SELECTIS HEALTH, INC. The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 as filed with theSEC . Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with theSEC . These factors include without limitation:
? macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets;
? changes in national and local economic conditions in the real estate and healthcare markets specifically;
? legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;
? the availability of debt and equity capital;
? changes in interest rates;
? competition in the real estate industry; and,
? the supply and demand for operating properties in our market areas.
COVID-19 Pandemic
In
Starting in March, the COVID-19 pandemic and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers. These trends accelerated in April and May, and are expected to continue through at least September, impacting revenues and net operating income. 21
Our triple-net tenants experienced similar trends, which has put them under increased operational and financial pressure. Without financial support or other government assistance, certain of our triple-net tenants will likely experience worsening financial conditions through the third quarter, which would pressure their rent coverage ratios and may affect their ability to pay us contractual rent in full on a timely basis. As of the date of this Report, two of our facilities have reported "presumptive positive" cases of COVID-19.The Centers for Disease Control & Prevention ("CDC") will provide final confirmation of the cases. The Company is engaging in aggressive mitigation efforts in accordance withCDC and stateDepartment of Health guidelines to protect the health and safety of residents while respecting their rights. Employees at both locations are taking several precautions as they care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Additionally, as of the date of this Report, none of our other operators have reported any occurrences of COVID-19 in any of the buildings they are managing. Our operators have also reported to us that they currently have adequate supply levels, including appropriate quantities of Personal Protective Equipment (PPE) for staff. Additionally, as of the date of filing the Company has received no additional information. The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers and managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers and managers regarding ways in which these programs could benefit them or us. In April and May, we applied for and were approved for an aggregate of$1,610,169 in PPP loans issued by the SBA. As a result of newly adopted amendments to the PPP program, 60% of the PPP loan amount must be expended on payroll in the 24 week-period following the loan date. We believe that most if not all of the PPP loans will be eligible to be forgiven under the PPP guidelines. Any portion that is not forgiven must be repaid over two years. The COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition. We expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The extent of the COVID-19 pandemic's continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business, tenants and operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows but it
could be material. Overview
We acquire, develop, lease, manage, operate and dispose of healthcare real
estate. Our portfolio will be comprised of investments in the following five
healthcare segments: (i) senior housing, (ii) life science, (iii) medical
office, (iv) post-acute/skilled nursing and (v) hospital. We will make
investments within our healthcare segments using the following five investment
products: (i) properties under lease, (ii) debt investments, (iii) developments
and redevelopments, (iv) investment management and (v) the Housing and Economic
Recovery Act of 2008 ("RIDEA"), which represents investments in senior housing
operations utilizing the structure permitted by RIDEA.
The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the following:
? Compelling demographics driving the demand for healthcare services; ? Specialized nature of healthcare real estate investing; and ? Ongoing consolidation of a fragmented healthcare real estate sector.
