Convertible Promissory Notes Issued in 2014
(the “2014 Notes”)
On March 28, 2014, the Company sold to certain accredited investors an aggregate of
$6.5 million
in principal amount of 2014 Notes. The 2014 Notes bore interest at
10.0%
per annum, with such interest payable quarterly in cash in arrears. The 2014 Notes matured on April 30, 2015. The 2014 Notes were unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company.
On April 30, 2015, the Company repaid the outstanding principal amount of
$6.5 million
under the 2014 Notes plus all interest accrued and unpaid thereunder. Of the
$6.5 million
outstanding principal amount,
$0.8 million
was repaid in cash and
$5.7 million
was repaid through the setoff of amounts owed to the Company by the noteholders.
Convertible Subordinated Notes Issued in 2015 (the “2015 Notes”)
On March 31, 2015, the Company entered into Subscription Agreements for
$8.5 million
of the 2015 Notes with certain accredited investors. In connection therewith, the Company issued approximately
$1.7 million
in principal amount of 2015 Notes on March 31, 2015 and approximately
$6.0 million
in principal amount of 2015 Notes on April 30, 2015. Accepted subscriptions for
$0.8 million
in principal amount of 2015 Notes were not funded by the April 30, 2015 payment deadline, and 2015 Notes were not issued in respect thereof.
The 2015 Notes bear interest at
10.0%
per annum and such interest is payable quarterly in cash in arrears. The 2015 Notes mature on April 30, 2017. The 2015 Notes are unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company.
The 2015 Notes are convertible at the option of the holder into shares of common stock at an initial conversion price equal to
$4.25
per share. The conversion price is subject to adjustment for any subdivision (by stock dividend, stock split or similar corporation action) or combination (by reverse stock split or similar corporate action) of the common stock.
The Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2015 Note; provided, however, that: (i) the shares of common stock issuable upon conversion of any 2015 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act; or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; (ii) at any time after the issue date of such 2015 Note, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded
125%
of the then-current conversion price; and (iii) such prepayment is not effected prior to March 31, 2016.
The holders holding a majority of the outstanding principal amount with respect to all the 2015 Notes may require the Company to redeem all or any portion of the 2015 Notes upon a change of control (as defined in the 2015 Notes) for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. In addition, upon a change of control, the Company may redeem all or any portion of the 2015 Notes for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.
During the existence and continuance of an event of default under a 2015 Note, the outstanding principal amount of such 2015 Note shall incur interest at a rate of
14%
per annum, and the holder of such 2015 Note may require the Company to redeem all or any portion of such 2015 Note at a redemption price in cash equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. An “event of default” with respect to a 2015 Note includes: (i) the Company’s failure to pay to the holder of such 2015 Note any amount of principal or interest by the seventh business day following the date when due under such 2015 Note; and (ii) specific events of bankruptcy, insolvency, reorganization or liquidation.
As of December 31, 2016, the outstanding principal amount of the 2015 Notes is
$7.7 million
. On January 10, 2017, the Company repurchased
$6.7 million
of the 2015 Notes pursuant to the Tender Offer. (See Note 19
- Subsequent Events
.)
NOTE 10. ACQUISITIONS
The Company made no acquisitions during the years ended
December 31, 2016
or
2015
.
NOTE 11. DISCONTINUED OPERATIONS
Disposition of Facility Operations
The following table summarizes the disposition of operations by facility for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Facility Name
|
|
State
|
|
Relationship to Property
|
|
Type of Disposition
|
|
Date of Disposition
|
2015
|
|
|
|
|
|
|
|
|
College Park
|
|
GA
|
|
Owned
|
|
Lease
|
|
4/1/2015
|
LaGrange
|
|
GA
|
|
Leased
|
|
Sublease
|
|
4/1/2015
|
Sumter Valley
|
|
SC
|
|
Owned
|
|
Lease
|
|
4/1/2015
|
Georgetown
|
|
SC
|
|
Owned
|
|
Lease
|
|
4/1/2015
|
Powder Springs
|
|
GA
|
|
Leased
|
|
Sublease
|
|
4/1/2015
|
Tara
|
|
GA
|
|
Leased
|
|
Sublease
|
|
4/1/2015
|
Heritage Park
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Homestead Manor
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Stone County SNF
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Stone County ALF
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Northridge
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
West Markham
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Woodland Hills
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Cumberland
|
|
AR
|
|
Owned
|
|
Lease
|
|
5/1/2015
|
Mountain Trace
|
|
NC
|
|
Owned
|
|
Lease
|
|
6/1/2015
|
Glenvue
|
|
GA
|
|
Owned
|
|
Lease
|
|
7/1/2015
|
Bentonville Manor
|
|
AR
|
|
Owned
|
|
Sale
|
|
7/1/2015
|
Hearth & Care of Greenfield
|
|
OH
|
|
Owned
|
|
Lease
|
|
8/1/2015
|
The Pavilion Care Center
|
|
OH
|
|
Owned
|
|
Lease
|
|
8/1/2015
|
Eaglewood ALF
|
|
OH
|
|
Owned
|
|
Lease
|
|
8/1/2015
|
Eaglewood Care Center
|
|
OH
|
|
Owned
|
|
Lease
|
|
8/1/2015
|
Covington Care Center
|
|
OH
|
|
Leased
|
|
Sublease
|
|
8/1/2015
|
Bonterra
|
|
GA
|
|
Leased
|
|
Sublease
|
|
9/1/2015
|
Parkview
|
|
GA
|
|
Leased
|
|
Sublease
|
|
9/1/2015
|
Autumn Breeze
|
|
GA
|
|
Owned
|
|
Lease
|
|
9/30/2015
|
Companions Specialized Care
|
|
OK
|
|
Owned
|
|
Sale
|
|
10/30/2015
|
River Valley
|
|
AR
|
|
Owned
|
|
Lease
|
|
11/1/2015
|
Quail Creek
|
|
OK
|
|
Owned
|
|
Lease
|
|
12/31/2015
|
Northwest
|
|
OK
|
|
Owned
|
|
Lease
|
|
12/31/2015
|
2016
|
|
|
|
|
|
|
|
|
Heritage Park
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Homestead Manor
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Stone County SNF
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Stone County ALF
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Northridge
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
West Markham
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Woodland Hills
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
Cumberland
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
River Valley
|
|
AR
|
|
Owned
|
|
Sale
|
|
10/6/2016
|
For the discontinued operations, the patient care revenue, related cost of services, and facility rental expense prior to the commencement of leasing are classified in the activities below.
The following table summarizes the activity of discontinued operations for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
(Amounts in 000’s)
|
|
2016
|
|
2015
|
Total revenues
|
|
$
|
—
|
|
|
$
|
87,920
|
|
Cost of services
|
|
$
|
12,411
|
|
|
$
|
89,783
|
|
Net loss
|
|
$
|
(13,428
|
)
|
|
$
|
(4,892
|
)
|
Interest expense, net
|
|
$
|
41
|
|
|
$
|
1,510
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
251
|
|
Gain on disposal of assets
|
|
$
|
—
|
|
|
$
|
1,251
|
|
Disposition of Assets
Companions.
On April 29, 2015, a wholly-owned subsidiary of the Company entered into an asset purchase agreement with Gracewood Manor, LLC, an Oklahoma limited liability company, to sell Companions for a sale price of
$3.5 million
. On October 30, 2015, the Company completed the sale of Companions for
$3.5 million
less customary closing and certain real property apportionments. The Company received
$0.4 million
net cash from the sale and proceeds were used for working capital purposes. The Company recorded a gain of
$0.1
million on the sale.
Bentonville.
On May 15, 2015, a wholly-owned subsidiary of the Company entered into an asset purchase agreement with Bozeman Development, LLC, a Texas limited liability company, to sell Bentonville. The transaction closed on July 1, 2015 and the net sales proceeds of
$3.4 million
were remitted to Bentonville Property Holdings, LLC. The Company recorded a gain of
$0.3
million on the sale.
Riverchase.
On June 11, 2015, Riverchase entered into an asset purchase agreement, as subsequently amended, with Omega Communities, LLC ("Omega") to sell the Riverchase Village facility, a
105
-bed assisted living facility located in Hoover, Alabama. The transaction closed on November 20, 2015 for a purchase price of
$6.9 million
. The Company recorded a gain of
$0.8
million on the sale, net of intercompany receivables (see Note 18
- Related Party Transactions
).
Office Buildings.
On February 9, 2016, the Company sold an office building in Arkansas for
$0.3 million
. The office space was unencumbered. On April 25, 2016, the Company completed the sale of an owned office building located in Roswell, Georgia for
$0.7 million
. Debt obligations on the transaction exceeded proceeds by
$0.2 million
. On July 28, 2016, the Company completed the sale of
one
of its unencumbered office buildings located in Roswell, Georgia for
$0.2 million
.
