Notes to Unaudited Consolidated Financial Statements
June 30, 2017
NOTE 1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
See Part II, Item 8, Notes to Consolidated Financial Statements
,
Note 1 -
Organization and Significant Accounting Policies
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
, filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2017 (the “Annual Report”), for a description of all 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 care and senior living. The Company’s business primarily consists of leasing and subleasing healthcare facilities to third-party tenants, which operate such facilities. The operators of the Company’s facilities provide a range of healthcare services, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.
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.
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 property including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual rent escalation clauses. The Company has many of the characteristics of a real estate investment trust (“REIT”) and is focused on the ownership, acquisition and leasing of healthcare properties. AdCare’s Board of Directors (the “Board”) continues to analyze and consider: (i) whether and, if so, when, the Company could satisfy the requirements to qualify as a REIT under the Internal Revenue Code of 1986, as amended; (ii) the structural and operational complexities which would need to be addressed before the Company 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 the Company 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. 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
June 30, 2017
, the Company owns, leases, or manages
30
facilities, which are located primarily in the Southeast. Of the
30
facilities, the Company: (i) leased
14
owned facilities and subleased
11
leased skilled nursing facilities to third-party tenants; (ii) leased
two
owned assisted living facilities to third-party tenants; and (iii) managed on behalf of third-party owners
two
skilled nursing facilities and
one
independent living facility (see Note 7 -
Leases
herein and Part II, Item 8, Notes to Consolidated Financial Statements
,
Note 7 -
Leases
in the Annual Report for a more detailed description of the Company’s leases).
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the
three and six
months ended
June 30, 2017
and
2016
are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at
December 31, 2016
has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
You should read the unaudited consolidated financial statements together with the historical audited consolidated financial statements of the Company for the year ended
December 31, 2016
, included in the Annual Report.
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 allowance for doubtful accounts, self-insurance reserves, deferred tax valuation allowance, fair value of employee and nonemployee stock based awards, valuation of goodwill and other long-lived assets, and cash flow projections. Actual results could differ materially from those estimates.
Revenue Recognition and Allowances
Triple-Net Leased Properties.
The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when 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. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company’s facilities, rental income for the affected facilities will be recognized only upon cash collection, and any accumulated straight-line rent receivable will be reversed in the period in which the Company first deems rent collection no longer reasonably assured.
Management Fee Revenue and Other.
The Company recognizes management fee revenues as services are provided. Further, the Company recognizes income from lease inducement receivables and interest income from loans and investments, using the effective interest method when collectibility is reasonably assured. We apply the effective interest method on a loan-by-loan basis.
Allowances.
The Company assesses the collectibility of our rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectibility of rent receivables and working capital loans to tenants on several factors, including, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments or payments on a working capital loan, the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease or required from a working capital loan to a tenant, the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates.
As of
June 30, 2017
and
December 31, 2016
, the Company allowed for approximately
$4.3 million
and
$7.5 million
, respectively, of gross patient care related receivables arising from our legacy operations. 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. Any changes in patient care receivable allowances are recognized as a component of discontinued operations. All uncollected patient care receivables were fully allowed at
June 30, 2017
and
December 31, 2016
. Accounts receivable, net totaled
$1.5 million
at
June 30, 2017
and
$2.4 million
at
December 31, 2016
, of which
$0.2 million
and
$0.9 million
, respectively, related to patient care receivables from our legacy operations.
Self-Insurance
The Company has self-insured against professional and general liability claims since it discontinued its healthcare operations during 2014 and 2015 (see Part II, Item 8, Notes to Consolidated Financial Statements
,
Note 15 -
Commitments and Contingencies
in the Annual Report for more information). The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions; and (v) 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
).
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.
Adopted Standards
On April 1, 2017, we adopted Accounting Standards Update (“
ASU
”) 2017-01, Clarifying the Definition of a Business (“
ASU 2017-01
”), which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business.
ASU 2017-01
states that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquired asset is not a business. If this initial test is not met, an acquired asset cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. The primary differences between business combinations and asset acquisitions include recognition of goodwill at the acquisition date and expense recognition for transaction costs as incurred. We are applying
ASU 2017-01
prospectively for acquisitions after April 1, 2017. Regardless of whether an acquisition is considered a business combination or an asset acquisition, we record the cost of the businesses (or assets) acquired as tangible and intangible assets and liabilities based upon their estimated fair values as of the acquisition date. Intangibles primarily include certificates of need ("CON") but could include value of in-place leases and acquired lease contracts. For an asset acquisition, the cost of the acquisition is allocated to the assets and liabilities acquired on a relative fair value basis and no goodwill is recognized. We estimate the fair value of assets in accordance with FASB Accounting Standards Codification (“
ASC”) 805
and
ASC 820
. The fair value is estimated under market conditions observed at the time of the measurement date and depreciated over the remaining life of the assets.
In March 2016, the FASB issued
ASU 2016-09,
with the intention to simplify aspects of the accounting for share-based payment transactions, including income tax impacts, classification on the statement of cash flows, and forfeitures.
ASU 2016-09
is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The various amendments within the standard require different approaches to adoption, on a retrospective, modified retrospective or prospective basis. The Company adopted the various amendments in its consolidated financial statements for the three month period ending March 31, 2017 with an effective date of January 1, 2017. The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of
ASU 2016-09
did not have a material effect on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws, the FASB
ASC
is the sole source of authoritative GAAP literature recognized by the FASB and 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 May 2014, the FASB issued
ASU 2014-09
, which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. This 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 ASU 2014-09 by one year and subsequently amended the new revenue standard under
ASU 2016-10
and
ASU 2016-12
in April and May 2016, respectively. ASU 2016-10 provides additional guidance for identifying performance obligations and licenses of intellectual property, and ASU 2016-12 clarifies guidance regarding collectibility, noncash considerations and completed contracts at transition. These new revenue standards are 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 continuing to evaluate the impact of this guidance on the Company’s consolidated financial condition, results of operations and cash flows. As our main revenue stream is lease revenues, the Company does not expect adoption of this guidance to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
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 lease 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 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 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.
In January 2017, the FASB issued
ASU 2017-04,
which simplifies the required periodic test for goodwill impairment and modifies the concept of impairment of goodwill under previous guidance,
ASC 350,
Intangibles - Goodwill and Other
. Under the updated guidance, a goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the total amount of goodwill allocated to that reporting unit. This simplification eliminates previous requirements to determine the implied fair value of goodwill and record a loss on impairment equal to the carrying value of goodwill less the implied fair value. Further, the
ASU
modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.
ASU 2017-04
is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on a prospective basis for annual and interim periods beginning after January 1, 2017. 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.
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 respective period. Diluted earnings per share is similar to basic earnings per share except: (i) net income or loss is adjusted by the impact of the assumed conversion of convertible debt into shares of common stock; and (ii) the weighted average number of shares of common stock outstanding includes potentially dilutive securities (such as options, warrants and additional shares of common stock issuable under convertible debt outstanding during the period) when such securities are not anti-dilutive. Potentially dilutive securities from options and warrants are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from convertible debt are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For the
three and six months ended
June 30, 2017
and
2016
, approximately
2.4 million
and
4.5 million
shares, respectively, of potentially dilutive securities were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive for such periods.
