Notes to Unaudited Consolidated Financial Statements
September 30, 2016
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, 2015
, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2016 (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 facility operators 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.
As of
September 30, 2016
, the Company owned, leased, or managed for third parties
38
facilities primarily in the Southeast. Of the
38
facilities, the Company: (i) leased to third-party operators
22
skilled nursing facilities which it owned and subleased to third-party operators
11
skilled nursing facilities which it leased; (ii) leased to third-party operators
two
assisted living facilities which it owned; and (iii) managed on behalf of third-party owners
two
skilled nursing facilities and
one
independent living facility (see
Note 7 - Leases
below 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). On October 6, 2016, the Company completed the sale of
nine
of its facilities in Arkansas (the “Arkansas Facilities”) (see
Note 16 - Subsequent Events).
The Company was incorporated in Ohio on August 14, 1991, under the name Passport Retirement, Inc. In 1995, the Company acquired substantially all of the assets and liabilities of AdCare Health Systems, Inc. and changed its name to AdCare Health Systems, Inc. AdCare completed its initial public offering in November 2006. Initially based in Ohio, the Company expanded its portfolio through a series of strategic acquisitions to include properties in a number of other states, primarily in the Southeast. In 2012, the Company relocated its executive offices and accounting operations to Georgia, and AdCare changed its state of incorporation from Ohio to Georgia on December 12, 2013.
Historically, the Company’s business focused on owning and operating skilled nursing and assisted living facilities. The Company also managed facilities on behalf of unaffiliated owners with whom the Company entered into management contracts. In July 2014, the Company’s Board of Directors (the “Board”) approved a strategic plan to transition the Company to a healthcare property holding and leasing company through a series of leasing and subleasing transactions (the “Transition”). The Company effected the Transition through: (i) leasing to third-party operators all of the healthcare properties which it owns and previously operated; (ii) subleasing to third-party operators all of the healthcare properties which it leases (but does not own) and previously operated; and (iii) continuing the
one
remaining management agreement to manage
two
skilled nursing facilities and
one
independent living facility for third parties. The Company completed the Transition in December, 2015.
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. As a result of the Transition, 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. 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.
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 nine
months ended
September 30, 2016
and
2015
, are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at
December 31, 2015
, 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 accompanying unaudited consolidated financial statements together with the historical consolidated financial audited statements of the Company for the year ended
December 31, 2015
, 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, 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.
Reclassifications
Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation with no effect on the Company’s consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities or stockholders’deficit. Reclassifications were made to the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the
three and nine
months ended
September 30, 2015
, to reflect the same facilities in discontinued operations for both periods presented.
Revenue Recognition and Allowances
Rental Revenues.
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. Rent revenues for the Arkansas Facilities previously leased by the Company (see
Note 16 - Subsequent Events
) and
two
facilities in Georgia are recorded on a cash basis.
Management Fee Revenues and Other Revenues.
The Company recognizes management fee revenues as services are provided. Further, the Company recognizes interest income from lease inducement receivables as other revenues.
Allowances.
The Company assesses the collectibility of our rent receivables, including straight-line rent receivables. The Company bases its assessment of the collectibility of rent receivables on several factors including payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company’s evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments, then the Company provides an allowance against the recognized rent receivable asset for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease, then the Company may adjust its reserve to increase or reduce the rental revenue recognized in the period the Company makes such change in its assumptions or estimates.
As of
September 30, 2016
and
December 31, 2015
, the Company allowed for approximately
$10.3 million
and
$12.5 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 patient care receivables exceeding 365 days are fully allowed at
September 30, 2016
and
December 31, 2015
. Accounts receivable, net
totaled
$3.3 million
at
September 30, 2016
and
$8.8 million
at
December 31, 2015
of which
$1.6 million
and
$8.0 million
, respectively related to patient care receivables from our legacy operations.
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.
Recent Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws, the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 Accounting Standards Update ("ASU") interpretations that have effectiveness dates during the periods reported and in future periods.