22
Health Care Regulatory Climate
TheCenters for Medicare & Medicaid Services ("CMS") annually updates Medicare skilled nursing facility prospective payment system rates and other policies. OnJuly 30, 2019 , CMS issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, CMS projects aggregate payments to skilled nursing facilities will increase by$851 million , or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the new Patient-Driven Payment Model case mix classification system that became effective onOctober 1, 2019 , changes to the group therapy definition in the skilled nursing facility setting, and various skilled nursing facility Value-Based Purchasing and quality reporting program policies. OnApril 10, 2020 , CMS issued a proposed rule to update skilled nursing facility rates and policies for fiscal year 2021, which startsOctober 1, 2020 . CMS estimates that payments to skilled nursing facilities would increase by$784 million , or 2.3%, for fiscal year 2021 compared to fiscal year 2020. CMS also proposes to revise the geographic wage index and apply a cap on wage index decreases used in setting skilled nursing facility rates. The proposal would also make changes to the patient classifications under the Patient Driven Payment Model and certain minor policy changes to the Value-Based Purchasing program. CMS is expected to release the final rule byAugust 1, 2020 . Since the announcement of the COVID-19 pandemic and beginning as ofMarch 13, 2020 , CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including skilled nursing facilities, respond to the COVID-19 pandemic. These include, waiving the skilled nursing facility's 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow skilled nursing facilities and certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments they received from October-December 2019 ; this expansion was suspendedApril 26, 2020 in light of other CARES Act funding relief. In addition, CMS has also enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities. OnMarch 26, 2020 ,President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), sweeping legislation intended to bolster the nation's response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspends the 2% across-the-board "sequestration" reduction during the periodMay 1, 2020 throughDecember 31, 2020 , and extends the current Medicare sequester requirement through fiscal year 2030. In addition, the law provides$100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. OnApril 10, 2020 , CMS announced the distribution of$30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers must agree to certain terms and conditions in receiving these grants. In addition, theDepartment of Health and Human Services ("HHS") has authorized$20 billion of additional funding for providers that have already received funds from the initial distribution of$30 billion . Unlike the first round of funds, which came automatically, providers have to apply for these additional funds and submit the required supporting documentation, using the online portal provided by HHS. Providers must attest to and agree to specific terms and conditions for the use of such funds. HHS will make the additional distributions with the goal of allocating the whole$50 billion proportionally across all providers based on those providers' proportional share of 2018 net Medicare fee-for-service revenue. CMS is expected to distribute additional funding to Medicaid and potentially other providers, but the details are not yet known. OnJuly 18, 2019 , CMS published a final rule that eliminates the prohibition on pre-dispute binding arbitration agreements between long-term care facilities and their residents. The rule also strengthens the transparency of arbitration agreements and makes other changes to arbitration requirements for long-term care facilities. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services.Congress continues to consider further legislative action in response to the COVID-19 pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company. Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic.Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.
Acquisitions
EffectiveMarch 2, 2020 , the Company, through its wholly-owned subsidiary,Global Quapaw, LLC ("Quapaw"), completed the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center ("Higher Call") located inQuapaw, Oklahoma for the purchase price of$1.3 million .Quapaw has entered into an operating lease agreement withGlobal Higher Call Nursing, LLC , a wholly owned subsidiary of the Company, as lessee, to be the operator of the facility. The acquisition represents the consummation of an Asset Purchase Agreement datedOctober 21, 2019 betweenHigher Call Nursing Center, Inc. ,
as Seller, andQuapaw , as Buyer. 23
In connection with the acquisition of Higher Call, the Company entered into two credit facilities, summarized as follows:
The Company entered into a senior loan agreement withSecurity Bank in the principal amount of$1.1 million (the "Senior Loan"). The Senior Loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of$7,907 . The Senior Loan matures in 2040. The Senior Loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents ("Mortgage") covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets. The Company also executed a promissory note in favor of the Seller,Higher Call Nursing Center, Inc. , in the principal amount of$150,000 (the "Seller Note"). The Seller Note accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest, and matures inApril 2024 . The Seller Note is secured by a Corporate Guaranty of Global. Properties