Arkansas Facilities.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities, together with substantially all of the fixtures, equipment, furniture and other assets relating to such facilities, to the Purchaser, pursuant the Purchase Agreement, as subsequently amended. The Arkansas Facilities consist of:
|
|
•
|
River Valley Health and Rehabilitation Center, a
129
-bed skilled nursing facility located in Fort Smith, Arkansas;
|
|
|
•
|
Heritage Park Nursing Center, a
110
-bed skilled nursing facility located in Rogers, Arkansas;
|
|
|
•
|
Homestead Manor Nursing Home, a
104
-bed skilled nursing facility located in Stamps, Arkansas;
|
|
|
•
|
Stone County Nursing and Rehabilitation Center, a
97
-bed skilled nursing facility located in Mountain View, Arkansas;
|
|
|
•
|
Stone County Residential Care Center, a
32
-bed assisted living facility located in Mountain View, Arkansas;
|
|
|
•
|
Northridge Health Care, a
140
-bed skilled nursing facility located in North Little Rock, Arkansas;
|
|
|
•
|
Little Rock Health & Rehabilitation, a
154
-bed skilled nursing facility located in Little Rock, Arkansas;
|
|
|
•
|
Woodland Hills Health & Rehabilitation, a
140
-bed skilled nursing facility located in Little Rock, Arkansas; and
|
|
|
•
|
Cumberland Health & Rehabilitation Center, a
120
-bed skilled nursing facility located in Little Rock, Arkansas.
|
Prior to the closing of the sale of the Arkansas Facilities (the “Closing”), the Skyline Lessors leased the Arkansas Facilities to the Skyline Lessee pursuant to the Skyline Lease. For further information, see Note 7
- Leases
.
The Arkansas Facilities contributed approximately
$0.9 million
income recorded in "Net loss attributable to AdCare Health Systems, Inc. common stockholders" reported in the Consolidated Statement of operations for the period ended December 31, 2016.
The aggregate purchase price paid to the Company for the Arkansas Facilities was
$55.0 million
, which purchase price consisted of: (i) a non-refundable deposit of
$1.8 million
; (ii) cash consideration of
$50.2 million
paid to the Skyline Lessors at the Closing; and (iii) the Skyline Note, from JS Highland Holdings LLC, an affiliate of Skyline (the “Borrower”), in favor of the Company with a principal amount of
$3.0 million
. The principal amount of the Skyline Note, together with all accrued and unpaid interest, is due and payable on March 31, 2022 (the “Maturity Date”). The Borrower is required to make payments of interest only commencing on October 30, 2016 and on the last day of each month thereafter until the Maturity Date. The Skyline Note provides that simple interest shall accrue on the unpaid balance of the Skyline Note at rate of ten percent (
10%
) per annum. Such interest rate will increase by two percent (
2%
) on each anniversary date of the Skyline Note beginning in year
three
if such note is still outstanding at that time. The Skyline Note is guaranteed by Joseph Schwartz and Roselyn Schwartz (collectively, the “Guarantors”), pursuant to a Guaranty Agreement, dated September 30, 2016 (the “Guaranty”), executed by the Guarantors in favor of the Company. For further information see Note 3 -
Liquidity and Profitability
.
In connection with the Closing, the Company entered into a Subordination and Standstill Agreement, dated September 26, 2016 (the “Subordination Agreement”), with the PrivateBank, as agent for the lenders specified therein (collectively, the “Lenders”). Pursuant to the Subordination Agreement, the Company agreed to subordinate its claims and rights to receive payment under the Skyline Note or any document which may evidence or secure the indebtedness evidenced by such note, other than the Guaranty (collectively, the “Subordinated Debt”), to the claims and rights of the Lenders to receive payment under certain revolving loans, with an initial aggregate principal amount of
$6.0 million
, and certain term loans, with an aggregate principal amount of
$45.6 million
(collectively, the “Loans”), each extended by certain of the Lenders to affiliates of Skyline (collectively, the “Skyline Borrowers”). Pursuant to the Subordination Agreement, the Company may not accept payment of the Subordinated Debt, or take any action to collect such payment, if: (i) the Company has received notice from the Lenders that the Skyline Borrowers have failed to meet a specified financial covenant with respect to the Loans; or (ii) a default has occurred or is continuing with respect to the Loans. Pursuant to the Guaranty, the Guarantors have agreed to pay the outstanding principal amount of the Skyline Note, together with all accrued and unpaid interest: (x) on the date on which the Borrower or an affiliate thereof repays or refinances any of the Loans; (y) on the date on which the Borrower or its affiliates sells any of the Arkansas Facilities which the Borrower or its affiliates purchased with proceeds from the Loans; or (z) upon written notice from the Company to the Guarantors any time on or after the two year anniversary of the Skyline Note.
On October 6, 2016, in conjunction with the sale of the Arkansas Facilities, the Company repaid
$2.4 million
of debt associated with the College Park Facility.
Assets and Liabilities Held for Sale
Assets and liabilities of the disposal groups held for sale at
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Amounts in (000's)
|
|
2016
|
|
2015
|
Property and equipment, net *
|
|
$
|
—
|
|
|
$
|
1,249
|
|
Assets of disposal group held for sale
|
|
$
|
—
|
|
|
$
|
1,249
|
|
|
|
|
|
|
Notes payable *
|
|
$
|
—
|
|
|
$
|
958
|
|
Liabilities of disposal group held for sale
|
|
$
|
—
|
|
|
$
|
958
|
|
*Amounts represent office buildings and associated debt sold during 2016.
NOTE 12. COMMON AND PREFERRED STOCK
Preferred Stock
The liquidation preference of the Series A Preferred Stock is
$25.00
per share. Cumulative dividends accrue and are paid in the amount of
$2.72
per share each year, which is equivalent to
10.875%
of the
$25.00
liquidation preference per share. The dividend rate may increase under certain circumstances.
Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a "Change of Control," as defined in the Company's Articles of Incorporation. On and after
December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying
$25.00
per share, plus any accrued and unpaid dividends to the redemption date.
The change-of-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, "
SEC Staff Announcement: Classification and Measurement of Redeemable Securities"
, requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are outside of the issuer's control. The assessment of whether the redemption of an equity security could occur outside of the issuer's control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable.
Preferred Stock Activity
The following table summarizes the shares of Series A Preferred Stock activity for the Company and net proceeds received and expenses from issuance and repurchases of Series A Preferred Stock for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Shares Issued & Outstanding
|
Net Proceeds from Issuance
(in 000's)
|
Balances, January 1, 2015
|
|
950,000
|
|
$
|
20,392
|
|
|
|
|
|
Issuance of Preferred Stock:
|
|
|
|
April 13, 2015 offering
(1)
|
|
575,000
|
|
13,481
|
|
June 2, 2015 offering
(2)
|
|
588,235
|
|
14,105
|
|
ATM offering
(3)
|
|
313,695
|
|
6,736
|
|
|
|
|
|
Balances, December 31, 2015
|
|
2,426,930
|
|
$
|
54,714
|
|
|
|
|
|
ATM Issuance of Preferred Stock for the three months ended:
(4)
|
|
|
|
March 31, 2016
|
|
186,905
|
|
3,677
|
|
June 30, 2016
|
|
43,204
|
|
870
|
|
September 30, 2016
|
|
106,796
|
|
2,233
|
|
December 31, 2016
|
|
—
|
|
—
|
|
|
|
|
|
Repurchases of Preferred Stock for the three months ended:
|
|
|
|
December 31, 2016
(5)
|
|
(2,300
|
)
|
(48
|
)
|
|
|
|
|
Balances, December 31, 2016
|
|
2,761,535
|
|
$
|
61,446
|
|
|
|
(1)
|
On April 13, 2015 the Company issued and sold
575,000
shares of Series A Preferred Stock in a “best efforts” registered public offering for a public offering price of
$25.75
per share. In connection therewith, the Company received net proceeds of approximately
$13.5 million
, after payment of underwriting commissions and discounts and all other offering expenses incurred by the Company.
|
|
|
(2)
|
On June 2, 2015, the Company issued and sold
588,235
shares of Series A Preferred Stock in a “best efforts” registered public offering for a public offering price of
$25.50
per share. In connection therewith, the Company received net proceeds of approximately
$14.1 million
, after payment of underwriting commissions and discounts and all other offering expenses incurred by the Company.
|
|
|
(3)
|
On July 21, 2015, the Company entered into separate At Market Issuance Sales Agreements with agents, pursuant to which the Company may offer and sell, from time to time, up to
800,000
shares of Series A Preferred Stock. For the year ended
December 31, 2015
, the Company sold
313,695
shares of Series A Preferred Stock under its ATM at an average sale price of
$22.11
per share. In connection therewith, the Company received net proceeds of approximately
$6.7 million
, after payment of sales commissions and discounts and all other expenses incurred by the Company.
|
|
|
(4)
|
For the year ended
December 31, 2016
, the Company sold
336,905
shares of Series A Preferred Stock under its ATM at an average sale price of
$20.06
per share. In connection therewith, the Company received net proceeds of approximately
$6.8 million
, after payment of sales commissions and discounts and all other expenses incurred by the Company.
|
|
|
(5)
|
On
November 17, 2016
, the Company bought
2,300
shares of Series A Preferred Stock pursuant to the November 2016 Repurchase Program at an average sale price of
$20.97
per share, excluding commissions. In connection therewith, the Company's net disbursement was approximately
$48 thousand
after payment of sales commissions.
