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 because 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, 2021 , 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:
? strategic business relationships;
? statements about our future business plans and strategies;
? anticipated operating results and sources of future revenue;
? our organization's growth;
? adequacy of our financial resources;
? development of markets;
? competitive pressures;
? changing economic conditions;
? expectations regarding competition from other companies
? the duration and scope of the COVID-19 pandemic
? the impact of the COVID-19 pandemic on occupancy rates and on the operations of
the Company's facilities and its operators/tenants.
? Actions governments take in response to the COVID-19 pandemic, including the
introduction of public health measures and other regulations affecting our
properties and our operations and the operations of our operators/tenants.
? The effects of health and safety measures adopted by us and our
operators/tenants in response to the COVID-19 pandemic.
? Increased operational costs because of health and safety measures related to
COVID-19.
? The impact of the COVID-19 pandemic on the business and financial conditions of
our operators/tenants and their ability to pay rent.
? Disruptions to our property acquisition and disposition activities due to
economic uncertainty caused by COVID-19.
? General economic uncertainty in key markets as a result of the COVID-19
pandemic and a worsening of global economic conditions or low levels of
economic growth. 18
? 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.
Properties
As of
Total Square Feet # of Beds
Operating Leased
Leased Square Square Operating Leased
State Properties Operations Operations Feet Feet Beds Beds
Arkansas 1 - 1 - 40,737 - 141
Georgia 5 4 1 78,197 46,199 454 100
Ohio 1 1 - 27,500 - 99 -
Oklahoma 6 6 - 162,976 - 351 -
Total 13 11 2 268,673 86,936 904 241
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 - Nine Months Ended
Rental revenues for the nine months endedSeptember 30, 2022 , and 2021 totaled$469,938 and$933,360 . The Company also had healthcare revenue of$26,438,806 for the nine months endedSeptember 30, 2022 , compared to$17,431,882 for the nine months endedSeptember 30, 2021 . Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease. 19
General and administrative expenses were$5,329,475 and$4,732,115 for the nine months endedSeptember 30, 2022 and 2021. To support the healthcare operations management has increased our corporate support to continue to aid the facilities in delivering world class care. Property taxes, insurance, and other operating expenses totaled$21,192,559 and$12,613,896 for the nine months endedSeptember 30, 2022 and 2021, respectively. This increase can be attributed to the Company operating additional facilities compared to the previous year. Expenses related to the provision for bad debt was$783,524 for the nine months endedSeptember 30, 2022 , and$28,275 for the nine months endedSeptember 30, 2021 . This increase is due to the Company's growth in healthcare revenue and new bad debt policy which has increased the provision for bad debt expense. Depreciation and amortization expense totaled$1,348,645 and$1,286,279 for the nine months endedSeptember 30, 2022 , and 2021 respectively. This increase is related to an increase in our plant, property, and equipment, compared to the same period in the prior year The Company had$1,438,629 of interest expense for the nine months endedSeptember 30, 2022 , and$1,680,540 interest expense for the nine months endedSeptember 30, 2021 . This decrease is related to the refinancing mortgages during the year endedDecember 31, 2021 . The Company had$135,468 of other income for the nine months endedSeptember 30, 2022 , and$548,933 for the nine months endedSeptember 30, 2021 Management is recording the principal reduction payments made by the operator for theArkansas facility as other income. We will continue to record this as the operator continues to satisfy the debt.
Results of Operations - Three Months Ended
Rental revenues for the three months endedSeptember 30, 2022 , and 2021 totaled$158,875 and$155,071 . The Company also had healthcare revenue of$9,135,306 for the three months endedSeptember 30, 2022 , compared to$6,939,841 for the three months endedSeptember 30, 2021 . Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease. 20
General and administrative expenses were$1,970,890 and$1,721,292 for the three months endedSeptember 30, 2022 and 2021. To support the healthcare operations management has increased our corporate support to continue to aid the facilities in delivering world class care. Property taxes, insurance, and other operating expenses totaled$7,227,718 and$4,413,930 for the three months endedSeptember 30, 2022 and 2021, respectively. This increase can be attributed to the Company operating additional facilities compared to the previous year. Expenses related to the provision for bad debt was$252,050 for the three months endedSeptember 30, 2022 , and$12,142 for the three months endedSeptember 30, 2021 . This increase is due to the Company's growth in healthcare revenue and new bad debt policy which has increased the provision for bad debt expense.
Depreciation and amortization expense totaled
The Company had$722,226 of interest expense for the three months endedSeptember 30, 2022 , and$486,816 interest expense for the three months endedSeptember 30, 2021 . This increase is related to the refinancing of mortgages during the year endedDecember 31, 2021 . The Company had$53,582 of other income for the three months endedSeptember 30, 2022 , and$51,856 of other expense for the three months endedSeptember 30, 2021 Management is recording the principal reduction payments made by the operator for theArkansas facility as other income. We will continue to record this as the operator continues to satisfy the debt.
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. AtSeptember 30, 2022 , the Company had cash of$1,928,472 and restricted cash of$831,687 . Our restricted cash is to be spent on insurance, taxes, repairs, and capital expenditures associated with Providence ofSparta Nursing Home orWarrenton Health and Rehab. 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 healthcare operations, rental revenues received, and existing cash on hand. We have successfully refinanced all five mortgage that matured in the 2021 fiscal year. Cash used in operating activities was$650,648 for the nine months endedSeptember 30, 2022 , compared to cash used in operating activities of$1,604,764 for the nine months endedSeptember 30, 2021 . Healthcare revenue was adversely affected by COVID-19 which increased costs and decreased our census.
Cash used in investing activities was
Cash used in financing activities was
In accordance with ASU 2014-15 management believes the Company has sufficient liquidity and capital resources to maintain ongoing operations. This is, in part due to refinancing debt to more favorable terms, and the optimization of our operations in many of our current facilities. 21
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.
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. 22
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. Revenue Recognition The Company's leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets and totaled$177,716 and$336,931 as ofSeptember 30, 2022 , and 2021, respectively. Rent receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line recognition of rents. Such allowances are charged to net against rental incomes.
When the lessee is the owner of any improvements, any lessee improvement
allowance that is funded by the Company is treated as a lease incentive and
amortized as a reduction of revenue over the lease term. As of
For our healthcare operations, we recognize revenue in accordance with ASC 606 whereby we apply the following steps:
a. Step 1: Identify the contract(s) with a customer
b. Step 2: Identify the performance obligations in the contract
c. Step 3: Determine the transaction price
d. Step 4: Allocate the transaction price to the performance obligations in the
contract
e. Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation
In accordance with ASC 606, estimated uncollectable amounts due from patients
are generally considered implicit price concessions that are a direct reduction
to net operating revenues.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
TheFinancial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2022. 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.
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