As of
Effective
Percentage Outstanding
Equity Date Gross Purchase Debt at
Property Name Location Ownership Acquired Square Feet Price March 31, 2020
Eastman
Nursing Home
(a/k/a
Crescent Eastman,
Ridge) GA 100 % 3/15/2013 28,808 $ 5,000,000 $ 3,423,170
Warrenton
Health and Warrenton,
Rehabilitation GA 100 % 12/31/2013 26,894 $ 3,500,000 $ 3,722,532
Southern Hills
Retirement
Center Tulsa, OK 100 % 2/7/2014 104,192 $ 2,000,000 $ 7,226,969
Goodwill
Nursing Home Macon, GA 85 % 5/19/2014 46,314 $ 7,185,000 $ 5,804,878
Edwards
Redeemer Oklahoma
Health & Rehab City, OK 100 % 9/16/2014 31,939 $ 3,142,233 $ 2,065,773
Providence of
Sparta Nursing
Home Sparta, GA 100 % 9/16/2014 19,441 $ 2,836,930 $ 2,908,417
Meadowview
Healthcare Seville,
Center OH 100 % 9/30/2014 27,500 $ 3,000,000 $ 2,851,800
Grand Prairie
Nursing Home Lonoke, AR 100 % 9/16/2014 40,737 $ 6,742,767 $ 4,618,006
Glen Eagle
Healthcare & Abbeville,
Rehab GA 100 % 5/25/2016 29,393 $ 2,100,000 $ 3,066,376
Higher Call
Nursing Center Quapaw, OK 100 % 3/2/2020 20,694 $ 1,300,000 $ 1,201,721
2020 Base Revenue Operating Lease
Property Name Per Lease Expiration
October 31,Eastman Nursing Home (a/k/a Crescent Ridge) $ 720,000
2022
Warrenton Health and Rehabilitation $ 642,846 June 30, 2026 Southern Hills Retirement Center $ 12,000
-
February 1,
Goodwill Nursing Home $ 560,138 2027
October 31,Edwards Redeemer Health & Rehab $ 574,958
2022
Providence of Sparta Nursing Home $ 494,496
November 30,
Meadowview Healthcare Center $ - 2023
Grand Prairie Nursing Home $ - - Glen Eagle Healthcare & Rehab $ -
-
Higher Call Nursing Center $ - -
24
Going Concern
The accompanying consolidated financial statements and notes have been prepared
assuming the Company will continue as a going concern. For the three months
ended March 31, 2020 , the Company had net income of $62,807 and reported net
cash provided by operations of $252,424 . However, the Company has incurred net
losses in each of the previous five fiscal years and, as of March 31, 2020 , had
an accumulated deficit of $11,908,620 . These circumstances raise substantial
doubt as to the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon the Company's ability
to generate sufficient revenues and cash flows to operate profitably and meet
contractual obligations or raise additional capital through debt financing or
through sales of common stock.
Failure to achieve the necessary levels of profitability and cash flows or
obtain additional funding would be detrimental to the Company. The consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
Results of Operations
The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations - Three Months Ended
Rental revenues for the three-month periods endedMarch 31, 2020 andMarch 31, 2019 totaled$521,012 and$895,288 , respectively, a decrease of 374,276. The Company also had healthcare revenue of$3,330,589 for the three months endedMarch 31, 2020 , compared to$379,791 for the three months endedMarch 31, 2019 . Factors that contributed to the decrease in rental revenue included the appointment of a receivership atEastman as well as the closure of Edwards Redeemer. Also, theSouthern Tulsa facility is operated directly by the Company as ofDecember 1, 2019 , increasing Healthcare revenues but decreasing rental revenues. The acquisition of the Higher Call Nursing Center also increased healthcare revenues. Looking forward, we anticipate growing the rental revenue at the Southern Hills ILF facility in 2020 and beyond, but the shift toward healthcare revenue will continue as we operate more facilities directly. General and administrative expenses were$343,063 and$193,479 for the three-month periods endedMarch 31, 2020 and 2019, respectively, an increase of$149,584 primarily due to additional expenses with theSouthern Tulsa facility being operated directly by the Company as ofDecember 1, 2019 and Higher Call Nursing Center as ofMarch 1, 2020 . The Company stringently reviews its costs regularly but believes its cost structure has been optimized for its current portfolio. For the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively, general and administrative expenses included$0 and$50,529 of share-based compensation related to restricted stock and common stock awards. Property taxes, insurance, and other operating expenses totaled$2,331,744 and$349,188 for the three-month periods endedMarch 31, 2020 and 2019, respectively. Lessees are responsible for the payment of insurance, taxes and other charges while under the lease. Should the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We are also responsible for all working capital related to ourGlen Eagle as well as the Southern Hills SNF, ALF and ILF, Meadowview, Higher Call, and Edwards properties. Expenses related to the provision for bad debt increased$206,608 from$0 for the three months endedMarch 31, 2019 to$206,608 for the three months endedMarch 31, 2020 . The company's greatly increased Healthcare Services operations require more complicated billing and less certain collection, and the company anticipates and preemptively records bad debt expense as a proportion of revenues.