|
Dividends
The following table summarizes the common stock and preferred stock dividends paid by the Company for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Date of Payment
|
Dividends Paid
(in 000's)
|
Dividends Per Share
|
Common Stock Dividends: *
|
|
|
|
|
4/30/2015
|
$
|
990
|
|
$
|
0.050
|
|
|
7/31/2015
|
1,093
|
|
0.055
|
|
|
10/31/2015
|
1,193
|
|
0.060
|
|
For the year ended December 31, 2015
|
|
$
|
3,276
|
|
$
|
0.165
|
|
|
|
|
|
Preferred Stock Dividends:
|
|
|
|
|
3/31/2015
|
$
|
646
|
|
$
|
0.68
|
|
|
6/30/2015
|
1,437
|
|
0.68
|
|
|
9/30/2015
|
1,498
|
|
0.68
|
|
|
12/31/2015
|
1,627
|
|
0.68
|
|
For the year ended December 31, 2015
|
|
$
|
5,208
|
|
$
|
2.72
|
|
|
|
|
|
|
3/31/2016
|
$
|
1,777
|
|
$
|
0.68
|
|
|
6/30/2016
|
1,801
|
|
0.68
|
|
|
9/30/2016
|
1,879
|
|
0.68
|
|
|
12/31/2016
|
1,878
|
|
0.68
|
|
For the year ended December 31, 2016
|
|
$
|
7,335
|
|
$
|
2.72
|
|
* There we no dividends paid on the common stock during the twelve months ended December 31, 2016.
Share Repurchase Programs
On November 10, 2016, the Board approved the November 2016 Repurchase Program, pursuant to which the Company is authorized to repurchase up to
1.0 million
shares of the common stock and
100,000
shares of the Series A Preferred Stock during a twelve-month period. The November 2016 Repurchase Program succeeded the November 2015 Repurchase Program announced on November 12, 2015, which terminated in accordance with its terms. Share repurchases under the November 2016 Repurchase Programs may be made from time to time through open market transactions, block trades or privately negotiated transactions and are subject to market conditions, as well as corporate, regulatory and other considerations. The November 2016 Repurchase Program may be suspended or discontinued at any time, and the Company has no obligation to repurchase any amount of the common stock or the Series A Preferred Stock under such program. The November 2016 Repurchase Program was suspended in February 2017.
November 2016 Repurchase Program -
In the
twelve months ended
December 31, 2016
, the Company repurchased (i)
133,316
shares of common stock at an average purchase price of approximately
$1.54
per share, exclusive of commissions and related fees for a net disbursement of approximately
$0.3 million
, and (ii)
2,300
shares of Series A Preferred stock at an average purchase price of approximately
$20.97
per share, exclusive of commissions and related fees for a net disbursement of approximately
$48,000
.
November 2015 Repurchase Program -
In the
twelve months ended
December 31, 2016
, the Company repurchased
150,000
shares of common stock at an average purchase price of approximately
$2.05
per share, exclusive of commissions and related fees, for a net disbursement of approximately
$0.2 million
. Pursuant to the November 2015 Repurchase Program, the Company was authorized to repurchase up to
500,000
shares of its outstanding common stock during a
twelve
-month period. The November
2015 Repurchase Program expired in accordance with its terms upon completion of such twelve-month period on November 12, 2016.
NOTE 13. STOCK BASED COMPENSATION
The following table summarizes employee and nonemployee stock based compensation for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Amounts in (000's)
|
|
2016
|
|
2015
|
Employee compensation:
|
|
|
|
|
Stock options
|
|
$
|
112
|
|
|
$
|
42
|
|
Warrants
|
|
278
|
|
|
196
|
|
Restricted stock
|
|
628
|
|
|
431
|
|
Total employee stock-based compensation expense
|
|
$
|
1,018
|
|
|
$
|
669
|
|
Non-employee compensation:
|
|
|
|
|
Stock options
|
|
$
|
50
|
|
|
$
|
49
|
|
Warrants
|
|
—
|
|
|
—
|
|
Restricted stock
|
|
65
|
|
|
224
|
|
Total non-employee stock-based compensation expense
|
|
$
|
115
|
|
|
$
|
273
|
|
Total stock-based compensation expense
|
$
|
1,133
|
|
|
$
|
942
|
|
The assumptions used in calculating the fair value of employee stock options and warrants granted for the years ended
December 31, 2016
and
2015
, using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
2016
|
|
2015
|
Dividend Yield
|
|
—
|
%
|
|
4.8
|
%
|
Expected Volatility
|
|
40.9
|
%
|
|
38.6
|
%
|
Risk-Free Interest Rate
|
|
1.43
|
%
|
|
1.09
|
%
|
Expected Term (in years)
|
|
5.0
|
|
|
3.9
|
|
No stock-based compensation awards were granted to non-employees for the year ended
December 31, 2016
or for the year ended
December 31, 2015
.
Common Stock Options
The Company has
two
stock option plans:
|
|
•
|
The 2005 Stock Incentive Plan, which expired
September 30, 2015
; and
|
|
|
•
|
The 2011 Stock Incentive Plan, which expires
March 28, 2021
and provides for a maximum of
2,027,393
shares of common stock to be issued.
|
The
two
plans permit the granting of incentive or nonqualified stock options. The 2011 Stock Incentive Plan also permits the granting of restricted stock. The plans are administered by the Board which has the authority to determine to whom awards will be made, the amounts of the awards, and the other terms and conditions of the awards. The number of securities remaining available for future issuance under the 2011 Stock Incentive Plan as of
December 31, 2016
is
438,110
.
The following summarizes the Company's employee and non-employee stock option activity for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options (000's)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining Contract Life (in years)
|
|
Aggregate
Intrinsic
Value (000's)
(a)
|
Outstanding at December 31, 2014
|
|
935
|
|
|
$
|
4.91
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Exercised
|
|
(13
|
)
|
|
$
|
2.35
|
|
|
|
|
|
|
Forfeited
|
|
(535
|
)
|
|
$
|
5.63
|
|
|
|
|
|
|
Expired
|
|
(120
|
)
|
|
$
|
4.10
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
267
|
|
|
$
|
3.96
|
|
|
6.9
|
|
$
|
2
|
|
Vested at December 31, 2015
|
|
184
|
|
|
$
|
3.96
|
|
|
6.1
|
|
$
|
2
|
|
Vested or Expected to Vest at December 31, 2015
(b)
|
|
264
|
|
|
$
|
3.96
|
|
|
6.9
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
267
|
|
|
$
|
3.96
|
|
|
|
|
|
Granted
|
|
141
|
|
|
$
|
2.07
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
|
(8
|
)
|
|
$
|
4.06
|
|
|
|
|
|
Expired
|
|
(45
|
)
|
|
$
|
3.86
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
355
|
|
|
$
|
3.21
|
|
|
5.6
|
|
$
|
—
|
|
Vested at December 31, 2016
|
|
320
|
|
|
$
|
3.14
|
|
|
5.3
|
|
$
|
—
|
|
Vested or Expected to Vest at December 31, 2016
(b)
|
|
355
|
|
|
$
|
3.21
|
|
|
5.6
|
|
$
|
—
|
|
(a)
Represents the aggregate gain on exercise for vested in-the-money options as of December 31, 2016.
(b)
Includes forfeiture adjusted unvested shares.
The weighted average grant date fair value of common stock options granted during the year ended
December 31, 2016
was
$2.07
. No options were granted during the year ended
December 31, 2015
. At
December 31, 2016
, the Company has approximately
$47.5 thousand
of unrecognized compensation expense related to unvested options. Assuming no pre-vesting forfeitures, this expense will be recognized as a charge to earnings over a weighted-average remaining service period of
1.0
year. The total intrinsic value of options exercised during the years ended
December 31, 2016
and
2015
, was
zero
and
$0.02 million
, respectively.
The following summary information reflects stock options outstanding, vested and related details as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
Exercise Price
|
|
Number Outstanding (000's)
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested and Exercisable (000's)
|
|
Weighted Average Exercise Price
|
$1.31 - $3.99
|
|
290
|
|
|
5.3
|
|
$
|
3.01
|
|
|
255
|
|
|
$
|
2.89
|
|
$4.00 - $4.30
|
|
65
|
|
|
6.7
|
|
$
|
4.12
|
|
|
65
|
|
|
$
|
4.12
|
|
Total
|
|
355
|
|
|
5.6
|
|
$
|
3.21
|
|
|
320
|
|
|
$
|
3.14
|
|
Common Stock Warrants
The Company grants stock warrants to officers, directors, employees and certain consultants to the Company from time to time as determined by the Board and, when appropriate, the Compensation Committee of the Board. The Board administers the granting of warrants, determines the persons to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards.