In May 2014, the FASB issued ASU 2014-09 guidance which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The new standard requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The new guidance does not affect the recognition of revenue from leases. In August 2015, the FASB delayed the effective date of the new revenue standard by one year. Identifying performance obligations and licensing (ASU 2016-10) and narrow scope improvements (ASU 2016-12) were issued in April and May 2016 respectively. This new revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the impact on the Company’s financial position and results of operations and related disclosures.
In August 2014, the FASB issued ASU 2014-15, which provides guidance regarding an entity’s ability to continue as a going concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has concluded that changes in its accounting required by this new guidance will not materially impact the Company’s financial position or results of operations and related disclosures.
In February 2015, the FASB issued ASU 2015-02, which changes the way reporting enterprises evaluate whether (i) they should consolidate limited partnerships and similar entities, (ii) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (iii) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. This consolidation guidance is effective for public business entities for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In April 2015, the FASB issued
ASU 2015-03
, which requires debt issuance costs to be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The new standard is to be applied on a retrospective basis and reported as a change in an
accounting principle. In August 2015, the FASB released clarifying guidance for debt issuance costs related to line-of-credit arrangements, which permits debt issuance costs to be presented as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Debt issuance costs associated with a line of credit can be amortized ratably over the term of the line-of-credit arrangement. This standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company adopted this standard in the first quarter of 2016 and has retroactively applied it to the December 31, 2015 balance sheet presentation. This change represents a change in accounting principle. The amount of deferred financing costs reclassified against long-term debt was
$2.5 million
and
$2.7 million
for March 31, 2016 and December 31, 2015, respectively. The adoption did not materially impact the Company’s results of operations and related disclosures.
In September 2015, the FASB issued
ASU 2015-16
, which
requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance the acquirer recognizes, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. New disclosures are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recognized in current-period earnings by line item that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At adoption, the new guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not 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 leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance,
ASC 840,
Leases
.
ASU 2016-02
creates a new Topic,
ASC 842, Leases
. This new Topic retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash flows.
In March 2016, the FASB issued
ASU 2016-09,
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. The ASU 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. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard as well as the as available transition methods.
In June 2016, the FASB issued
ASU 2016-13
, which provides for an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for the Company beginning January 1, 2020, and we do not expect its adoption will have a significant effect on our consolidated financial statements.
In August 2016, the FASB issued
ASU
2016-1
5, guidance which clarifies the treatment of several cash flow categories. In addition, the guidance clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this guidance on its 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 nine months ended
September 30, 2016
and
2015
, approximately
4.5 million
and
5.0 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
September 30,
|
|
Nine Months Ended
September 30,
|
(Amounts in 000’s, except per share data)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
222
|
|
|
$
|
(2,038
|
)
|
|
$
|
(2,407
|
)
|
|
$
|
(13,379
|
)
|
Preferred stock dividends
|
|
(1,879
|
)
|
|
(1,499
|
)
|
|
(5,457
|
)
|
|
(3,582
|
)
|
Basic and diluted loss from continuing operations
|
|
(1,657
|
)
|
|
(3,537
|
)
|
|
(7,864
|
)
|
|
(16,961
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
(2,210
|
)
|
|
(3,057
|
)
|
|
(6,513
|
)
|
|
(2,328
|
)
|
Net loss attributable to noncontrolling interests
|
|
—
|
|
|
284
|
|
|
—
|
|
|
784
|
|
Basic and diluted loss from discontinued operations
|
|
(2,210
|
)
|
|
(2,773
|
)
|
|
(6,513
|
)
|
|
(1,544
|
)
|
Basic and diluted loss from continuing operations attributable to AdCare Health Systems, Inc common stockholders
|
|
$
|
(3,867
|
)
|
|
$
|
(6,310
|
)
|
|
$
|
(14,377
|
)
|
|
$
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic - weighted average shares
|
|
19,917
|
|
|
19,838
|
|
|
19,909
|
|
|
19,617
|
|
Diluted - adjusted weighted average shares
(a)
|
|
19,917
|
|
|
19,838
|
|
|
19,909
|
|
|
19,617
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to AdCare
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.86
|
)
|
Loss income from discontinuing operations
|
|
(0.11
|
)
|
|
(0.14
|
)
|
|
(0.33
|
)
|
|
(0.08
|
)
|
Loss attributable to to AdCare Health Systems, Inc. common stockholders
|
|
$
|
(0.19
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.94
|
)
|
|
|
|
|
|
|
|
|
|
(a)
Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
(Share amounts in 000’s)
|
|
2016
|
|
2015
|
Stock options
|
|
355
|
|
|
744
|
|
Warrants - employee
|
|
1,559
|
|
|
1,559
|
|
Warrants - non employee
|
|
437
|
|
|
567
|
|
Convertible notes
|
|
2,165
|
|
|
2,165
|
|
Total anti-dilutive securities
|
|
4,516
|
|
|
5,035
|
|
NOTE 3.