The following tables provide a reconciliation of net loss for continuing and discontinued operations and the number of shares of common stock used in the computation of both basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Amounts in 000’s, except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
624
|
|
|
$
|
(1,207
|
)
|
|
$
|
85
|
|
|
$
|
(2,629
|
)
|
Preferred stock dividends
|
|
1,912
|
|
|
1,801
|
|
|
3,790
|
|
|
3,578
|
|
Basic and diluted loss from continuing operations
|
|
(1,288
|
)
|
|
(3,008
|
)
|
|
(3,705
|
)
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
(604
|
)
|
|
(3,775
|
)
|
|
(1,017
|
)
|
|
(4,303
|
)
|
Net loss attributable to AdCare Health Systems, Inc. common stockholders
|
|
$
|
(1,892
|
)
|
|
$
|
(6,783
|
)
|
|
$
|
(4,722
|
)
|
|
$
|
(10,510
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic - weighted average shares
|
|
19,766
|
|
|
19,907
|
|
|
19,795
|
|
|
19,896
|
|
Diluted - adjusted weighted average shares
(a)
|
|
19,766
|
|
|
19,907
|
|
|
19,795
|
|
|
19,896
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to AdCare
|
|
$
|
(0.07
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.31
|
)
|
Loss from discontinued operations
|
|
(0.03
|
)
|
|
(0.19
|
)
|
|
(0.05
|
)
|
|
(0.22
|
)
|
Loss attributable to AdCare Health Systems, Inc. common stockholders
|
|
$
|
(0.10
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
(a)
Securities outstanding that were excluded from the computation, because they would have been anti-dilutive were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
(Share amounts in 000’s)
|
|
2017
|
|
2016
|
Stock options
|
|
245
|
|
|
355
|
|
Warrants - employee
|
|
1,350
|
|
|
1,559
|
|
Warrants - non employee
|
|
437
|
|
|
437
|
|
Shares issuable upon conversion of convertible debt
|
|
353
|
|
|
2,165
|
|
Total anti-dilutive securities
|
|
2,385
|
|
|
4,516
|
|
NOTE 3.
LIQUIDITY AND PROFITABILITY
Sources of Liquidity
The Company continues to undertake measures to grow its operations and to reduce its expenses by: (i) increasing future lease revenue through acquisitions and investments in its 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
June 30, 2017
, the Company had
$2.0 million
in cash and cash equivalents as well as restricted cash and investments of
$3.7 million
. In addition, 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, 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, including issuances of preferred stock and convertible debt.
On May 27, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with JMP Securities LLC to sell, from time to time, shares of the Company’s
10.875%
Series A Cumulative Redeemable Preferred Stock, (the “Series A Preferred Stock”), having an aggregate offering price of up to
$4,618,472
through an “at-the-market” offering program (the “ATM”). From the inception of the ATM through
June 30, 2017
, the Company sold
50,000
shares of the Series A Preferred Stock generating net proceeds of approximately
$1.0 million
, (see Note 12 -
Common and Preferred Stock
). No shares of Series A Preferred Stock were sold under the ATM since
June 30, 2017
. On August 2, 2017 the Company terminated the Sales Agreement and discontinued sales under the ATM. Management anticipates renewing its at-the-market offering program with respect to sales of Series A Preferred Stock as a source of liquidity over the next twelve months.
On July 31, 2017, the Company extended the maturity date of a
$1.2 million
credit facility entered into in December 2012 between a certain wholly-owned subsidiary of the Company and the First Commercial bank associated with its Northwest Oklahoma facility (the “Northwest Credit Facility”) from December 31, 2017 to July 31, 2020.
On August 11, 2017, the Company extended the maturity date of the credit facilities entered into in April 2015, with respect to an aggregate of
$0.5 million
of indebtedness between certain wholly-owned subsidiaries of the Company and the KeyBank National Association (the “Key Bank Credit Facility”), from October 17, 2017 to August 2, 2019.
Beginning in the fourth quarter of 2017, the Company expects to receive full rent with respect to the facilities (the “Peach Facilities”) subleased by a subsidiary of the Company (“ADK”) to affiliates (collectively, “Peach Health Sublessee”) of Peach Health Group, LLC (“Peach Health”). Prior thereto the Peach Facilities were subleased to affiliates of New Beginnings Care, LLC (“New Beginnings”) prior to the bankruptcy of New Beginnings and 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 was only
$1
per month for the Oceanside Facility and Jeffersonville Facility until the date such facilities were recertified by the Centers for Medicare and Medicaid Services (“CMS”) or April 1, 2017, whichever occurred first (the “Rent Commencement Date”). The Oceanside Facility and Jeffersonville Facility were recertified by CMS in February 2017 and December 2016, respectively. Furthermore, with respect to the Oceanside Facility and Jeffersonville Facility, 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%
.
On September 19, 2016, the Company obtained an option to extend the maturity date, subject to customary conditions, of a
$4.4 million
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. On August 10, 2017, the Company extended the maturity date of the Quail Creek Credit Facility to December 31, 2017 and retains the option to further extend the maturity date of such credit facility to September 2018. 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.
Cash Requirements
At
June 30, 2017
, the Company had
$74.2 million
in indebtedness of which the current portion is
$4.1 million
. The current portion is comprised of the following components: (i) convertible debt of
$1.5 million
; and (ii) other debt of approximately
$2.6 million
which includes senior debt - bond and mortgage indebtedness (for a complete listing of our debt, see Note 9 -
Notes Payable and Other Debt
).
The Company anticipates net principal disbursements, over the next twelve months, of approximately
$4.1 million
, which includes
$1.5 million
of convertible debt, approximately
$0.3 million
of payments on shorter term vendor notes,
$1.9 million
of routine debt service amortization, and a
$0.4 million
payment of other debt. 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
June 30, 2017
, the Company had approximately
$10.5 million
of debt maturities due over the
two
-year period ending
June 30,
2019
. These debt maturities include the aforementioned
$1.5 million
of convertible promissory notes, which are convertible into shares of the common stock in addition to
$4.4 million
with respect to
the Quail Creek Credit Facility. The Company believes its long-term liquidity needs will be satisfied by cash flows from operations, cash on hand, borrowings as required to refinance indebtedness as well as other sources, including issuances of preferred stock and convertible debt.
The Company is a defendant in a total of
41
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
$6.1 million
and
$6.9 million
at
June 30, 2017
, and
December 31, 2016
, 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 judgment. Accordingly, the self-insurance reserve primarily reflects the Company's estimated legal costs of litigating the pending actions, which 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 period ended
June 30, 2017
; however, management cannot reliably estimate the exact timing of payments. The Company expects to fund litigation and potential indemnity costs through cash on hand as well as other sources as described above.
During the
three months ended
June 30, 2017
, the Company generated positive cash flow from operations and anticipates positive cash flow from operations through the remainder of the current year. 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 the Series A Preferred Stock on the NYSE American, formerly known as the NYSE MKT.
NOTE 4.