Depreciation expense increased
The Company had no interest income for the three months ended
Interest expense decreased
25
Liquidity and Capital Resources
Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities. Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from rental revenues received and existing cash on hand. We plan to renew secured obligations that mature during 2020, as our projected cash flow from operations will be insufficient to retire the debt. Our restricted cash approximated$383,760 as ofMarch 31, 2020 and is to be expended on insurance, taxes, repairs, and capital expenditures associated with Providence ofSparta Nursing Home . Cash provided by operating activities was$252,424 for the three months endedMarch 31, 2020 compared to cash provided by operating activities of$266,139 for the three months endedMarch 31, 2019 . Cash flows from operations were beneficially impacted by net income and a decrease in prepaid expenses offset by an increase in accounts receivable and a decrease in accounts payable and accrued liabilities during the first three months of 2020. Cash used in investing activities was$1,085,923 for the three-month period endedMarch 31, 2020 compared to cash used in investing activities of$954,879 for the three-month period endedMarch 31, 2019 . The increase is primarily due to net cash paid in the acquisition of Higher Call assets offset by decreased spending on property renovations and refurbishments. Cash provided by financing activities was$1,079,580 for the three months endedMarch 31, 2020 compared to cash used in financing activities of$3,828 for the three months endedMarch 31, 2019 . During the first three months of 2020, we received proceeds from the issuance of debt of$1,211,721 and made payments on debt of$124,641 . During the first three months of 2019, we issued$159,875 in debt in cash and made cash payments on debt of$147,318 . As ofMarch 31, 2020 , andDecember 31, 2019 , our debt balances consisted of the following:March 31, 2020 December 31, 2019
Senior Secured Promissory Notes$ 1,545,000 $ 1,485,000 Senior Unsecured Promissory Notes 300,000 300,000 Senior Secured Promissory Notes - Related Parties 975,000
875,000
Fixed-Rate Mortgage Loans 22,306,946 22,427,949
Variable-Rate Mortgage Loans 5,669,727 4,618,006Line of Credit, Senior Secured 7,226,969 7,230,582 Other Debt, Subordinated Secured 1,536,000 1,386,000 Other Debt, Subordinated Secured - Related Parties 150,000
150,000
39,709,642 38,472,537
Premium, Unamortized Discount and Debt Issuance Costs (468,322 )
(493,353 )
$ 39,241,320 $ 37,979,184 As presented in the Consolidated Balance Sheets:
Debt, Net$ 38,122,480 $ 36,954,184 Debt - Related Parties, Net 1,118,840 1,025,000$ 39,241,320 $ 37,979,184 The weighted average interest rate and term of our fixed rate debt are 5.88% and 7.66 years, respectively, as ofMarch 31, 2020 . The weighted average interest rate and term of our variable rate debt are 5.89% and 17.83 years, respectively, as ofMarch 31, 2020 . 26
Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as lines of credit are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee ofChristopher Brogdon or corporate guarantees. Mortgage loans for the periods presented consisted of the following: Face Principal Outstanding at Stated Maturity Interest Property Amount March 31, 2020 December 31, 2019 Rate Date Southern Hills Retirement Center Line of Credit(1)(2)$ 7,227,074 $ 7,226,969 $ 7,230,582 4.75% Fixed June 18, 2023 Eastman Nursing Home (1)(3) 3,570,000 3,423,170 3,451,593 5.50% Fixed October 26, 2021 Goodwill Nursing Home (1)(4) 4,268,878 4,268,878 4,286,237 4.75% Fixed April 12, 2025 Warrenton Nursing Home (5) 3,768,600 3,722,532 3,739,942 3.73% Fixed July 1, 2049 Edward Redeemer Health & Rehab(6) 2,065,804 2,065,773 2,074,958 4.75% Fixed June 29, 2021 Glen Eagle Health and Rehab(7) 3,119,214 3,066,376 3,083,006 5.50% Fixed May 25, 2021 Providence of Sparta Nursing Home (8) 3,039,300 2,908,417 2,923,013 3.50% Fixed November 1, 2047 Meadowview Healthcare Center (9) 3,000,000 2,851,800 2,869,200
6.00% Fixed
Prime Plus
GL Nursing 1.50%/
Home(10) 5,000,000 4,618,006 4,618,006 5.75% Floor August 3, 2037
Higher Call
Nursing Prime Plus
Center(11) 1,051,721 1,051,721 -
2.00% March 3, 2040
$ 35,203,642 $ 34,276,537 (1) Mortgage loans are non-recourse to the Company except for (i) the senior
loan held by
credit and
Bank).