LIQUIDITY AND PROFITABILITY
Sources of Liquidity
The Company continues to undertake measures to improve its operations and streamline its cost infrastructure in connection with its new business model, including: (i) increasing future lease revenue; (ii) refinancing or repaying debt to reduce interest costs and reducing mandatory principal repayments; and (iii) reducing general and administrative expenses.
At
September 30, 2016
, the Company had
$1.5 million
in cash and cash equivalents as well as restricted cash of
$5.5 million
. Over the next twelve months, the Company anticipates both access to and receipt of several sources of liquidity.
The Company routinely has discussions with existing and new potential lenders to refinance current debt on a long-term basis and, in recent periods, has refinanced short-term acquisition-related debt with traditional long-term mortgage notes, some of which have been executed under government guaranteed lending programs such as those operated by the United States (“U.S.”) Department of Housing and Urban Development (“HUD”).
On July 21, 2015, the Company entered into separate At Market Issuance Sales Agreements with each of MLV & Co. LLC and JMP Securities LLC (“JMP”), regarding the Company’s sale, from time to time, of up to
800,000
shares of the Company’s
10.875%
Series A Cumulative Redeemable Preferred Stock, (the “Series A Preferred Stock”), through an “at-the-market” offering program (“ATM”). The Company subsequently announced that the Series A Preferred Stock offered and sold through the ATM will be sold exclusively through JMP on and after June 7, 2016. During the quarter ended
September 30, 2016
, the Company sold
106,796
shares of Series A Preferred Stock generating net proceeds to the Company of approximately
$2.2 million
. Since the inception of the ATM in July 2015 and through
September 30, 2016
, the Company sold
650,600
shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately
$13.5 million
(see
Note 11 -
Common and Preferred Stock
). The Company ceased sales under the ATM in September 2016, and will not engage in any additional sales of the Series A Preferred Stock until the Company’s recently announced preferred stock repurchase program has terminated or expired (See
Note 16 - Subsequent Events
).
On
March 24, 2016
, the Company obtained a lender commitment to extend the maturity date of the credit facility entered into on January 30, 2015, (the “Sumter Credit Facility”), between a certain-wholly owned subsidiary of the Company and The PrivateBank and Trust Company (the “PrivateBank”), from September 2016 to June 2017, subject to definitive documentation and certain closing conditions, which commitment expires on November 30, 2016. On June 13, 2016, the Company received a commitment to refinance the Sumter Credit Facility, subject to definitive documentation and certain closing conditions. The Company expects to close on such financing arrangement with HUD in the fourth quarter of 2016.
On September 19, 2016, the Company obtained an option to extend the maturity date of the credit facility entered into in September 2013, between a certain wholly-owned subsidiary of the Company and Housing & Healthcare Funding, LLC (the “Quail Creek Credit Facility”), from September 2017 to September 2018, which option management intends exercise.