RESTRICTED CASH AND INVESTMENTS
The following presents the Company's restricted cash, escrow deposits and investments:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
June 30, 2017
|
|
December 31, 2016
|
Cash collateral
|
|
$
|
16
|
|
|
$
|
260
|
|
Replacement reserves
|
|
765
|
|
|
811
|
|
Escrow deposits
|
|
580
|
|
|
529
|
|
Total current portion
|
|
1,361
|
|
|
1,600
|
|
|
|
|
|
|
Restricted investments for other debt obligations and certificates of deposit
|
|
467
|
|
|
2,274
|
|
HUD and other replacement reserves
|
|
1,841
|
|
|
1,590
|
|
Total noncurrent portion
|
|
2,308
|
|
|
3,864
|
|
Total restricted cash and investments
|
|
$
|
3,669
|
|
|
$
|
5,464
|
|
Cash collateral
—In securing mortgage financing from certain lending institutions, the Company and certain of its wholly-owned subsidiaries are required to deposit cash to be held as collateral in accordance with the terms of such loan agreements.
Replacement reserves
—Cash reserves set aside for non-critical building repairs 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 other debt obligations and certificates of deposit
—In compliance with certain financing and insurance agreements, the Company and certain wholly-owned subsidiaries of the Company are required to deposit cash and/or certificates of deposit held as collateral by the lender or in escrow with certain designated financial institutions.
HUD and other replacement reserves
—The regulatory agreements entered into in connection with the financing secured through the U.S. Department of Housing and Urban Development (“HUD”) require monthly escrow deposits for replacement and improvement of the HUD project assets.
NOTE 5.
PROPERTY AND EQUIPMENT
The following table sets forth the Company’s property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
Estimated Useful
Lives (Years)
|
|
June 30, 2017
|
|
December 31, 2016
|
Buildings and improvements
|
|
5-40
|
|
$
|
89,829
|
|
|
$
|
84,108
|
|
Equipment and computer related
|
|
2-10
|
|
10,863
|
|
|
12,286
|
|
Land
|
|
—
|
|
4,091
|
|
|
3,988
|
|
Construction in process
|
|
—
|
|
73
|
|
|
602
|
|
|
|
|
|
104,856
|
|
|
100,984
|
|
Less: accumulated depreciation and amortization
|
|
|
|
(21,629
|
)
|
|
(21,816
|
)
|
Property and equipment, net
|
|
|
|
$
|
83,227
|
|
|
$
|
79,168
|
|
On May 1, 2017, the Company completed the acquisition of an assisted living and memory care community with
106
operational beds in Glencoe, Alabama (“the Meadowood Facility”) from Meadowood Retirement Village, LLC and Meadowood Properties, LLC (see Note 10 -
Acquisitions)
.
Buildings and improvements includes the capitalization of costs incurred for the respective CON’s. For additional information on the CON amortization, see Note 6 -
Intangible Assets and Goodwill
.
The following table summarizes total depreciation and amortization for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Amounts in 000’s)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Depreciation
|
|
$
|
832
|
|
|
$
|
961
|
|
|
$
|
1,629
|
|
|
$
|
2,214
|
|
Amortization
|
|
339
|
|
|
378
|
|
|
677
|
|
|
838
|
|
Total depreciation and amortization
|
|
$
|
1,171
|
|
|
$
|
1,339
|
|
|
$
|
2,306
|
|
|
$
|
3,052
|
|
|
|
|
|
|
|
|
|
|
NOTE 6.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
CON (included in property and equipment)
|
|
Bed Licenses - Separable
|
|
Lease Rights
|
|
Total
|
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
|
|
(343
|
)
|
|
—
|
|
|
(334
|
)
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2017
|
|
|
|
|
|
|
|
|
Gross
|
|
22,811
|
|
|
2,471
|
|
|
6,881
|
|
|
32,163
|
|
Accumulated amortization
|
|
(3,826
|
)
|
|
—
|
|
|
(4,461
|
)
|
|
(8,287
|
)
|
Net carrying amount
|
|
$
|
18,985
|
|
|
$
|
2,471
|
|
|
$
|
2,420
|
|
|
$
|
23,876
|
|
The following table summarizes total amortization for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Amounts in 000’s)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
CON
|
|
$
|
172
|
|
|
$
|
212
|
|
|
$
|
343
|
|
|
$
|
505
|
|
Lease rights
|
|
167
|
|
|
166
|
|
|
334
|
|
|
333
|
|
Total amortization
|
|
$
|
339
|
|
|
$
|
378
|
|
|
$
|
677
|
|
|
$
|
838
|
|
|
|
|
|
|
|
|
|
|
Expected amortization expense for all definite-lived intangibles for each of the years ended
December 31
is as follows:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
Bed Licenses
|
|
Lease Rights
|
2017
(a)
|
|
$
|
346
|
|
|
$
|
333
|
|
2018
|
|
692
|
|
|
667
|
|
2019
|
|
692
|
|
|
667
|
|
2020
|
|
692
|
|
|
482
|
|
2021
|
|
692
|
|
|
203
|
|
Thereafter
|
|
16,171
|
|
|
68
|
|
Total expected amortization expense
|
|
$
|
19,285
|
|
|
$
|
2,420
|
|
(a)
Estimated amortization expense for the year ending
December 31, 2017
, includes only amortization to be recorded after
June 30, 2017
.
The following table summarizes the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
June 30, 2017
|
|
December 31, 2016
|
Goodwill
|
|
$
|
2,945
|
|
|
$
|
2,945
|
|
Accumulated impairment losses
|
|
(840
|
)
|
|
(840
|
)
|
Net carrying amount
|
|
$
|
2,105
|
|
|
$
|
2,105
|
|
The Company does not amortize indefinite-lived intangibles, which consist of separable bed licenses and goodwill.
NOTE 7. LEASES
Operating Leases
The Company leases a total of
eleven
skilled nursing facilities from unaffiliated owners under non-cancelable leases, all 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 Suwanee, Georgia and Atlanta, Georgia. The Atlanta office space is subleased to a third-party tenant.
As of
June 30, 2017
, the Company is in compliance with all operating lease financial covenants.
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
(a)
|
|
$
|
4,122
|
|
2018
|
|
8,331
|
|
2019
|
|
8,492
|
|
2020
|
|
8,671
|
|
2021
|
|
8,830
|
|
Thereafter
|
|
46,456
|
|
Total
|
|
$
|
84,902
|
|
(a)
Estimated minimum lease payments for the year ending
December 31, 2017
include only payments to be recorded after
June 30, 2017
.
Leased and Subleased Facilities to Third-Party Operators
The Company leases or subleases
27
facilities (
16
owned by the Company and
11
leased to the Company) to third-party tenants on a triple net basis, meaning that the lessee (i.e., the third-party tenant of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Peach Health.
On June 18, 2016, ADK entered into a master sublease agreement (the “Peach Health Sublease”) with Peach Health Sublessee, providing that Peach Health Sublessee would take possession of and operate the Peach Facilities as subtenant. The Jeffersonville Facility and the Oceanside Facility were previously decertified by CMS in February and May 2016, respectively, for deficiencies related to the operations and maintenance of the facility while operated by the previous sublessee
(
see
Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 -
Leases
included in the Annual Report for additional information). The Jeffersonville Facility and the Oceanside Facility were recertified by CMS as of December 20, 2016 and February 7, 2017, respectively, which are the Rent Commencement Dates for such facilities.