The following summarizes the Company's employee and non-employee common stock warrant activity for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants (000's)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contract Life (in years)
|
|
Aggregate
Intrinsic
Value (000's)
(a)
|
Outstanding at December 31, 2014
|
|
2,716
|
|
|
$
|
3.45
|
|
|
|
|
|
|
Granted
|
|
275
|
|
|
$
|
4.25
|
|
|
|
|
|
|
Exercised
|
|
(519
|
)
|
|
$
|
3.43
|
|
|
|
|
|
|
Forfeited
|
|
(225
|
)
|
|
$
|
4.04
|
|
|
|
|
|
|
Expired
|
|
(196
|
)
|
|
$
|
3.91
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
2,051
|
|
|
$
|
3.46
|
|
|
4.7
|
|
$
|
305
|
|
Vested at December 31, 2015
|
|
1,576
|
|
|
$
|
3.19
|
|
|
3.5
|
|
$
|
305
|
|
Vested or Expected to Vest at December 31, 2015
(b)
|
|
1,998
|
|
|
$
|
3.43
|
|
|
4.7
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
2,051
|
|
|
$
|
3.46
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
(109
|
)
|
|
$
|
1.04
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
|
(55
|
)
|
|
$
|
4.08
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
1,887
|
|
|
$
|
3.58
|
|
|
4.1
|
|
$
|
11
|
|
Vested at December 31, 2016
|
|
1,604
|
|
|
$
|
3.44
|
|
|
3.3
|
|
$
|
11
|
|
Vested or Expected to Vest at December 31, 2016
(b)
|
|
1,867
|
|
|
$
|
3.57
|
|
|
4.0
|
|
$
|
11
|
|
(a)
Represents the aggregate gain on exercise for vested in-the-money warrants as of December 31, 2016.
(b)
Includes forfeiture adjusted unvested shares.
No warrants were granted during the year ended
December 31, 2016
. The weighted average grant date fair value of common stock warrants granted during the year ended
December 31, 2015
, was
$0.85
. The Company has approximately
$0.3 million
of unrecognized compensation expense related to unvested common stock warrants as of
December 31, 2016
. Assuming no pre-vesting forfeitures, this expense will be recognized as a charge to earnings over a weighted-average remaining service period of
1.0
years. The total intrinsic value of common stock warrants exercised during the years ended
December 31, 2016
and
2015
was
$0.1 million
and
$0.4 million
, respectively.
The following summary information reflects warrants outstanding, vested and related details as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
Exercise Price
|
|
Number Outstanding (000's)
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested and Exercisable (000's)
|
|
Weighted Average Exercise Price
|
$1.04 - $1.99
|
|
218
|
|
|
0.9
|
|
$
|
1.82
|
|
|
218
|
|
|
$
|
1.82
|
|
$2.00 - $2.99
|
|
335
|
|
|
1.5
|
|
$
|
2.58
|
|
|
335
|
|
|
$
|
2.58
|
|
$3.00 - $3.99
|
|
500
|
|
|
2.8
|
|
$
|
3.59
|
|
|
500
|
|
|
$
|
3.59
|
|
$4.00 - $4.99
|
|
811
|
|
|
6.7
|
|
$
|
4.39
|
|
|
528
|
|
|
$
|
4.42
|
|
$5.00 - $5.90
|
|
23
|
|
|
6.4
|
|
$
|
5.90
|
|
|
23
|
|
|
$
|
5.90
|
|
Total
|
|
1,887
|
|
|
4.1
|
|
$
|
3.58
|
|
|
1,604
|
|
|
$
|
3.44
|
|
Restricted Stock
The following summarizes the Company's restricted stock activity for the year ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares (000's)
|
|
Weighted Average
Grant Date
Fair Value
|
Unvested at December 31, 2014
|
|
504
|
|
|
$
|
3.68
|
|
Granted
|
|
204
|
|
|
$
|
4.05
|
|
Vested
|
|
(393
|
)
|
|
$
|
3.51
|
|
Forfeited
|
|
(21
|
)
|
|
$
|
3.20
|
|
Unvested at December 31, 2015
|
|
294
|
|
|
$
|
4.19
|
|
Granted
|
|
305
|
|
|
$
|
1.93
|
|
Vested
|
|
(183
|
)
|
|
$
|
3.52
|
|
Forfeited
|
|
(12
|
)
|
|
$
|
2.49
|
|
Unvested at December 31, 2016
|
|
404
|
|
|
$
|
2.84
|
|
The weighted average grant date fair value of restricted stock awards granted during the years ended
December 31, 2016
and
2015
was
$1.93
and
$4.05
, respectively. The Company has approximately
$0.9 million
of unrecognized compensation expense related to unvested restricted stock awards as of
December 31, 2016
. Assuming no pre-vesting forfeitures, this expense will be recognized as a charge to earnings over a weighted-average remaining service period of
2.81
years.
NOTE 14. VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entity
The Company had one variable interest entity that was required to be consolidated because AdCare had control as primary beneficiary. A "primary beneficiary" is the party in a VIE that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. For a further description of the VIE, see Note 18
- Related Party Transactions - Riverchase
.
On
March 3, 2014
, the Company and certain of its subsidiaries entered into a letter agreement, dated as of
February 28, 2014
(the "Letter Agreement"), with Christopher Brogdon (a then director of the Company and a greater than
5%
beneficial owner of the outstanding common stock) and entities controlled by Mr. Brogdon, which: (i) amended the Company's previously-existing option to acquire all of the issued and outstanding membership interests in Riverchase, the Company's consolidated VIE, until
June 22, 2015
; and (ii) reduced the purchase price for the exercise of such option to
$1.00
. Furthermore, the Letter Agreement provides that, upon the closing of the sale of the Riverchase Village facility, a
105
-bed assisted living facility located in Hoover, Alabama and owned by Riverchase, to an arms-length third party purchaser, regardless of whether the Company has exercised its option to purchase Riverchase, the net sales proceeds from such sale shall be distributed as follows: (a) one-half of the net sales proceeds will be paid to the Company; (b) the remaining net sales proceeds will be paid to the Company to satisfy the outstanding principal balance and interest (if any) then due under the promissory note issued by Mr. Brogdon in favor of the Company with an original principal amount of
$523,663
, with such payment to be applied in the order of scheduled amortization under the note; and (c) the balance of net sales proceeds will be paid to the Company.
On
May 15, 2014
, the Company and certain of its subsidiaries entered into an Amendment to the Letter Agreement (the "Letter Agreement First Amendment"), pursuant to which the Company agreed to pay
$92,323
(the "Tax Payment") to the appropriate governmental authorities of Jefferson County, Alabama, such amount representing outstanding real property taxes due on the Riverchase Village facility. The Company determined that it was in its best interest to make the Tax Payment in order to preserve the Company's interest in the sale of the Riverchase Village facility. In connection with the Tax Payment, the parties also agreed to amend and restate the promissory note issued by Mr. Brogdon in favor of the Company to reflect a new principal amount of
$615,986
, which amount represents the original principal amount of the note plus the Tax Payment. Furthermore, the Letter Agreement First Amendment amended the Letter Agreement to provide that, if the closing of the sale of the Riverchase Village facility does not occur on or before
December 31, 2014
, then a payment of principal under the amended and restated promissory note equal to the Tax Payment will be due and payable to the Company on or before
January 31, 2015
.
On
October 10, 2014
, AdCare and certain of its subsidiaries entered into a second amendment to the Letter Agreement, as amended (the “Letter Agreement Second Amendment”), with Mr. Brogdon and entities controlled by Mr. Brogdon, pursuant to which the Company reduced the principal amount of the note issued by Mr. Brogdon by the amount equal to
$92,323
(which represents the amount of the Tax Payment) plus
$255,000
(which represents an offset of amounts owed by the Company to Mr. Brogdon under his Consulting Agreement with the Company). The Letter Agreement Second Amendment also amended the Letter Agreement, as amended, to provide that upon the closing of the sale of the Riverchase Village facility to a third party purchaser, the net sales proceeds from such sale shall be distributed so that any net sales proceeds shall first be paid to the Company to satisfy the
$177,323
outstanding under the note issued by Riverchase to the Company, which note is discussed below.
AdCare was a guarantor of Riverchase’s obligations with respect to the Riverchase Bonds, and in order to preserve the Company's interest in the sale of the Riverchase Village facility, the Company made a payment in the amount of
$85,000
(the "Principal Obligation") on behalf of Riverchase with respect to its obligations under the bonds. On
October 10, 2014
, Riverchase issued a promissory note in favor of the Company in the principal amount of
$177,323
, which represented the amount of Tax Payment plus the Principal Obligation. The note did not bear interest and was due upon the closing of the sale of the Riverchase Village facility.
On
March 25, 2015
, AdCare and certain of its subsidiaries entered into a third amendment to the Letter Agreement, as amended (the “Letter Agreement Third Amendment”), with Mr. Brogdon and entities controlled by him, pursuant to which Riverchase and the Company agreed to amend the promissory notes issued by Riverchase to the Company to: (i) increase the principal amount due under the promissory note issued by Riverchase to the Company by any additional real property tax payments made by the Company with respect to the Riverchase Village facility and (ii) to state that such promissory note would not bear interest.
The Letter Agreement Third Amendment amended the Letter Agreement to provide a schedule for the payment to the Company of the net sales proceeds resulting from a sale of the Riverchase Village facility to a third-party purchaser. The net sales proceeds from such sale shall be distributed to the Company as follows: (i) an amount sufficient to satisfy all amounts due and owing under the promissory note issued by Riverchase to the Company; (ii) one-half of the then remaining net sales proceeds; (iii) an amount sufficient to satisfy the amounts due and owing under the promissory note issued by Mr. Brogdon to the Company; and (iv) the then remaining balance of net sales proceeds.