On September 29, 2016, the Company closed on HUD-guaranteed financing in the amount of
$3.7 million
, which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Company’s facility located in Georgetown, South Carolina (the “Georgetown Facility”).
On
September 30, 2016
, total outstanding debt, net of deferred financing costs and restricted cash with respect to the Arkansas Facilities was approximately
$28.4 million
, included within “Liabilities of disposal group held for sale” in the Company’s unaudited consolidated balance sheet at
September 30, 2016
. All such debt and restricted cash was current at
September 30, 2016
. Proceeds to the Company from the sale of the Arkansas Facilities exceeded related obligations by approximately
$23.0 million
, less routine closing costs and the Skyline Note in the amount of
$3.0 million
. The cash impact of the sale of the Arkansas Facilities consisted of total sales proceeds of
$55.0 million
, payment of associated liabilities held for sale of
$32.2 million
(excluding deferred loan costs of
$0.2 million
), the Skyline Note in the amount of
$3.0 million
, payments for property taxes of
$0.4 million
, and release of restricted cash of
$3.6 million
, for total net cash to seller of
$23.0 million
.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities for a total sale price of
$55.0 million
,which sale price consisted of: (i) a non-refundable deposit of
$1.8 million
; (ii) cash consideration of
$50.3 million
paid at closing; and (iii) a promissory note in the amount of
$3.0 million
(the “Skyline Note”) (see
Note 16 - Subsequent Events
).
On June 18, 2016, ADK Georgia, LLC, a wholly-owned subsidiary of the Company (“ADK Georgia”), entered into a new master sublease agreement (the “Peach Health Sublease”) with affiliates (collectively, “Peach Health Sublessee”) of Peach Health Group, LLC (“Peach Health”), providing that Peach Health Sublessee would take possession of the facilities (the “Peach Facilities”) subleased by ADK Georgia to affiliates of New Beginnings Care, LLC (“New Beginnings”) and operate them as a subtenant (see
Note 7 - Leases
). The Peach Facilities are comprised of: (i) an 85-bed skilled nursing facility located in Tybee Island, Georgia (the “Oceanside Facility”); (ii) a 50-bed skilled nursing facility located in Tybee Island, Georgia (the “Savannah Beach Facility”); and (iii) a 131-bed skilled nursing facility located in Jeffersonville,Georgia (the “Jeffersonville Facility”). Rent for the Oceanside Facility and the Jeffersonville Facility is
$0.4 million
and
$0.6 million
per annum, respectively; but such rent is only
$1
per month for the Oceanside and Jeffersonville Facilities until the date such facilities are recertified by U.S. Department of Health and Human Services Center for Medicare and Medicaid Services (“CMS”) or April 1, 2017, whichever first occurs (the “Rent Commencement Date”). In addition, with respect to the Oceanside and Jeffersonville Facilities, Peach Health Sublessee is entitled to
three
months of
$1
per month rent following the Rent Commencement Date and, following such
three
-month period,
five
months of rent discounted by
50%
. In the event that the Savannah Beach Facility is decertified due to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to
$1
a month until it is recertified along with the other facilities. Under the terms of the Peach Health Sublease, Peach Health Sublessee agrees to use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with CMS as soon as possible. However if recertification fails to occur, then it could have an adverse effect on our business, financial condition and results of operations.
Cash Requirements
At
September 30, 2016
, the Company had
$115.5 million
in indebtedness of which the current portion is
$51.2 million
. This current portion is comprised of the following components: (i) debt of held for sale entities of approximately
$32.0 million
, primarily senior debt and mortgage indebtedness; and (ii) convertible debt of
$7.7 million
; and (iii) remaining debt of approximately
$11.5 million
which includes senior debt - bond and mortgage indebtedness (see
Note 9 - Notes Payable and Other Debt
). As indicated previously, the Company routinely has ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs.