The Peach Health Sublease became effective for the Jeffersonville Facility on June 18, 2016, and for the Savannah Beach Facility and the Oceanside Facility on July 13, 2016 (the date on which ADK accepted possession of the facilities from the previous sublessee). 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 the Oceanside Facility and the Jeffersonville Facility in connection with recertification by CMS. 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; provided, however, that rent was only
$1
per month for the Oceanside Facility and the Jeffersonville Facility until the respective Rent Commencement Dates. In addition, for the Oceanside Facility and the Jeffersonville Facility, Peach Health Sublessee is entitled to
three
months of
$1
per month rent following the respective Rent Commencement Dates and, following such
three
-month period,
five
months of rent discounted by
50%
. The annual rent for each of the Peach Facilities will escalate at a rate of
3%
each year pursuant to the Peach Health Sublease, and the term of the Peach Health Sublease for all
three
Peach Facilities expires on August 31, 2027.
In connection with the Peach Health Sublease, the Company extended a line of credit to the Peach Health Sublessee for 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 a starting interest rate of
13.5%
, increasing by
1%
per annum. The entire principal amount due under the Peach Line, together with all accrued and unpaid interest thereunder, was 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.
On April 6, 2017, the Company modified certain terms of the Peach Line in connection with the Peach Health Sublessee's securing a
$2.5 million
working capital loan from a third party lender (the “Peach Working Capital Facility”). Borrowings under the Peach Working Capital Facility are based on a borrowing base of eligible accounts receivable. The modifications of the Peach Line include: (i) reducing the loan balance to
$0.8 million
and restricting further borrowings, hereinafter referred to as (the “Peach Note”); (ii) extending the maturity of the loan to
October 1, 2020
and adding a
six
month extension option by the Peach Health Sublessee, assuming certain conditions precedent are met at the time of the exercise of the option; (iii) increasing the interest rate from
13.5%
per annum by
1%
per year; and (iv) establishing a
four
year amortization schedule. Payment of principal and interest under the Peach Note shall be governed by certain financial covenants limiting distributions under the Peach Working Capital Facility. Furthermore, the Company guaranteed Peach Health Sublessee’s borrowings under the Peach Working Capital Facility subject to certain burn-off provisions (i.e., the Company’s obligations under such guaranty cease after the later of
18
months or achievement of a certain financial ratio by Peach Health Sublessee).
At
June 30, 2017
, there was a
$0.9 million
outstanding balance on the Peach Note.
Arkansas Leases and Facilities
. Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”)
nine
facilities located in Arkansas (collectively, 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. 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. 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
, consisting of cash consideration in the amount of
$52.0 million
and a promissory note with a principal amount of
$3.0 million
. The Company completed the sale of the Arkansas Facilities to the Purchaser on October 6, 2016. For further information see
Part II, Item 8, Notes to Consolidated Financial Statements, Note 7
- Leases
included in the Annual Report).
Meadowood.
On March 8, 2017, AdCare executed a purchase and sale agreement with Meadowood Retirement Village, LLC and Meadowood Properties, LLC (the “Meadowood Purchase Agreement”) to acquire the Meadowood Facility for
$5.5 million
cash. On March 21, 2017, AdCare executed a long-term lease with an affiliate of C.R. Management (the “Meadowood Operator”) to lease the Meadowood Facility effective on May 1, 2017. For further information, see Note 10 -
Acquisitions
.
Future minimum lease receivables from the Company’s facilities leased and subleased to third party tenants for each of the next
five
years ending December 31 are as follows:
|
|
|
|
|
|
|
|
(Amounts in
000's)
|
2017
(a)
|
|
$
|
10,816
|
|
2018
|
|
22,281
|
|
2019
|
|
22,764
|
|
2020
|
|
23,299
|
|
2021
|
|
23,886
|
|
Thereafter
|
|
136,813
|
|
Total
|
|
$
|
239,859
|
|
(a)
Estimated minimum lease receivables for the year ending
December 31, 2017
, include only payments to be received after
June 30, 2017
.
For further details regarding the Company’s leased and subleased facilities to third-party operators, see Note 10 -
Acquisitions
below and Part II, Item 8, Notes to Consolidated Financial Statements, Note 7
- Leases
included in the Annual Report.
NOTE 8.
ACCRUED EXPENSES AND OTHER
Accrued expenses and other consist of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
June 30, 2017
|
|
December 31, 2016
|
Accrued employee benefits and payroll-related
|
|
$
|
384
|
|
|
$
|
442
|
|
Real estate and other taxes
|
|
436
|
|
|
557
|
|
Self-insured reserve
(1)
|
|
6,100
|
|
|
6,924
|
|
Accrued interest
|
|
248
|
|
|
251
|
|
Other accrued expenses
|
|
767
|
|
|
903
|
|
Total accrued expenses and other
|
|
$
|
7,935
|
|
|
$
|
9,077
|
|
|
|
(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. The decrease in the reserve at
June 30, 2017
primarily reflects the legal and associated settlement amounts paid (see Note 15 -
Commitments and Contingencies)
.
|
NOTE 9.
NOTES PAYABLE AND OTHER DEBT
See Part II, Item 8, Notes to Consolidated Financial Statements,
Note 9 -
Notes Payable and Other Debt
included in the Annual Report for a detailed description of all the Company’s debt facilities.
Notes payable and other debt consists of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
June 30, 2017
|
|
December 31, 2016
|
Senior debt—guaranteed by HUD
|
|
$
|
34,087
|
|
|
$
|
34,473
|
|
Senior debt—guaranteed by USDA
(a)
|
|
20,640
|
|
|
22,518
|
|
Senior debt—guaranteed by SBA
(b)
|
|
2,264
|
|
|
2,319
|
|
Senior debt—bonds
|
|
7,055
|
|
|
7,145
|
|
Senior debt—other mortgage indebtedness
|
|
9,651
|
|
|
5,639
|
|
Other debt
|
|
1,254
|
|
|
1,063
|
|
Convertible debt
|
|
1,500
|
|
|
9,200
|
|
Subtotal
|
|
76,451
|
|
|
82,357
|
|
Deferred financing costs, net
|
|
(2,090
|
)
|
|
(2,196
|
)
|
Unamortized discount on bonds
|
|
(184
|
)
|
|
(191
|
)
|
Total debt
|
|
74,177
|
|
|
79,970
|
|
Less: current portion of debt
|
|
4,133
|
|
|
13,154
|
|
Notes payable and other debt, net of current portion
|
|
$
|
70,044
|
|
|
$
|
66,816
|
|
|
|
(a)
|
U.S. Department of Agriculture (“USDA”)
|
|
|
(b)
|
U.S. Small Business Administration (“SBA”)
|
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)
|
|
June 30, 2017
|
|
December 31, 2016
|
Senior debt - guaranteed by HUD
|
|
|
|
|
|
|
|
|
|
|
The Pavilion Care Center
|
|
Red Mortgage
|
|
12/01/2027
|
|
Fixed
|
|
4.16%
|
|
$
|
1,382
|
|
|
$
|
1,434
|
|
Hearth and Care of Greenfield
|
|
Red Mortgage
|
|
08/01/2038
|
|
Fixed
|
|
4.20%
|
|
2,159
|
|
|
2,191
|
|
Woodland Manor
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
5,391
|
|
|
5,447
|
|
Glenvue
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
8,371
|
|
|
8,457
|
|
Autumn Breeze
|
|
KeyBank
|
|
01/01/2045
|
|
Fixed
|
|
3.65%
|
|
7,276
|
|
|
7,352
|
|
Georgetown
|
|
Midland State Bank
|
|
10/01/2046
|
|
Fixed
|
|
2.98%
|
|
3,684
|
|
|
3,723
|
|
Sumter Valley
|
|
KeyBank
|
|
01/01/2047
|
|
Fixed
|
|
3.70%
|
|
5,824
|
|
|
5,869
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
34,087
|
|
|
$
|
34,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt - guaranteed by USDA
(b)
|
|
|
|
|
|
|
|
|
Attalla
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
$
|
6,272
|
|
|
$
|
7,189
|
|
Coosa
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
5,655
|
|
|
6,483
|
|
Mountain Trace
|
|
Community B&T
|
|
01/24/2036
|
|
Prime + 1.75%
|
|
5.75%
|
|
4,322
|
|
|
4,384
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 1.50%
|
|
6.00%
|
|
4,391
|
|
|
4,462
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
20,640
|
|
|
$
|
22,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt - guaranteed by SBA
|
|
|
|
|
|
|
|
|
College Park
|
|
CDC
|
|
10/01/2031
|
|
Fixed
|
|
2.81%
|
|
$
|
1,567
|
|
|
$
|
1,611
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 2.25%
|
|
5.75%
|
|
697
|
|
|
708
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,264
|
|
|
$
|
2,319
|
|
|
|
(a)
|
Represents cash interest rates as of
June 30, 2017
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
0.53%
per annum.