In connection with the Letter Agreement Third Amendment, the Company and Mr. Brogdon agreed to amend the promissory note issued by Mr. Brogdon to the Company. Pursuant to this amendment, the principal balance plus any accrued interest under the promissory note issued by Mr. Brogdon to the Company would be due and payable on the earlier of: (i) December 31, 2015; or (ii) the closing of the sale of the Riverchase Village facility.
On June 11, 2015, Omega executed an Asset Purchase Agreement (the “Omega Purchase Agreement”) for
$6.75 million
and had a closing deadline of August 31, 2015. The Omega Purchase Agreement was later amended on August 6, 2015 to, among other things, extend the closing deadline from August 31, 2015 to September 30, 2015 as well as increase the purchase price from
$6.75 million
to
$6.85 million
. The Omega Purchase Agreement was later amended for a second time on September 30, 2015 to, among other things, extend the closing deadline from September 30, 2015 to November 30, 2015.
Riverchase completed the sale of the Riverchase Village facility effective November 20, 2015. As of November 20, 2015, proceeds to repay the full balance of the facility’s senior debt were deposited with the lender/bond trustee. On November 23, 2015, the Company announced that Christopher Brogdon had informed the Board of his decision to accelerate his resignation from the Board to be effective as of November 20, 2015.
As of December 31, 2016, principal due and payable under the promissory note issued by Riverchase was
$95,000
. This note was fully allowed at December 31, 2015.
The facility assets were sold while the VIE was still consolidated and, as such, the sale of the Riverchase Village facility is reflected in the Company's financial statements. The accounting for the operations and the sale are reflected in discontinued operations.
As a result of the Riverchase Village sale and resulting payoff of the Riverchase Bonds, the Company was no longer the guarantor of the underlying debt. In consideration of this and the fact that the Company no longer holds a purchase option for the Riverchase Village facility, the Company determined it was no longer the primary beneficiary and determined it should deconsolidate the Riverchase VIE. As part of the deconsolidation of the Riverchase VIE, an eliminated intercompany balance of approximately
$1.6 million
consisting of operating losses sustained from 2010-2013, which were funded by AdCare and recognized in AdCare’s consolidated statements of operations from 2010-2013 attributable to the non-controlling interest in 2010-2013, were re-attributed to the Company’s shareholders.
Non-consolidated Variable Interest Entities
Aria.
On April 30, 2015, the Company entered into a lease inducement (the "Aria Lease Inducement") with Aria Health Consulting, LLC with respect to the Aria Subleases. The Aria Lease Inducement provided for a one-time payment from the Company to Aria Health Consulting, LLC equal to
$2.0 million
minus the security deposits and first month's base and special rent for all Aria Sublessees. On April 30, 2015, in connection with the Aria Lease Inducement,
eight
sublease agreements with Aria Sublessees were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of
$29,500
per month payable in advance on or before the first day of each month (except for the first special rent payment, which shall be subtracted from the lease inducement fee paid by the Company under the Aria Lease Inducement).
On July 17, 2015, the Company made a short-term loan, with an annual interest rate of
13.5%
, to HAH and, in connection therewith, HAH executed the HAH Note, as subsequently amended, in favor of the Company. Since July 17, 2015, the HAH Note has been amended from time to time and currently has an outstanding principal amount of
$1.0 million
and matured on
December 31, 2015
. On October 6, 2015, HAH and the Company entered into a security agreement, whereby HAH granted the Company a security interest in all accounts arising from the business of HAH and the Aria Sublessees, and all rights to payment from patients, residents, private insurers and others arising from the business of HAH and the Aria Sublessees (including any proceeds thereof), as security for payment of the HAH Note, as amended, and certain rent and security deposit obligations of the Aria Sublessees under Aria Subleases. The Company is currently seeking the repayment of the HAH Note in accordance with its terms and expects full repayment. For further information, see Note 7
- Leases
.
The Aria Lease Inducement and HAH Note entered into by the Company create a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the Aria Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance (see Note 7
- Leases
).
Beacon.
On August 1, 2015, the Company entered into a Lease Inducement Fee Agreement with certain affiliates of Beacon Health Management, LLC ("Beacon"), pursuant to which the Company paid a fee of
$0.6 million
as a lease inducement for certain affiliates of Beacon (the "Beacon Sublessees") to enter into sublease agreements and to commence such subleases and transfer operations thereunder (see
Note 7 - Leases
). The inducement fee was paid net of certain other fees and costs owed by the affiliates of, including the first month of base rent for all of the Beacon facilities and the first month of special rent pertaining to the four of such facilities.
On August 1, 2015, the Company made a short-term loan to certain affiliates of Beacon (collectively, the "Beacon Affiliates") and, in connection therewith, Beacon Affiliates executed a promissory note maturing on May 31, 2016 in the amount
$0.6 million
(the "Beacon Note"), as amended, in favor of the Company. Interest accrues on the unpaid principal balance of the note at a rate of
18%
per annum. Until all amounts due and owing under the note have been paid, the Beacon Sublessees will not pledge, as security, any of the accounts receivable relating to the respective facilities that such entities sublease from affiliates of the Company. As of June 30, 2016,
$0.6 million
outstanding principal on the Beacon Note was paid in full.
The Beacon Lease Inducement and Beacon Note entered into by the Company create a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the Beacon Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance (see Note 7
- Leases
).
Peach Health.
In connection with the Peach Health Sublease, the Company extended the Peach Line to Peach Health Sublessee in an amount of up to
$1.0 million
, with interest accruing on the unpaid balance under the Peach Line at a rate of
13.5%
per annum. The entire principal amount due under the Peach Line, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The Peach Line is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Peach Health Sublessee. As of
December 31, 2016
,
$0.7 million
was outstanding on the Peach Line. For further information on the Peach Health Sublease, see Note 7
- Leases
and
Note 19
- Subsequent Events
.
The Peach Line creates a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the affiliates of Peach Health as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Regulatory Matters
Laws and regulations governing federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. In February and May 2016, CMS decertified the Jeffersonville and Oceanside Facilities respectively, meaning the facilities can no longer accept Medicare or Medicaid patients. On December 20, 2016, the Jeffersonville Facility was recertified by CMS and received a new Medicare/Medicaid provider contract. For further information (see Note 7
- Leases
and
Note 19
- Subsequent Events).
The Company believes that it is in compliance in all material respects with all applicable laws and regulations.
Legal Matters
The Company is party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including claims that the services the Company provides during the time it operated skilled nursing facilities resulted in injury or death to the residents of the Company's facilities and claims related to employment, staffing requirements and commercial matters. Although the Company intends to vigorously defend itself in these matters, there is no assurance that the outcomes of these matters will not have a material adverse effect on the Company's business, results of operations and financial condition.
The Company previously operated, and the Company's tenants now operate, in an industry that is extremely regulated. As such, in the ordinary course of business, the Company's tenants are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition, we believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations against or involving the Company, for the Company's prior operations, or the Company's tenants, whether currently asserted or arising in the future, could have a material adverse effect on the Company's business, results of operations and financial condition.
Clanton Matter.
On June 24, 2013, South Star Services, Inc., Troy Clanton and Rose Rabon (collectively, the “Plaintiffs”) filed a complaint in the District Court of Oklahoma County, State of Oklahoma against: (i) AdCare, certain of its wholly owned subsidiaries and AdCare’s former Chief Executive Officer; (ii) Christopher Brogdon (a director of the Company, owner of greater than
5%
of the outstanding shares of the common stock and former Chief Acquisition Officer of the Company) and his wife; and (iii)
five
entities controlled by Mr. and Mrs. Brogdon, which entities own
five
skilled-nursing facilities located in Oklahoma that were previously managed by an AdCare subsidiary. On February 10, 2015, Plaintiffs and the defendants participated in a voluntary mediation in an attempt to resolve the case. Although the case did not settle at the mediation, Plaintiffs and defendants continued to negotiate over the following weeks and executed a settlement agreement on March 30, 2015 (the "Clanton Settlement Agreement") to settle all claims for a lump sum payment of
$2.0 million
. In April 2015, under the Clanton Settlement Agreement, the Company paid
$0.6 million
to the Plaintiffs with the balance paid by
two
of the Company's insurance carriers. The Company and the other defendants in the matter deny all of the Plaintiff's claims and any wrongdoing but agreed to settle the matter to avoid the continued expense and unpredictability of litigation.
Ohio Attorney General Action.