(2) On
consummated a new Line of Credit with
refinanced the prior mortgage on its skilled nursing facility in
Revenue Bonds covering the ALF and ILF as well as provided working capital
for improvements to the ALF and ILF. As of
a total of
The interest rate on the Line of Credit increased from 5.25% to 5.75%
effective
payments of interest began on
Promissory Note is paid in full on the Maturity Date. The Maturity Date was
been extended multiple times in three month increments initially from April
30, 2018 to
amount of
Assignment of Rents on Real Property for Southern Hills Rehabilitation
Center, a Junior Lien and Assignment of Rents on Real Property for its
Southern Hills Independent Living Facility location and a Junior Lien onReal Property for its Southern Hills Assisted Living Facility location. With
the retirement of the Tulsa Industrial Authority Bonds effective
2018,
position on the ALF and ILF properties.
(3) The loan at
extended to
amortization expense related to loan costs totaled
(4) The maturity for the loan at Goodwill Nursing was extended on
to
outstanding at the time of 4,268,878, and the interest rate was decreased to
4.75%, from 5.50%.
(5) The original loan was extended on
the Company capitalized
in
refinance this debt with another lender. The refinance was treated as debt
extinguishment, with a new maturity date of
rate of 3.73%. For the three months ended
expense related to loan costs totaled
(6) The maturity for the loan at Edwards Redeemer was extended to
in
outstanding at the time of the modification,
rate was decreased from 5.50% to 4.75%.
(7) Amortization expense related to loan costs of this loan totaled
three months ended
2019. In
which qualified as debt extinguishment, unamortized debt discount on the
original note was expensed as a loss on extinguishment of
2018, the Company capitalized
principal. The Company is subject to financial covenants and customary
affirmative and negative covenants, including compliance with the covenants
of all other notes and bonds. As of
compliance with some unrelated notes and bonds, which is considered to be a
technical Event of Default as defined in the note agreement, but the Company
believes that it is in good standing with the Lender. In October 2018 the
Lender extended the Company a line of credit with a limit of $200,365 to
provide working capital to scale operations at the facility. The line of
credit was expanded in February 2019 to $400,000 with a maturity date of
due May 25, 2021 .
27
(8) The senior debt and subordinated debt owed in relation to Providence of
Amortization expense related to loan costs totaled
months ended
3.50% as part of a refinance completed in
(9) Amortization expense related to loan costs of this loan totaled
the three months ended
covenants and customary affirmative and negative covenants, including
compliance with the covenants of all other notes and bonds. As of
2020, the Company was not in compliance with some unrelated notes and
bonds, which is considered to be a technical Event of Default as defined in
the note agreement, but the Company believes that it is in good standing
with the Lender.