|
|
|
(b)
|
For the
four
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
3%
to
5%
through 2017, which decline
1%
each year capped at
1%
for the remainder of the term.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate
(a)
|
|
June 30, 2017
|
|
December 31, 2016
|
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%
|
|
445
|
|
|
535
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
7,055
|
|
|
$
|
7,145
|
|
|
|
(a)
|
Represents cash interest rates as of
June 30, 2017
. The rates exclude amortization of deferred financing of approximately
0.26%
per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
Facility
|
Lender
|
Maturity
|
|
Interest Rate
(a)
|
|
June 30, 2017
|
|
December 31, 2016
|
Senior debt - other mortgage indebtedness
|
|
|
|
|
|
|
|
|
Quail Creek
(b)
|
Congressional Bank
|
12/31/2017
|
|
LIBOR + 4.75%
|
|
5.75%
|
|
4,371
|
|
|
4,432
|
|
Northwest
(c)
|
First Commercial
|
07/31/2020
|
|
Prime
|
|
5.00%
|
|
1,165
|
|
|
1,207
|
|
Meadowood
(d)
|
Exchange Bank of Alabama
|
05/01/2022
|
|
Fixed
|
|
4.50%
|
|
4,115
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
9,651
|
|
|
$
|
5,639
|
|
|
|
(a)
|
Represents cash interest rates as of
June 30, 2017
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.00%
to
0.86%
per annum.
|
|
|
(b)
|
On September 19, 2016, the Company obtained an option to extend the maturity date, subject to customary conditions, of the Quail Creek Credit Facility from September 2017 to September 2018, which management intends to exercise. On August 10, 2017, the Company extended the maturity date of the Quail Creek Credit Facility to December 31, 2017 and retains the option to further extend the maturity date of such credit facility to September 2018.
|
|
|
(c)
|
On July 31, 2017, the Company extended the maturity date of the Northwest Credit Facility from December 2017 to July 31, 2020.
|
|
|
(d)
|
On May 1, 2017, in connection with the Meadowood Purchase Agreement, a wholly-owned subsidiary of the Company entered into a Loan Agreement (the “Meadowood Credit Facility”) with the Exchange Bank of Alabama, which provides for a
$4.1 million
principal amount secured credit facility maturing on May 1, 2022. Interest on the Meadowood Credit Facility accrues on the principal balance thereof at
4.5%
per annum. The Meadowood Credit Facility is secured by the Meadowood Facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Maturity
|
|
Interest Rate
|
|
June 30, 2017
|
|
December 31, 2016
|
Other debt
|
|
|
|
|
|
|
|
|
|
|
First Insurance Funding
|
|
02/28/2018
|
|
Fixed
|
|
4.24%
|
|
$
|
140
|
|
|
$
|
20
|
|
Key Bank
(a)
|
|
08/02/2019
|
|
Fixed
|
|
0.00%
|
|
496
|
|
|
496
|
|
Pharmacy Care of Arkansas
|
|
02/08/2018
|
|
Fixed
|
|
2.00%
|
|
295
|
|
|
547
|
|
South Carolina Department of Health & Human Services
(b)
|
|
02/24/2019
|
|
Fixed
|
|
5.75%
|
|
323
|
|
|
—
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,254
|
|
|
$
|
1,063
|
|
|
|
(a)
|
On August 11, 2017, the Company extended the maturity date of the Key Bank Credit Facility from October 17, 2017 to August 2, 2019.
|
|
|
(b)
|
On February 21, 2017, the South Carolina Department of Health and Human Services (“SCHHS”) issued fiscal year 2013 Medicaid audit reports for
two
facilities operated by the Company during 2013. In the fiscal year 2013 Medicaid audit reports, it was determined that the Company owes an aggregate
$0.4 million
related to patient-care related payments made by the SCHHS during 2013. Repayment of the
$0.4 million
began on March 24, 2017 in the form of a
two
-year note bearing interest of
5.75%
per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Maturity
|
|
Interest Rate
(a)
|
|
June 30, 2017
|
|
December 31, 2016
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
Issued July 2012
|
|
10/31/2017
|
|
Fixed
|
|
10.00%
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
Issued March 2015
(b)
|
|
04/30/2017
|
|
Fixed
|
|
10.00%
|
|
—
|
|
|
7,700
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,500
|
|
|
$
|
9,200
|
|
|
|
(a)
|
Represents cash interest rates as of
June 30, 2017
. The rates exclude amortization of deferred financing costs which range from
0.25%
to
1.92%
per annum.
|
|
|
(b)
|
On December 8, 2016, the Company announced a tender offer (the “Tender Offer”) for any and all of the Company’s
10%
convertible subordinated notes due April 30, 2017 (the “2015 Notes”) at a cash purchase price 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 tendered and paid on January 10, 2017. On April 30, 2017, the remaining
$1.0 million
in aggregate principal amount of the 2015 Notes outstanding was repaid plus accrued and unpaid interest in accordance with the terms of such notes, and all related obligations owed under the 2015 Notes were extinguished at that time.
|
Debt Covenant Compliance
As of
June 30, 2017
, the Company had approximately
28
credit related instruments 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, and current ratios. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries). 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 monthly and quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements.