On October 27, 2016, the Ohio Attorney General (the “OAG”) filed in the Court of Common Pleas, Franklin County, Ohio a complaint against The Pavilion Care Center, LLC, Hearth & Home of Greenfield, LLC (each a subsidiary of the Company), and certain other parties (including parties for which the Company provides or provided management services). The lawsuit alleges that defendants submitted improper Medicaid claims for independent laboratory services for glucose blood tests and capillary blood draws and further alleges that defendants (i) engaged in deception, (ii) willfully received Medicaid payments to which they were not entitled or in a greater amount than that to which they were entitled, and (iii) obtained payments under the Medicaid program to which they were not entitled pursuant to their provider agreements and applicable Medicaid rules and regulations. The OAG is seeking, among other things, triple the amount of damages proven at trial (plus interest) and not less than
$5,000
and not more than
$10,000
for each deceptive claim or falsification. As previously disclosed, the Company received a letter from the OAG in February 2014 offering to settle its claims against the defendants for improper Medicaid claims related to glucose blood tests and capillary blood draws for a payment of approximately
$1.0 million
. The Company responded to such letter in July 2014 denying the allegations and heard nothing more from the OAG until the above referenced lawsuit was filed. The Company filed an answer to the complaint on January 27, 2017 in which it denied the allegations. Although there is no assurance as to the ultimate outcome of this matter or its impact on the Company’s business or its financial condition, the Company believes it has meritorious defenses and intends to vigorously defend the claim.
Professional and General Liability Claims
. The Company was a defendant in a purported class action lawsuit captioned Amy Cleveland et. al. v. APHR&R Nursing, LLC et. al. filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit (the “Amy Cleveland Class Action”). On December 16, 2015, the Company's insurance carrier reached a settlement with each of the individual plaintiffs on behalf of the Company and all other defendants pursuant to which separate payments are to be made by the Company's carrier to the plaintiffs. The individual settlements are contingent on approval by the probate courts having jurisdiction over the deceased plaintiffs' respective estates, if applicable. As of June 30, 2016, all of the individual settlement agreements had been approved and the settlement consideration paid to the plaintiffs.
As of
April 17, 2017
, the Company was a defendant in a total of
44
professional and general liability actions commenced on behalf of former patients, of which
28
cases were filed in the State of Arkansas by the same plaintiff attorney who represented the plaintiffs in the Amy Cleveland Class Action. These actions generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured or died while patients of facilities operated by the Company due to professional negligence or understaffing. Three of the pending actions are covered by insurance, except that any award of punitive damages would be excluded from such coverage. The actions are in various stages of discovery, and the Company intends to vigorously litigate the claims.
The Company has self-insured against professional and general liability actions since it discontinued its healthcare operations in connection with its transition to a healthcare holding and leasing company. The Company established a self-insurance reserve for these professional and general liability claims, included within “Accrued expenses and other” in the Company’s audited consolidated balance sheets of
$6.9 million
and
$0.2 million
at
December 31, 2016
, and
December 31, 2015
, respectively.
The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (v) the status and likely success of any settlement discussions; and (vi) the venues in which the actions have been filed or will be adjudicated.
In evaluating the adequacy of the self-insurance reserve in connection with the preparation of the Company’s financial statements for the year ended
December 31, 2016
, the Company also considered: (i) the increase in the number of pending actions since
December 31, 2015
; (ii) the outcome of initial mediation sessions and the status of settlement negotiations; and (iii) defense counsel’s evaluation of estimated legal costs and other expenses if the pending actions were to be litigated to final judgment.
Based on the foregoing, the Company has increased the self-insurance reserve at
December 31, 2016
to
$6.9 million
. The Company currently believes that most of its cases, and particularly many of the most recently filed cases, are defensible and intends to defend these claims through final judgment. The self-insurance reserve includes the Company's estimated legal costs of litigating the pending actions accordingly.
NOTE 16. INCOME TAXES
The provision for income taxes attributable to continuing operations for the years ended
December 31, 2016
and
2015
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Amounts in 000's)
|
|
2016
|
|
2015
|
Current Tax Expense:
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
8
|
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Deferred Tax Expense:
|
|
|
|
|
Federal
|
|
$
|
(163
|
)
|
|
$
|
102
|
|
|
|
$
|
(163
|
)
|
|
$
|
102
|
|
Total income tax expense
|
|
$
|
(163
|
)
|
|
$
|
110
|
|
The income tax expense applicable to continuing and discontinued operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Amounts in 000's)
|
|
2016
|
|
2015
|
Income tax expense on continuing operations
|
|
$
|
(163
|
)
|
|
$
|
110
|
|
Income tax (benefit) expense on discontinued operations
|
|
—
|
|
|
251
|
|
Total income tax (benefit) expense
|
|
$
|
(163
|
)
|
|
$
|
361
|
|
At
December 31, 2016
and
2015
, the tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Amounts in 000's)
|
|
2016
|
|
2015
|
Net deferred tax asset (liability):
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,475
|
|
|
$
|
5,839
|
|
Accrued expenses
|
|
3,374
|
|
|
1,047
|
|
Net operating loss carry forwards
|
|
21,624
|
|
|
21,521
|
|
Property, equipment & intangibles
|
|
(4,004
|
)
|
|
(4,526
|
)
|
Stock based compensation
|
|
268
|
|
|
125
|
|
Convertible debt adjustments
|
|
261
|
|
|
206
|
|
Total deferred tax assets
|
|
25,998
|
|
|
24,212
|
|
Valuation allowance
|
|
(26,224
|
)
|
|
(24,601
|
)
|
Net deferred tax liability
|
|
$
|
(226
|
)
|
|
$
|
(389
|
)
|
In accordance with ASU No. 2015-17, the Company has prospectively adopted the early application of ASU No. 2015-17, thereby classifying all deferred taxes as noncurrent assets and noncurrent liabilities as of December 31, 2015. The reason for the change is to simplify the reporting of all deferred tax assets and liabilities on the balance sheet.
The items accounting for the differences between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Federal income tax at statutory rate
|
|
34.0
|
%
|
|
34.0
|
%
|
State and local taxes
|
|
(0.4
|
)%
|
|
2.4
|
%
|
Consolidated VIE LLC
|
|
—
|
%
|
|
1.0
|
%
|
Nondeductible expenses
|
|
(20.6
|
)%
|
|
(7.3
|
)%
|
Other
|
|
(0.1
|
)%
|
|
(2.6
|
)%
|
Change in valuation allowance
|
|
(11.7
|
)%
|
|
(28.8
|
)%
|
Effective tax rate
|
|
1.2
|
%
|
|
(1.3
|
)%
|
As of
December 31, 2016
, the Company had consolidated federal net operating loss ("NOL") carry forwards of
$65.1 million
. These NOLs begin to expire in
2018
through
2036
and currently are offset by a full valuation allowance. As of
December 31, 2016
, the Company had consolidated state NOL carry forwards of
$44.5 million
. These NOLs begin to expire in
2017
through
2036
and currently are offset by a full valuation allowance.
Given the Company's historical net operating losses, a full valuation allowance has been established on the Company's net deferred tax assets. The Company has generated additional deferred tax liabilities related to its tax amortization of certain acquired indefinite lived intangible assets because these assets are not amortized for book purposes. The tax amortization in current and future years gives rise to a deferred tax liability which will only reverse at the time of ultimate sale or book impairment. Due to the uncertain timing of this reversal, the temporary differences associated with indefinite lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot be used to support an equal amount of the deferred tax asset related to the NOL carry forward. This resulted in recognizing deferred federal and state tax expense of
$0.2 million
and
$0.1 million
for the years ended
December 31, 2016
and
2015
, respectively, and a deferred tax liability of
$0.2 million
and
$0.4 million
for the years ended
December 31, 2016
and
2015
, respectively.
In early 2014, the IRS initiated an examination of the Company's income tax return for the 2011 income tax year. On May 7, 2014, the IRS completed and closed the examination and no changes were required to the Company's 2011 income tax return.
In October
2014
, the GDOR initiated an examination of the Company's Georgia income tax returns and net worth returns for the
2010
,
2011
,
2012
, and
2013
income tax years, which was closed during 2016, with no adjustments required to the filed tax returns. The Company is not currently under examination by any other major income tax jurisdiction.
NOTE 17. BENEFIT PLANS
The Company sponsors a 401(k) plan, which provides retirement benefits to eligible employees. All employees are eligible once they reach age
21 years
and complete
one
year of eligible service. The Company's plan allowed eligible employees to contribute up to
20%
of their eligible compensation, subject to applicable annual Code limits. The Company provides
50%
matching on employee contributions, up to
2%
of the employee's salary. Total matching contributions during the years ended
December 31, 2016
and
2015
were approximately
$2 thousand
and
$37 thousand
, respectively.
NOTE 18. RELATED PARTY TRANSACTIONS
Riverchase
. On
April 9, 2010
, Riverchase, then a wholly owned subsidiary of the Company, entered into a purchase agreement with a third party to acquire the assets of Riverchase Village, a
105
-bed assisted living facility located in Hoover, Alabama, for a purchase price of approximately
$5.0 million
. On
June 22, 2010
, the Company assigned to Christopher F. Brogdon (a then director of the Company, beneficial owner of more than
5%
of the common stock and the Company’s former Chief Acquisition Officer)
100%
of the membership interests in Riverchase (the “Assignment”). On
June 25, 2010
, Riverchase, then owned by Mr. Brogdon, completed the acquisition of the Riverchase Village facility.
Riverchase financed the purchase of the Riverchase Village facility by borrowing from the Medical Clinic Board of the City of Hoover, Alabama the proceeds from the issuance of the Riverchase Bonds, with an aggregate principal amount of
$6.3 million
. As part of the financing, AdCare guaranteed Riverchase’s obligations under the Riverchase Bonds.