The Company anticipates, during the next
twelve
months, net principal disbursements of approximately
$43.5 million
(including
$32.0 million
of liabilities held for sale and repaid upon sale of the Arkansas Facilities, approximately
$0.9 million
of payments on short term vendor notes,
$1.4 million
of routine debt service amortization, and
$0.7 million
payment of other debt) which is inclusive of anticipated proceeds on refinancing of approximately
$8.3 million
. The Company anticipates operating cash requirements for the next twelve months as being substantially less than the previous twelve months due to the Transition. 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
September 30, 2016
, the Company had approximately
$60.2 million
of debt maturities due over the next
two
year period ending
September 30, 2018
, inclusive of
$32.2 million
of liabilities held for sale (gross of deferred financing costs). These debt maturities include
$9.2 million
of convertible promissory notes, which are convertible into shares of common stock. The Company believes its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.
During the
three and nine
months ended
September 30, 2016
, the Company generated negative cash flows, and anticipates positive cash flow starting in 2017,
due to anticipated continued reductions in operating overhead primarily impacting general and administrative expenses
.
In order to satisfy the Company’s capital needs, the Company seeks to: (i) continue improving operating results through its leasing and subleasing transactions executed with favorable terms and consistent and predictable cash flow; (ii) expand borrowing arrangements with certain lenders; (iii) refinance current debt, where possible, to obtain more favorable terms; and (iv) raise capital through the issuance of debt securities. The Company anticipates that these actions, if successful, will provide the opportunity to maintain liquidity on a short and long-term basis, thereby permitting the Company to meet its operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful or that anticipated operating results of the Transition will be realized. If the Company is unable to expand existing borrowing agreements, refinance current debt, or raise capital through the issuance of securities, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives or sell additional assets, or suspend payment of preferred dividends.
.
NOTE 4.
RESTRICTED CASH
The following table sets forth the Company’s various restricted cash, escrow deposits and related financial instruments excluding
$3.6 million
classified as assets held for sale:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
September 30, 2016
|
|
December 31, 2015
|
Cash collateral and certificates of deposit
|
|
$
|
245
|
|
|
$
|
7,687
|
|
Replacement reserves
|
|
836
|
|
|
950
|
|
Escrow deposits
|
|
715
|
|
|
532
|
|
Total current portion
|
|
1,796
|
|
|
9,169
|
|
|
|
|
|
|
Restricted investments for other debt obligations
|
|
2,279
|
|
|
2,264
|
|
HUD and other replacement reserves
|
|
1,403
|
|
|
1,294
|
|
Total noncurrent portion
|
|
3,682
|
|
|
3,558
|
|
Total restricted cash
|
|
$
|
5,478
|
|
|
$
|
12,727
|
|
NOTE 5.
PROPERTY AND EQUIPMENT
The following table sets forth the Company’s property and equipment excluding
$44.1 million
and
$1.2 million
classified as assets held for sale at September 30, 2016 and December 31, 2015, respectively :
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
Estimated Useful
Lives (Years)
|
|
September 30, 2016
|
|
December 31, 2015
|
Buildings and improvements
|
|
5-40
|
|
$
|
83,481
|
|
|
$
|
128,912
|
|
Equipment
|
|
2-10
|
|
9,194
|
|
|
13,470
|
|
Land
|
|
—
|
|
3,988
|
|
|
7,128
|
|
Computer related
|
|
2-10
|
|
2,894
|
|
|
2,999
|
|
Construction in process
|
|
—
|
|
627
|
|
|
390
|
|
|
|
|
|
100,184
|
|
|
152,899
|
|
Less: accumulated depreciation and amortization
|
|
|
|
(20,864
|
)
|
|
(26,223
|
)
|
Property and equipment, net
|
|
|
|
$
|
79,320
|
|
|
$
|
126,676
|
|
Buildings and improvements includes the capitalization of costs incurred for the respective certificates of need (the “CON”). For additional information on the CON amortization, see
Note 6 - Intangible Assets and Goodwill
.