The table below indicates which of the Company’s credit-related instruments were not in compliance as of
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
Balance at
June 30, 2017(000's)
|
|
Subsidiary or Operator Level Covenant Requirement
|
|
Financial Covenant
|
|
Min/Max
Financial
Covenant
Required
|
|
Financial
Covenant
Metric
Achieved
|
|
|
|
Future
Financial
Covenant
Metric
Required
|
Congressional Bank - Mortgage Note - QC Property Holdings, LLC
|
|
$
|
4,371
|
|
|
Operator
|
|
Minimum Operator EBITDAR (000’s)
|
|
$500
|
|
$430
|
|
(a)
|
|
$500
|
|
|
(a)
|
Waiver for violation of covenant obtained.
|
Scheduled Maturities
The schedule below summarizes the scheduled maturities for the twelve months ended
June 30
of the respective year (not adjusted for commitments to refinance or extend the maturities of debt as noted above):
|
|
|
|
|
For the twelve months ended June 30,
|
(Amounts in 000’s)
|
2018
|
$
|
4,139
|
|
2019
|
6,343
|
|
2020
|
2,560
|
|
2021
|
2,958
|
|
2022
|
5,568
|
|
Thereafter
|
54,883
|
|
Subtotal
|
$
|
76,451
|
|
Less: unamortized discounts
|
(184
|
)
|
Less: deferred financing costs, net
|
(2,090
|
)
|
Total notes and other debt
|
$
|
74,177
|
|
NOTE 10. ACQUISITIONS
On March 8, 2017, AdCare executed the Meadowood Purchase Agreement with Meadowood Retirement Village, LLC and Meadowood Properties, LLC to acquire the Meadowood Facility for
$5.5 million
cash. In addition, on March 21, 2017, AdCare executed a long-term, triple net operating lease with the Meadowood Operator to lease the facility upon purchase. Lease terms include: (i) a
13
-year initial term with one
five
-year renewal option; (ii) base rent of
$37,500
per month; (iii) a rental escalator of
2.0%
per annum in the initial term and
2.5%
per annum in the renewal term; (iv) a cross renewal provision, whereby the Meadowood Operator may exercise the lease renewal for the Meadowood Facility if its affiliate exercises the lease renewal option for Coosa Valley Health Care, a
124
-bed skilled nursing facility located in Gadsden, Alabama (the “Coosa Valley Facility”); and (v) a security deposit equal to
one
month of base rent. The Company completed the purchase of the Meadowood Facility on May 1, 2017 pursuant to the Meadowood Purchase Agreement, at which time the lease commenced and operations of the Meadowood Facility transferred to the Meadowood Operator.
The following table sets forth the preliminary purchase price allocation of the Meadowood Facility:
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
Estimated Useful
Lives (Years)
|
|
May 1, 2017
|
Buildings and improvements
|
|
15-32
|
|
$
|
4,700
|
|
Equipment and computer related
|
|
10
|
|
400
|
|
Land
|
|
—
|
|
100
|
|
Property and equipment
|
|
|
|
5,200
|
|
In place occupancy
(a)
|
|
32
|
|
300
|
|
Purchase Price
|
|
|
|
5,500
|
|
(a)
In place occupancy is included in property and equipment, net on the Company’s unaudited consolidated balance sheets.
On May 1, 2017, in connection with the Meadowood Purchase Agreement, a wholly-owned subsidiary of the Company entered into the Meadowood Credit Facility with the Exchange Bank of Alabama, which provides for a
$4.1 million
principal amount secured credit facility maturing on May 1, 2022. Interest on the Meadowood Credit Facility accrues on the principal balance thereof at
4.5%
per annum. The Meadowood Credit Facility is secured by the Meadowood Facility.
NOTE 11.
DISCONTINUED OPERATIONS
For the discontinued operations, the patient care revenue and related cost of services prior to the commencement of subleasing are classified in the activities below. For a historical listing and description of the Company’s discontinued entities, see Part II, Item 8, Notes to Consolidated Financial Statements,
Note 11 -
Discontinued Operations
included in the Annual Report.
The following table summarizes certain activity of discontinued operations for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Amounts in 000’s)
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total revenues
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of services
|
|
|
597
|
|
|
3,758
|
|
|
1,006
|
|
|
4,278
|
|
Interest expense, net
|
|
|
7
|
|
|
17
|
|
|
11
|
|
|
25
|
|
Net loss
|
|
|
(604
|
)
|
|
(3,775
|
)
|
|
(1,017
|
)
|
|
(4,303
|
)
|
NOTE 12.
COMMON AND PREFERRED STOCK
Common and Preferred Stock Repurchase Activity
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. The November 2016 Repurchase Program succeeded the repurchase program announced on November 12, 2015 (the “November 2015 Repurchase Program”), which terminated in accordance with its terms. Share repurchases under the November 2016 Repurchase Program could be made from time to time through open market transactions, block trades or privately negotiated transactions and were subject to market conditions, as well as corporate, regulatory and other considerations. The Company could suspend or continue the November 2016 Repurchase Program at any time and had 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.
During the six months ended
June 30, 2016
, the Company repurchased
150,000
shares of common stock pursuant to the November 2015 Repurchase Program for
$0.3 million
at an average purchase price of approximately
$2.05
per share, exclusive of commissions and related fees and made no repurchases during the three months ended
June 30, 2016
. 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. During the three and six months ended
June 30, 2016
, the Company made
no
repurchases of the Series A Preferred Stock.
During the six months ended
June 30, 2017
, the Company repurchased
118,199
shares of the common stock pursuant to the November 2016 Repurchase Program for
$0.2 million
at an average price of
$1.54
per share, exclusive of commissions and related fees and made no repurchases during the three months ended
June 30, 2017
. During the three and six months ended
June 30, 2017
, the Company made
no
repurchases of the Series A Preferred Stock.
Preferred Stock Offerings and Dividends
Dividends declared and paid on shares of the Series A Preferred Stock were
$0.68
per share, or
$1.9 million
and
$3.8 million
for the
three and six months ended
June 30, 2017
, respectively, and
$1.8 million
and
$3.6 million
for the
three and six months ended
June 30, 2016
, respectively.
During the three and six months ended
June 30, 2016
, the Company sold
43,204
and
230,109
shares of Series A Preferred Stock under the Company’s At Market Issuance Sales Agreement, dated July 21, 2015, at an average sale price of
$22.15
and
$20.51
(excluding fees and commissions) per share, respectively. The Company received net proceeds of approximately
$0.9 million
during the three months ended
June 30, 2016
and
$4.5 million
during the six months ended
June 30, 2016
, after payment of sales commissions and discounts and all other expenses incurred by the Company.
During the three and six months ended
June 30, 2017
, the Company sold, under the ATM and pursuant to the Sales Agreement, a total of
50,000
shares of the Series A Preferred Stock generating net proceeds of
$1.0 million
at an average price of
$21.80
per
share, exclusive of commissions and related fees. As of
June 30, 2017
, the Company had
2,811,535
shares of the Series A Preferred Stock issued and outstanding. On August 2, 2017, the Company terminated the Sales Agreement and discontinued sales under the ATM.
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-in-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.
For historical information regarding the Series A Preferred Stock, the ATM and prior share repurchase programs, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 12 -
Common and Preferred Stock
included in the Annual Report.
NOTE 13.