As consideration for the Assignment and AdCare’s guarantee of Riverchase’s obligations under the Riverchase Bonds, Mr. Brogdon granted to a wholly owned subsidiary of the Company an exclusive and irrevocable option to acquire Riverchase (the “Riverchase Option”) originally through June 22, 2012 (which option was subsequently extended through June 22, 2015) for an exercise price of
$100,000
. In addition, another wholly owned subsidiary of the Company entered into a
five
-year year management agreement with Riverchase pursuant to which such subsidiary supervised the management of the Riverchase Village facility for a monthly fee equal to
5%
of the monthly gross revenues of the Riverchase Village facility. On June 22, 2013, the Company subsidiary and Riverchase agreed to mutually terminate such management agreement. See “- Letter Agreement with Brogdon”.
Sale of Riverchase Facility
. On June 11, 2015, Riverchase entered into an asset purchase agreement with Omega to sell the Riverchase Village facility, which was subsequently amended.
On November 20, 2015, Riverchase completed the sale of the Riverchase Village facility to Omega for a purchase price of
$6.9 million
. In connection with such sale, the Riverchase Bonds were repaid in full, and the Company was released from its guaranty of Riverchase’s obligations thereunder. In connection with the sale of the Riverchase Village facility, the Company received
$0.2 million
, all of which was applied to reduce the obligations under the promissory note issued by Riverchase to the Company (See “- Letter Agreement with Brogdon”). As of December 31, 2016, principal due and payable under the promissory note issued by Riverchase was
$95,000
.
See “- Letter Agreement with Brogdon” below for a further description of the agreements with respect to the Riverchase Village facility and related matters.
Promissory Note Issued By Brogdon
. On December 31, 2013, the Company notified certain entities controlled by Mr. Brogdon of the Company’s intent to terminate the management agreements between subsidiaries of the Company and such Brogdon entities under which the Company subsidiaries managed eight skilled nursing facilities located in Oklahoma owned by the Brogdon entities. Pursuant to the Letter Agreement discussed under “- Letter Agreement with Brogdon”: (i) the parties agreed to terminate the management agreements effective March 1, 2014 and (ii) Mr. Brogdon executed a promissory note in favor of the Company in principal amount of
$523,663
which represented amounts owed as of March 1, 2014 (a) by the Brogdon entities pursuant to the management agreements and (b) by GL Nursing, LLC (an entity controlled by Mr. Brogdon) to the Company in connection with the Company’s assignment to GL Nursing, LLC in May 2012 of the Company’s rights to acquire a 141-bed skilled nursing facility located in Lonoke, Arkansas, known as Golden Years Manor. The promissory note was originally payable in five equal monthly installments commencing on September 1, 2014 and ending on December 31, 2014, and did not bear interest.
Letter Agreement with Brogdon
. On March 3, 2014, the Company and certain of its subsidiaries entered into a letter agreement, dated as of February 28, 2014 (the “Letter Agreement”), with Mr. Brogdon and entities controlled by him which reduced the purchase price for the exercise of the Riverchase Option to
$1.00
. Furthermore, the Letter Agreement provided that, upon the closing of the sale of the Riverchase Village facility to an arms-length third party purchaser, regardless of whether the Company has exercised the Riverchase Option, the net sales proceeds from such sale shall be distributed as follows: (a) one-half of the net sales proceeds will be paid to the Company; (b) the remaining net sales proceeds will be paid to the Company to satisfy the outstanding principal balance and interest (if any) then due under the promissory note issued by Mr. Brogdon in favor of the Company with an original principal amount of
$523,663
, with such payment to be applied in the order of scheduled amortization under the note; and (c) the balance of net sales proceeds will be paid to the Company.
On May 15, 2014, the Company and certain of its subsidiaries entered into an amendment to the Letter Agreement (the “Letter Agreement First Amendment”), pursuant to which the Company paid
$92,323
(the “Tax Payment”) to the appropriate governmental authorities of Jefferson County, Alabama, such amount representing outstanding real property taxes due on the Riverchase Village facility. The Company determined that it was in its best interests to make the Tax Payment in order to preserve the Company’s interest in the sale of the Riverchase Village facility. In connection with the Tax Payment, the parties also agreed to amend and restate the promissory note issued by Mr. Brogdon in favor of the Company to reflect a new principal amount of
$615,986
, which amount represents the original principal amount of the note plus the Tax Payment. Furthermore, the Letter Agreement First Amendment amended the Letter Agreement to provide that, if the closing of the sale of the Riverchase Village facility did not occur on or before December 31, 2014, then a payment of principal under the amended and restated promissory note equal to the Tax Payment would be due and payable to the Company on or before January 31, 2015.
Prior to the sale of the Riverchase Village facility in November 2015, AdCare guaranteed Riverchase’s obligations with respect to the Riverchase Bonds, and in order to preserve the Company’s interest in the sale of the Riverchase Village facility, the Company made a payment in the amount of
$85,000
(the “Principal Obligation”) on behalf of Riverchase with respect to its obligations under the bonds. On October 10, 2014, Riverchase issued a promissory note in favor of the Company in the principal amount of
$177,323
, which represented the amount of Tax Payment plus the Principal Obligation. The note does not bear interest and was due upon the closing of the sale of the Riverchase Village facility. See “- Sale of Riverchase Village Facility”.
On October 10, 2014, the Company and certain of its subsidiaries entered into a second amendment to the Letter Agreement, as amended (the “Letter Agreement Second Amendment”), with Mr. Brogdon and entities controlled by Mr. Brogdon, pursuant to which the Company reduced the principal amount of the promissory note issued by Mr. Brogdon by the amount equal to
$92,323
(which represents the amount of the Tax Payment) plus
$255,000
(which represents an offset of amounts owed by the Company to Mr. Brogdon under his consulting agreement with the Company). See “- Brogdon Consulting Agreement”.
The Letter Agreement Second Amendment also amended the Letter Agreement, as amended, to provide that upon the closing of the sale of the Riverchase Village facility to a third party purchaser, the net sales proceeds from such sale shall be distributed so that any net sales proceeds shall first be paid to the Company to satisfy the
$177,323
outstanding under the note issued by Riverchase to the Company.
On March 25, 2015, the Company and certain of its subsidiaries entered into a third amendment to the Letter Agreement, as amended (the “Letter Agreement Third Amendment”), with Mr. Brogdon and entities controlled by him, pursuant to which Riverchase and the Company agreed to amend the promissory note issued by Riverchase to the Company to: (i) increase the principal amount due under the promissory note issued by Riverchase to the Company by any additional real property tax payments made by the Company with respect to the Riverchase Village facility and (ii) to state that such promissory note would not bear interest.
The Letter Agreement Third Amendment amended the Letter Agreement to provide a schedule for the payment to the Company of the net sales proceeds resulting from a sale of the Riverchase Village facility to a third-party purchaser. The Letter Agreement Third Amendment required that the net sales proceeds from such sale be distributed to the Company as follows: (i) an amount sufficient to satisfy all amounts due and owing under the promissory note issued by Riverchase to the Company; (ii) one-half of the then remaining net sales proceeds; (iii) an amount sufficient to satisfy the amounts due and owing under the promissory note issued by Mr. Brogdon to the Company; and (d) the then remaining balance of net sales proceeds.
In connection with the Letter Agreement Third Amendment, the Company and Mr. Brogdon agreed to amend the promissory note issued by Mr. Brogdon to the Company. Pursuant to this amendment, the principal balance plus any accrued interest under the promissory note issued by Mr. Brogdon to the Company shall be due and payable on the earlier of: (i) December 31, 2015; or (ii) the closing of the sale of the Riverchase Village facility. See “- Sale of Riverchase Village Facility”. On November 10, 2016, the Company and Mr. Brogdon agreed to further amend the promissory note issued by Mr. Brogdon to the Company to extend its maturity date to December 31, 2017. As a condition to such amendment, Winter Haven Homes, Inc. (“Winter Haven”), an entity owned and controlled by Mr. Brogdon, has agreed to waive payment of certain charges otherwise due and owing from the Company to Winter Haven from January 1, 2016 to July 31, 2016. As of December 31, 2016, principal due and payable under the promissory note issued by Mr. Brogdon to the Company was
$268,663
.
Brogdon Consulting Agreement
. In December 2012, the Company entered into a three-year consulting agreement with Mr. Brogdon for consulting services related to the acquisition and financing of skilled nursing facilities.
On May 6, 2014, the Company and Mr. Brogdon amended the consulting agreement to: (i) provide for an aggregate consulting fee equal to
$400,000
; (ii) a success fee of
$25,000
(a “Success Fee”), subject to certain limitations; and (iii) eliminate the severance pay originally payable to Mr. Brogdon upon termination of the original consulting agreement without cause. Under the amended consulting agreement, Mr. Brogdon also would have received a change of control fee of
$500,000
, if a change of control occurred on or before May 1, 2015; however, no such fee became payable.