(10) The mortgage loan collateralized by the
by the
0.25% of the
as of
covenants and customary affirmative and negative covenants. As of
2020, the Company was not in compliance with certain of these financial and
non-financial covenants which is considered to be a technical Event of
Default as defined in the note agreement. The Company is also delinquent in
installment payments due under the mortgage. Remedies available to the
lender in the event of a continuing Event of Default, at its option,
include, but are not necessarily limited to the following (1) lender maydeclare the principal and all accrued interest on the note due and payable;
and (2) lender may exercise additional rights and remedies under the note
agreement to include taking possession of the collateral or seeking
satisfaction from the guarantors. The Company has been notified by thelender regarding the Events of Default. Guarantors under the mortgage loan
include
operations of the facility and is making payment of interest on the loan.
The Company is not obligated to repay the interest.
(11) In connection with the acquisition of Higher Call, the Company entered into
a senior loan agreement with
payable in monthly installments of
Mortgage, Security Agreement and Assignment of Rents covering the Higher
Call facility and a UCC Security Interest covering the personal property
and other non-real estate assets. The Company is subject to financial
covenants and customary affirmative and negative covenants. As of
2020, the Company was in compliance with these covenants.
We have $1.9 million of debt maturing and expect principal reduction payments of
approximately $527,000 in the next twelve months. There is also $10.5 million in
debt in technical default maturing after March 31, 2021 but shown due
immediately. While we anticipate being able to refinance all the loans at
reasonable market terms upon maturity, inability to do so may impact our
financial position and results of operations. We expect to refinance $1.5
million in mortgage loans maturing in 2020 as the associated properties meet
loan to value requirements currently being employed in commercial lending
markets. We have $325,000 in note obligations maturing in 2020. Following is a
summary of our subordinated debt and corporate debt at March 31, 2020 and
December 31, 2019 .
Subordinated and Corporate Debt
Our subordinated debt atMarch 31, 2020 andDecember 31, 2019 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties. Face Principal Outstanding at Stated Interest Maturity Property Amount March 31, 2020 December 31, 2019 Rate Date Goodwill December Nursing Home$ 2,180,000 $ 1,536,000 $ 1,536,000 13% (1) Fixed 31, 2019 Higher Call Nursing April 1, Center(2) 150,000 150,000 - 8% Fixed 2024$ 1,686,000 $ 1,536,000
(1) The subordinated note on
LLC every six months if the note is not paid when due. Effective December
31, 2015, the investors holding the subordinated debt executed an Agreement
Among Lenders pursuant to which they (i) agreed to waive any and all equity
ratchets and (ii) agreed to extend the maturity date of the subordinated
debt to
investors an additional one-time premium equal to 5% of the principal amount
of the individual note at such time as the note is repaid. Effective
2017, we entered into an Allonge and Modification Agreement with the
interest through
beginning
the notes, the investors would be entitled to a one-time premium payment in
the amount of 15% of the principal balance of the notes. On
the Company purchased from four former investors in
notes issued by
the note as of March 31, 2020 and it is technically in default.
28
(2) In connection with the acquisition of Higher Call, the Company executed a
promissory note in favor of the Seller,
the principal amount of
per annum and is payable in equal monthly installments, principal and
interest. This note is secured by a corporate guaranty of Global.
Our corporate debt at March 31, 2020 and December 31, 2019 includes unsecured
notes and notes secured by all assets of the Company not serving as collateral
for other notes.