For the
three months ended
September 30, 2016
and
2015
, total depreciation and amortization expense was
$1.1 million
and
$1.9 million
, respectively. For the
nine months ended
September 30, 2016
and
2015
, total depreciation and amortization expense was
$4.2 million
and
$5.4 million
, respectively. There were no amounts of total depreciation and amortization expense recognized in Loss from discontinued operations, net of tax in the
three and nine
month periods ended
September 30, 2016
nor the three month period ended
September 30, 2015
. Total depreciation and amortization expense excludes
$0.1 million
for the
nine months ended
September 30, 2015
that is recognized in Loss from discontinued operations, net of tax.
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, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
35,690
|
|
|
$
|
2,471
|
|
|
$
|
6,881
|
|
|
$
|
45,042
|
|
Accumulated amortization
|
|
(4,760
|
)
|
|
—
|
|
|
(3,461
|
)
|
|
(8,221
|
)
|
Net carrying amount
|
|
$
|
30,930
|
|
|
$
|
2,471
|
|
|
$
|
3,420
|
|
|
$
|
36,821
|
|
|
|
|
|
|
|
|
|
|
Transfers -Assets of disposal group held for sale
|
|
|
|
|
|
|
|
|
Gross
|
|
(12,879
|
)
|
|
—
|
|
|
—
|
|
|
(12,879
|
)
|
Accumulated amortization
|
|
2,123
|
|
|
—
|
|
|
—
|
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
(676
|
)
|
|
—
|
|
|
(500
|
)
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2016
|
|
|
|
|
|
|
|
|
Gross
|
|
22,811
|
|
|
2,471
|
|
|
6,881
|
|
|
32,163
|
|
Accumulated amortization
|
|
(3,313
|
)
|
|
—
|
|
|
(3,961
|
)
|
|
(7,274
|
)
|
Net carrying amount
|
|
$
|
19,498
|
|
|
$
|
2,471
|
|
|
$
|
2,920
|
|
|
$
|
24,889
|
|
Amortization expense for the CON included in property and equipment was approximately
$0.2 million
and
$0.7 million
for the
three and nine
month periods ended
September 30, 2016
and was approximately
$0.3 million
and
$0.9 million
for the
three and nine
month periods ended
September 30, 2015
, respectively.
Amortization expense for lease rights was approximately
$0.2 million
and
$0.5 million
for the
three and nine
month periods ended
September 30, 2016
and was approximately
$0.2 million
and
$0.5 million
for the
three and nine
month periods ended
September 30, 2015
, respectively.
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
|
2016
(a)
|
|
$
|
171
|
|
|
$
|
166
|
|
2017
|
|
683
|
|
|
667
|
|
2018
|
|
683
|
|
|
667
|
|
2019
|
|
683
|
|
|
667
|
|
2020
|
|
683
|
|
|
482
|
|
Thereafter
|
|
16,595
|
|
|
271
|
|
Total expected amortization expense
|
|
$
|
19,498
|
|
|
$
|
2,920
|
|
(a)
Estimated amortization expense for the year ending
December 31, 2016
, includes only amortization to be recorded after
September 30, 2016
.
The following table summarizes the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
September 30, 2016
|
|
December 31, 2015
|
Goodwill
|
|
$
|
5,023
|
|
|
$
|
5,023
|
|
Transfers - Assets of disposal group held for sale
|
|
(2,078
|
)
|
|
—
|
|
Accumulated impairment losses
|
|
(840
|
)
|
|
(840
|
)
|
Net carrying amount
|
|
$
|
2,105
|
|
|
$
|
4,183
|
|
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, most of which have rent escalation clauses and provisions for payments of real estate taxes, insurance and maintenance costs. Each of the skilled nursing facilities that are leased by the Company are subleased to and operated by third-party operators. The Company also leases certain office space located in Suwanee, Georgia. The Company has also entered into lease agreements for various equipment previously used in the facilities. These leases are included in future minimum lease payments below.