STOCK BASED COMPENSATION
For the
three and six months ended
June 30, 2017
and
2016
, the Company recognized stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Amounts in 000’s)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee compensation:
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
$
|
(84
|
)
|
|
$
|
130
|
|
|
$
|
34
|
|
|
$
|
376
|
|
Stock options
|
|
—
|
|
|
1
|
|
|
—
|
|
|
112
|
|
Warrants
|
|
(56
|
)
|
|
66
|
|
|
4
|
|
|
151
|
|
Total employee stock-based compensation expense
|
|
$
|
(140
|
)
|
|
$
|
197
|
|
|
$
|
38
|
|
|
$
|
639
|
|
Non-employee compensation:
|
|
|
|
|
|
|
|
|
|
Board restricted stock
|
|
48
|
|
|
31
|
|
|
$
|
92
|
|
|
$
|
57
|
|
Board stock options
|
|
12
|
|
|
12
|
|
|
24
|
|
|
24
|
|
Total non-employee stock-based compensation expense
|
|
$
|
60
|
|
|
$
|
43
|
|
|
$
|
116
|
|
|
$
|
81
|
|
Total stock-based compensation expense
|
|
$
|
(80
|
)
|
|
$
|
240
|
|
|
$
|
154
|
|
|
$
|
720
|
|
Stock Incentive Plan
The AdCare Health Systems, Inc. 2011 Stock Incentive Plan, as amended (the “2011 Stock Incentive Plan”) expires March 28, 2021 and provides for a maximum of
2,027,393
shares of common stock to be issued. The 2011 Stock Incentive Plan permits the granting of incentive or nonqualified stock options and the granting of restricted stock. The plan is administered by the Compensation Committee of the Board (the “Compensation Committee”), pursuant to authority delegated to it by the Board. The Compensation Committee is responsible for determining the employees to whom awards will be made, the amounts of the awards, and the other terms and conditions of the awards. As of
June 30, 2017
, the number of securities remaining available for future issuance is
594,179
.
In addition to the Company’s 2011 Stock Incentive Plan, 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.
The assumptions used in calculating the fair value of employee common stock options and warrants granted during the
six months ended
June 30, 2017
and
June 30, 2016
, using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
*
|
2016
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
—
|
%
|
|
41
|
%
|
Risk-free interest rate
|
—
|
%
|
|
1.43
|
%
|
Expected term (in years)
|
n/a
|
|
|
5.0
|
|
*
No issuances of common stock options or warrants during the current period.
Common Stock Options
The following table summarizes the Company’s common stock option activity for the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares (000's)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in 000's)
|
Outstanding, December 31, 2016
|
355
|
|
|
$
|
3.21
|
|
|
5.6
|
|
$
|
—
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Expired
|
(110
|
)
|
|
$
|
2.62
|
|
|
|
|
|
Outstanding, June 30, 2017
|
245
|
|
|
$
|
3.48
|
|
|
6.0
|
|
$
|
—
|
|
Vested, June 30, 2017
|
210
|
|
|
$
|
3.41
|
|
|
5.8
|
|
$
|
—
|
|
The following table summarizes the common stock options outstanding and exercisable as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Options Exercisable
|
Exercise Price
|
Number of Shares
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested, June 30, 2017
|
|
Weighted Average Exercise Price
|
$1.31 - $3.99
|
180
|
|
|
5.9
|
|
$
|
3.25
|
|
|
145
|
|
|
$
|
3.09
|
|
$4.00 - $4.30
|
65
|
|
|
6.2
|
|
$
|
4.12
|
|
|
65
|
|
|
$
|
4.12
|
|
Total
|
245
|
|
|
6.0
|
|
$
|
3.48
|
|
|
210
|
|
|
$
|
3.41
|
|
For options unvested at
June 30, 2017
,
$0.02 million
in compensation expense will be recognized over the next
0.5
years.
Common Stock Warrants
The following table summarizes the Company’s common stock warrant activity for the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants (000's)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in 000's)
|
Outstanding, December 31, 2016
|
1,887
|
|
|
$
|
3.58
|
|
|
4.1
|
|
$
|
11
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Forfeited
|
(100
|
)
|
|
$
|
4.49
|
|
|
|
|
|
|
Expired
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding, June 30, 2017
|
1,787
|
|
|
$
|
3.53
|
|
|
3.4
|
|
$
|
—
|
|
Vested, June 30, 2017
|
1,695
|
|
|
$
|
3.49
|
|
|
3.1
|
|
$
|
—
|
|
The following table summarizes the common stock warrants outstanding and exercisable as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
Exercise Price
|
Number of Shares (000's)
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested at June 30, 2017
|
|
Weighted Average Exercise Price
|
$0 - $1.99
|
218
|
|
|
0.4
|
|
$
|
1.82
|
|
|
218
|
|
|
$
|
1.82
|
|
$2.00 - $2.99
|
335
|
|
|
1.0
|
|
$
|
2.58
|
|
|
335
|
|
|
$
|
2.58
|
|
$3.00 - $3.99
|
500
|
|
|
2.3
|
|
$
|
3.59
|
|
|
500
|
|
|
$
|
3.59
|
|
$4.00 - $4.99
|
711
|
|
|
6.0
|
|
$
|
4.38
|
|
|
619
|
|
|
$
|
4.40
|
|
$5.00 - $5.90
|
23
|
|
|
5.9
|
|
$
|
5.90
|
|
|
23
|
|
|
$
|
5.90
|
|
Total
|
1,787
|
|
|
3.4
|
|
$
|
3.53
|
|
|
1,695
|
|
|
$
|
3.49
|
|
For warrants unvested at
June 30, 2017
,
$0.1 million
in compensation expense will be recognized over the next
0.7
years.
Restricted Stock
The following table summarizes the Company’s restricted stock activity for the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares (000's)
|
|
Weighted Avg. Grant Date Fair Value
|
Unvested, December 31, 2016
|
404
|
|
|
$
|
2.84
|
|
|
Granted
|
23
|
|
|
$
|
1.07
|
|
|
Vested
|
(78
|
)
|
|
$
|
3.21
|
|
|
Forfeited
|
(70
|
)
|
|
$
|
4.29
|
|
Unvested, June 30, 2017
|
279
|
|
|
$
|
2.22
|
|
For restricted stock unvested at
June 30, 2017
,
$0.5 million
in compensation expense will be recognized over the next
1.6
years.
NOTE 14.
.
VARIABLE INTEREST ENTITIES
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 Subleases. On April 30, 2015, in connection with the Aria Lease Inducement,
eight
of the Aria Subleases 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 was 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 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 currently has an outstanding principal amount of $
1.0 million
and matured on
December 31, 2016
. 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. On March 1, 2017, the Company was advised by the bankruptcy trustee in the Aria bankruptcy proceeding, that
$0.8 million
was available for repayment of all of Aria’s remaining obligations, including the HAH Note. Accordingly, the Company has charged a
$0.2 million
bad debt expense to the Company’s unaudited consolidated statement of operations during the six months ended
June 30, 2017
. Though management continues to believe that the remaining receivable balance on the HAH Note is collectible, there is no guarantee that the bankruptcy court will approve full repayment of the HAH Note to the Company or that AdCare will prevail in any avoidance action that may be filed
against it, which could have an adverse effect on the Company’s business, results of operations and financial condition. For further information, see Note 7 -
Leases
and Note 15 -
Commitments and Contingencies
.