Face Principal Outstanding at Stated Interest Maturity
Series Amount March 31, 2020 December 31, 2019 Rate Date
10% Senior
Secured
Promissory December
Note $ 25,000 $ 25,000 $ 25,000 10.0% Fixed 31, 2018
10% Senior
Unsecured
Promissory October
Notes 300,000 300,000 300,000 10.0% Fixed 31, 2020
11% Senior
Secured
Promissory October
Notes 1,520,000 1,520,000 1,460,000 11.0% Fixed 31, 2021
11% Senior
Secured
Promissory
Notes -
Related October
Party 975,000 975,000 875,000 11.0% Fixed 31, 2021
$ 2,820,000 $ 2,660,000
Contractual Obligations
As of
Total
Contractual Less Than More Than
Terms 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Notes Payable - Principal $ 39,709,642 $ 12,930,156 $ 8,454,163 $ 7,945,024 $ 10,380,299
Notes Payable - Interest 7,638,137 1,554,656 1,985,567 1,034,212 3,063,702
Total Contractual Obligations
Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand and revenues generated from operations are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations atGrand Prairie andSouthern Hills Retirement Center , there are no material capital improvement or recurring capital expenditure commitments at the properties.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material. Critical Accounting Policies Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions. Property Acquisitions We allocate the purchase price of acquired properties to net tangible and identified intangible assets and any liabilities based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing and leasing at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the purchase price or fair value of an acquired property. 29
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties using standard industry valuation techniques.Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets.Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2020. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. Subsequent Events
OnApril 20, 2020 , the Company through its subsidiaries received a loan of$574,975 pursuant to the Paycheck Protection Program (the "PPP Loan") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP Loan matures onApril 20, 2022 (the "Maturity Date"), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act. OnMay 4, 2020 , the Company through its subsidiaries received loans of$324,442 and$710,752 pursuant to the Paycheck Protection Program (the "PPP Loans") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Both PPP Loans mature onMay 4, 2022 (the "Maturity Date"), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act. As ofJune 30, 2020 , the Company purchased from former GWH Investors, LLC their notes issued byGoodwill Hunting LLC in the aggregate principal amount of$402,000 for an equal amount of cash. The notes matured onDecember 31, 2019 and were in default. The Company will recognize a gain from elimination of the premium owed to the note holders. The notes cannot be retired until all interests are repaid. 30 OnJuly 2, 2020 , the court approved the Operations Transfer Agreement ("OTA") from the receiver toGlobal Eastman, LLC , newly formed subsidiary of the Company. The OTA will be effective as of the date thatGlobal Eastman, LLC secures an operating license from the state. Pursuant to the terms of the OTA, Global Eastman will assume all receivables and select critical liabilities associated with the prior operator. EffectiveJuly 23, 2020 ,Global Fairland Property, LLC ("Fairland Property"), a newly formed wholly-owned subsidiary of the Company, signed a definitive Asset Purchase Agreement (the "Agreement') pursuant to which Fairland Property intends to purchase a skilled nursing facility located inFairland, Oklahoma consisting of 29 licensed beds and commonly known as "Family Care Center of Fairland " (the "Facility"). The purchase price of the Facility will be$796,500 . The purchase and sale of the Facility is subject to numerous conditions, including satisfactory due diligence, financing and other conditions customary in transactions of this nature. There can be no assurance that the transaction
will be consummated. EffectiveJuly 31, 2020 the Company received a line of credit of$500,000 and a construction loan of$750,000 to be used for renovation and capital investment in its Edwards facility fromSouthern Bank . Both loans carry an interest rate of 4.75% on principal balance and matureJuly 30, 2021 . OnAugust 7, 2020 , the Meadowview skilled-nursing facility owned by the Company was served with a Notice of Immediate Imposition of Remedies from theCenters for Medicare and Medicaid Services ("CMS"), as well as a Notice of Imposition of Remedies by theOhio Department of Health ("ODH") ordering the facility to relocate all residents no later thanAugust 9, 2020 . The actions of the CMS and ODH were the result of ongoing operating deficiencies which the operator failed to cure. All residents of the Meadowview facility were relocated by theAugust 9, 2020 deadline and, as a result, the facility has been closed. The Company has submitted an application with the ODH for a new nursing home license which is pending. The Company has not determined what additional future courses of action may be required or appropriate. OnAugust 18, 2020 , the Company's Board of Directors approved the repurchase for redemption of 443,431 shares of common stock for$75,385 or$0.17 per share in a privately negotiated transaction. The redemption has been completed and the shares of common stock cancelled. OnSeptember 29, 2020 , the Company's President and Chief Financial Officer and a member of the Board of Directors resigned from all positions with the Company. The resignations were prompted by regulatory issues not involving the Company or its subsidiaries.
© Edgar Online, source