Pursuant to the amended consulting agreement, the Company made a one-time payment of
$100,000
in respect of the
$400,000
consulting fee on May 6, 2014, and was obligated to pay the remainder of the consulting fee in monthly payments of
$15,000
, which payments commenced on June 1, 2014. The Company did not pay any Success Fee to Mr. Brogdon during the fiscal year 2015. Pursuant to the amended consulting agreement, the balance of the consulting fee owed to Mr. Brogdon by the Company in the amount of
$255,000
was offset in October 2014 against the remaining amount owed by Mr. Brogdon to the Company under the promissory note, thereby reducing the principal amount of the promissory note to
$268,663
. See “- Promissory Note Issued by Brogdon” above.
On March 21, 2016, Mr. Brogdon and the Company entered into a letter agreement with respect to the amended consulting agreement pursuant to which Mr. Brogdon and the Company agreed that such agreement was terminated effective as of November 20, 2015.
Settlement and Indemnification Agreement
. On March 26, 2015, the Company and certain entities controlled by Mr. Brogdon entered into a Settlement and Indemnification Agreement with respect to: (i) certain claims made by the Brogdon entities in connection with management and administrative services provided by the Company to the Brogdon entities under various
management agreements; and (ii) certain pending, or threatened, legal proceedings against the Company and certain of its subsidiaries, and Mr. Brogdon and certain entities controlled by him, including the litigation filed in the District Court of Oklahoma County, State of Oklahoma and described in Part I, Item 3, “Legal Proceedings” in the Company’s 2014 Annual Report on Form 10-K (collectively, and including any unasserted claims arising from the management agreements, the “AdCare Indemnified Claims”). Pursuant to such agreement, the Company contributed
$600,000
towards the settlement of the litigation, which occurred in March 2015, and Mr. Brogdon and the Brogdon entities released the Company from any and all claims arising in connection with the management agreements and indemnified the Company with respect to the AdCare Indemnified Claims.
Personal Guarantor on Loan Agreements
. Mr. Brogdon serves as personal guarantor on certain loan agreements entered into by the Company prior to 2015. At December 31, 2016, the total outstanding principal owed under such loan agreements was approximately
$15.3 million
.
Park City Capital
. On March 31, 2015, the Company accepted a Subscription Agreement from Park City Capital Offshore Master, Ltd. (“Park City Offshore”), an affiliate of Michael J. Fox, for a 2015 Note with an aggregate principal amount of
$1,000,000
and, in connection therewith, issued such note to Park City Capital Offshore on April 30, 2015. The 2015 Note was offered to Park City Offshore on the same terms and conditions as all other investors in the offering. In January 2017, the Company repurchased the
$1,000,000
2015 Note held by Park City Offshore pursuant to the terms of the Tender Offer for any and all of the outstanding 2015 Notes. For a description of the Tender Offer, see Note 19 -
Subsequent Events
. Mr. Fox is a an affiliate of Park City Offshore, a director of the Company since October 2013, Lead Independent Director since April 1, 2015 and a beneficial owner of greater than
5%
of the outstanding common stock.
Rimland Consulting Agreement
. During March 2015, prior to Allan J. Rimland’s appointment as Chief Financial Officer of the Company, Mr. Rimland provided certain consulting services to the Company as an independent contractor. The Company paid Mr. Rimland
$20,000
for such services.
Knaup Consulting Agreement
. From November 2014 through September 2015, Thomas Knaup provided certain insurance-related consulting services to the Company through an entity owned and controlled by him. In connection with such services, the Company issued to the entity in December 2014 a
five
-year warrant to purchase
224,758
shares of common stock at an exercise price of
$4.04
per share. In September 2015, the Company and the entity terminated the consulting arrangement and the warrant, without it being exercised, and the Company paid
$115,000
to the entity in connection therewith. Mr. Knaup was elected a director of the Company in October 14, 2015.
Doucet Asset Management, LLC
. On June 10, 2014 and on subsequent dates, Doucet Capital, LLC, Doucet Asset Management, LLC, Christopher L. Doucet and Suzette A. Doucet jointly filed with the SEC a Schedule 13D reporting beneficial ownership of greater than
5%
of the common stock.
On March 31, 2015, the Company accepted Subscription Agreements from Christopher L. Doucet and Suzette A. Doucet for 2015 Notes with an aggregate principal amount of
$250,000
. The 2015 Notes were offered to them on the same terms and conditions as all other investors in the offering. With respect to the offering of 2015 Notes, Institutional Securities Corporation served as the placement agent and Doucet Asset Management, LLC served as the selected dealer, both of which are affiliates of Mr. and Ms. Doucet. In connection with the offering of 2015 Notes, the Company paid to Institutional Securities Corporation a placement fee of
$151,000
.
In January 2017, the Company repurchased the 2015 Notes in aggregate principal amount of
$250,000
held by Mr. and Ms. Doucet pursuant to the terms of the Tender Offer for any and all of the outstanding 2015 Notes. For a description of the Tender Offer, see Note 19
- Subsequent Events
.
On January 19, 2017, Doucet Capital, LLC, Doucet Asset Management, LLC and Mr. and Ms. Doucet jointly filed with the SEC a Schedule 13D reporting beneficial ownership of less than
5%
of the common stock as a result of the convertible notes repurchased by the Company pursuant to such tender offer.
Cantone
. On April 12, 2011 and on subsequent dates, Anthony J. Cantone, Cantone Research, Inc. (“CRI”), and certain other reporting persons filed with the SEC a Schedule 13G reporting beneficial ownership of greater than
5%
of the common stock. On October 5, 2015, Mr. Cantone, CRI and CAM, and certain other reporting persons filed with the SEC a Schedule 13G/A-2, which reported beneficial ownership of less than
5%
of the common stock.
As part of a private placement offering in 2012 for which CRI acted as placement agent, the Company issued and sold to Mr. Cantone and CAM 2012 Notes with an aggregate principal amount of approximately
$6.4 million
.
On June 30, 2015, the Company entered into prepayment agreements with Mr. Cantone and CAM and, in connection therewith, prepaid the 2012 Note held by Mr. Cantone in its entirety and partially prepaid the 2012 Note held by CAM, leaving a principal balance of approximately
$4.8 million
with respect to such note. All but
$1.5 million
of such principal balance was repaid on the July 31, 2015 maturity date.
Effective July 31, 2015, the Company and CAM amended the 2012 Note held by CAM to, among other things: (i) extend the maturity date with respect to
$1.5 million
of the principal amount of the 2012 Note to October 31, 2017; (ii) increase the interest rate from
8.0%
to
10.0%
per annum; and (iii) increase the conversion price from
$3.97
to
$4.25
per share. Additionally, the amendment modifies the Company’s right to prepay the 2012 Note held by CAM so that the Company may prepay at any time, without penalty, upon
60
days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to the 2012 Note; provided, however, that: (i) the shares of the common stock issuable upon conversion of the 2012 Note have been registered for resale under the Securities Act; and (ii) at any time after the issue date of the 2012 Note, the volume-weighted average price of the common stock for
ten
consecutive trading days has equaled or exceeded
150%
of the then-current conversion price. The amendment also affords each of CAM and the Company the right to cause the redemption of all or any portion of the principal amount of the 2012 Note held by CAM upon a change of control (as defined in the 2012 Note) at a redemption price equal to
115%
of the sum of (i) outstanding principal amount to be redeemed, plus (ii) the amount of accrued and unpaid interest thereon.
Pursuant to the amendment, the Company paid to CRI a fee equal to
$37,500
. The amendment also amends the consulting agreement, dated July 2, 2012, between the Company and CRI to: (i) reduce the annual consulting fee payable thereunder from approximately
$50,000
to
$15,000
and further reduce such fee proportionately upon each repayment, redemption or conversion of the principal amount of the 2012 Note held by CAM; and (ii) terminate such consulting agreement upon the earlier of October 31, 2017, or the conversion, redemption or prepayment of the entire principal amount of the 2012 Note held by CAM. The consulting agreement was originally executed by the parties in 2012 in connection with the Company’s private offering of the 2012 Notes.
Other than the items discussed above, there are no other material undisclosed related party transactions. For purposes of the disclosure in this Note 18
- Related Party Transactions
, note that: (i) Mr. Brogdon is a greater than
5%
holder of the outstanding common stock
;
and (ii) CAM and CRI are affiliates of Anthony J. Cantone, who filed with the SEC in July 2013 a Form 4 reporting that he beneficially owned greater than
10%
of the outstanding common stock which was reported as less than
5%
on a Schedule 13G/A filed with the SEC in October 2015.
NOTE 19. SUBSEQUENT EVENTS
The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the SEC. The following is a summary of the material subsequent events.
Tender Offer for 10% Convertible Subordinated Notes Due April 30, 2017
On December 8, 2016, the Company commenced the Tender Offer for any and all of its outstanding 2015 Notes. The purchase price offered was cash in an amount equal to
$1,000
per
$1,000
principal amount of the 2015 Notes purchased, plus accrued and unpaid interest to, but not including, the payment date.
The Tender Offer expired on January 9, 2017, and
$6.7 million
in aggregate principal amount of the 2015 Notes were validly tendered and not properly withdrawn. AdCare accepted and paid all of the 2015 Notes validly tendered and not properly withdrawn pursuant to the Tender Offer. Payment for the 2015 Notes tendered and accepted for payment was made by check on January 10, 2017. After giving effect to such payment,
$1.0 million
in aggregate principal amount of the 2015 Notes remain outstanding.