The Aria Lease Inducement and HAH Note entered into by the Company create a variable interest that may absorb some or all of the expected losses of the Variable Interest Entity (“VIE”). 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.
Effective February 3, 2016, each Aria Sublessor terminated the applicable Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease.
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, was 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.
On April 6, 2017, the Company modified certain terms of the Peach Line in connection with the Peach Health Sublessee's securing the Peach Working Capital Facility in the amount of
$2.5 million
. Borrowings under the Peach Working Capital Facility are based on a borrowing base of eligible accounts receivable. The modifications of the Peach Line include: (i) reducing the loan balance to
$0.8 million
and restricting further borrowings; (ii) extending the maturity of the loan to
October 1, 2020
and adding a
six
month extension option by the Peach Health Sublessee, assuming certain conditions precedent are met at the time of the exercise of the option; (iii) increasing the interest rate from
13.5%
per annum by
1%
per year; and (iv) establishing a
four
year amortization schedule. Payment of principal and interest under the Peach Note shall be governed by certain financial covenants limiting distributions under the Peach Working Capital Facility. Furthermore, the Company guaranteed Peach Health Sublessee’s borrowings under the Peach Working Capital Facility subject to certain burn-off provisions (i.e., the Company’s obligations under such guaranty cease after the later of
18
months or achievement of a certain financial ratio by Peach Health Sublessee). As of
June 30, 2017
,
$0.9 million
was outstanding on the Peach Note. For further information on the Peach Health Sublease and Peach Line and Note, see Note 7
- Leases
.
The Peach Note 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. As of
June 30, 2017
, all of the Company’s facilities leased and subleased to third-party operators and managed for third-parties are certified by CMS and operational (see Note 7
- Leases
).
Legal Matters
The Company is party to various legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of business, including claims that the services the Company provided during the time it operated skilled nursing facilities resulted in injury or death to the patients of the Company’s facilities and claims related to professional and general negligence, 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.
Professional and General Liability Claims
. As of
June 30, 2017
, the Company was a defendant in a total of
41
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 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. During the three months ended
June 30, 2017
,
three
professional and general liability claims against the Company were dismissed,
two
of which were dismissed without prejudice. 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.
Two
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 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
$6.1 million
and
$6.9 million
at
June 30, 2017
, and
December 31, 2016
, respectively. The decrease in the reserve at
June 30, 2017
, primarily reflects the legal and associated settlement amounts paid. For additional information regarding the Company’s self-insurance reserve, please see Part II, Item 8, Notes to Consolidated Financial Statements,
Note 15
- Commitments and Contingencies
included in the Annual Report.
Ohio Attorney General Action.
On October 27, 2016, the Attorney General of Ohio (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 demanding repayment of allegedly improper Medicaid claims related to glucose blood tests and capillary blood draws and penalties of approximately
$1.0 million
, and the Company responded to such letter in July 2014 denying all claims. The Company filed an answer to the complaint on January 27, 2017 in which it denied the allegations. An order granting a motion to stay this proceeding was granted in the Court of Common Pleas, Franklin County, Ohio on July 12, 2017. 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.
Aria Bankruptcy Proceeding
. On May 31, 2016, HAH and
nine
affiliates of HAH, (Highland of Stamps, LLC,; Highlands of Rogers Dixieland, LLC,; Highlands of North Little Rock John Ashley, LLC,; Highlands of Mountain View SNF, LLC,; Highlands of Mountain View RCF, LLC,; Highlands of Little Rock West Markham, LLC,; Highlands of Little Rock South Cumberland, LLC,; Highlands of Little Rock Riley, LLC,; and Highlands of Fort Smith, LLC,; collectively with HAH, the “Debtors”), filed petitions in the United States Bankruptcy Court for the District of Delaware
for relief under Chapter 7 (“Chapter 7”) under the United States Bankruptcy Code, as amended. Following venue transfer from the Delaware court, these cases are pending in the United States Bankruptcy Court for the Eastern District of Arkansas.
On April 21, 2017, AdCare moved for relief from the automatic stay seeking release of its collateral, the Debtors’ accounts and their proceeds, which the trustee has represented total approximately
$800,000
. AdCare’s motion was opposed by the Chapter 7 trustee and another creditor, in May 2017. In its objection, the Chapter 7 trustee asserts that AdCare is not entitled to any of the
$800,000
with respect to the HAH Note. Discovery with respect to the motion is ongoing, and the motion is currently set for hearing on September 12, 2017. In addition to opposing AdCare’s claim to the
$800,000
, the Chapter 7 trustee has also taken the position that he is investigating avoidance claims against AdCare with respect to funds it received from the Debtors prior to the bankruptcy filings. The trustee’s statute of limitation for filing avoidance actions runs on May 31, 2018. There is no guarantee that the bankruptcy court will approve repayment of the HAH Note to AdCare or that AdCare will prevail in any avoidance action that may be filed against it.
NOTE 16.
RELATED PARTY TRANSACTIONS
For additional information regarding the Company’s related party transactions, see Part II, Item 8, Notes to Consolidated Financial Statements,
Note 18 -
Related Party Transactions
included in the Annual Report.
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 9 -
Notes Payable and Other Debt
). Mr. Fox is 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.
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.
In January 2017, the Company repurchased the 2015 Notes held by Mr. and Ms. Doucet , which had an aggregate principal amount of
$250,000
, 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 9 -
Notes Payable and Other Debt
).
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 2015 Notes repurchased by the Company pursuant to the Tender Offer.
Brogdon Matters
Brogdon Promissory Note.
On November 10, 2016, the Company and Mr. Brogdon (a beneficial owner of greater than
5%
of the outstanding common stock) agreed to further amend the promissory note issued by Mr. Brogdon on December 31, 2013 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 June 30, 2017, principal due and payable under the promissory note issued by Mr. Brogdon to the Company was
$268,663
, which was fully allowed for in the Company’s unaudited consolidated statement of operations during the quarter ended March 31, 2017.
Indemnification Claim
.
On May 25, 2017, McKesson Corporation (“McKesson”) obtained a judgment against AdCare in the principal amount of
$232,439
, plus accrued interest, court costs and legal fees, related to an unpaid debt incurred by certain entities affiliated with Mr. Brogdon located in Oklahoma, pursuant to a supply agreement between McKesson and Mr. Brogdon, as to which the Company was a guarantor. The Company has accrued for this judgment during the quarter ended June 30, 2017. Management has entered into settlement negotiations with McKesson and notified Mr. Brogdon of the amount owed. The Company intends to seek recovery of the judgment amount, or negotiated settlement amount, if applicable, from Mr. Brogdon under the Settlement and Indemnity Agreement entered into by the Company and Mr. Brogdon on March 26, 2015.
NOTE 17.
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.
Debt Maturity Extensions
On July 31, 2017, the Company extended the maturity date of the Northwest Credit Facility from December 2017 to July 31, 2020.
On August 10, 2017, the Company extended the maturity date of the Quail Creek Credit Facility to December 31, 2017. The Company has the option to further extend the maturity date of the Quail Creek Credit Facility to September 2018, subject to customary conditions.
On August 11, 2017, the Company extended the maturity date of the Key Bank Credit Facility from October 17, 2017 to August 2, 2019.