As of
September 30, 2016
, the Company is in compliance with all operating lease financial and administrative 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)
|
2016
(a)
|
|
$
|
2,048
|
|
2017
|
|
8,149
|
|
2018
|
|
8,313
|
|
2019
|
|
8,492
|
|
2020
|
|
8,671
|
|
Thereafter
|
|
55,260
|
|
Total
|
|
$
|
90,933
|
|
(a)
Estimated minimum lease payments for the year ending
December 31, 2016
include only payments to be recorded after
September 30, 2016
.
Leased and Subleased Facilities to Third-Party Operators
As a result of the completion of the Transition, the Company leases or subleases to third-party operators
35
facilities (
24
owned by the Company and
11
leased to the Company) on a triple net basis, meaning that the lessee (i.e., the new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see
Note 16 - Subsequent Events).
Termination of Arkansas Leases
. Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”) the Arkansas Facilities to affiliates (the “Aria Sublessees”) of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated each Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease. The term of each Aria Sublease was approximately
fifteen
(15) years, and the annual aggregate base and special rent payable to the Company under the Aria Subleases was approximately
$4.2 million
in the first year of such subleases and the base rent was subject to specified annual rent escalators.
On July 17, 2015, the Company made a short-term loan to Highlands Arkansas Holdings, LLC, an affiliate of Aria (“HAH”), for working capital purposes, and, in connection therewith, HAH executed a promissory note (the “ HAH Note”) in favor of the Company. Since July 17, 2015, the HAH Note has been amended from time to time and at September 30, 2016, had an outstanding principal amount of
$1.0 million
and matured on December 31, 2015. The Company received
$0.7 million
in partial repayment of the HAH Note during the second quarter of 2016. The Company is currently seeking the repayment of the remaining balance of the HAH Note in accordance with its terms and expects full repayment.
Lease of Arkansas Facilities.
From February 5, 2016, to October 6, 2016,
nine
wholly-owned subsidiaries of the Company (each, a “Skyline Lessor”) leased the Arkansas Facilities to Skyline Healthcare LLC (“Skyline”), or an affiliate of Skyline (the “Skyline Lessee”), pursuant to a Master Lease Agreement, dated February 5, 2016 (the “Skyline Lease”). The term of the Skyline Lease commenced on April 1, 2016. The initial lease term of the Skyline Lease was
fifteen
(15) years with
two
(2) separate renewal terms of
five
(5) years each. The Skyline Lease provided for annual rent in the first year of
$5.4 million
, and an annual rent escalator of
2.5%
each year during the initial term and any subsequent renewal terms. Skyline guaranteed the obligations of its affiliates.
Sale of Arkansas Facilities.
In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of
$55.0 million
, which the Purchaser could exercise in accordance with such agreement until May 1, 2016.
On April 22, 2016, the Purchaser delivered notice to the Company of its intent to exercise its option to purchase the Arkansas Facilities. Pursuant to such purchase option, on May 10, 2016, the Skyline Lessors and the Purchaser entered into a Purchase and Sale Agreement (the “Purchase Agreement”) whereby the Skyline Lessors agreed to sell, and the Purchaser agreed to buy, the Arkansas Facilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the nursing home business at such facilities, for an aggregate purchase price of
$55.0 million
. Pursuant to the Purchase Agreement the purchase price consisted of: (i) a deposit of
$1.0 million
deposited by the Purchaser with an escrow agent at the time of the Purchaser’s exercise of the purchase option; (ii) cash consideration of
$51.0 million
to be paid at closing; and (iii) the Skyline Note from the Purchaser in favor of the Skyline Lessors with a principal amount of
$3.0 million
, to be executed and delivered at closing.
On July 14, 2016, August 26, 2016 and September 29, 2016, the Skyline Lessors entered into separate letter agreements with Skyline and the Purchaser, which in the aggregate amended the Purchase Agreement to extend the date by which the purchase and sale of the Arkansas Facilities was required to close from August 1, 2016 to October 6, 2016 and increased the deposit payable by the Purchaser from
$1.0 million
to
$1.8 million
.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities to the Purchaser pursuant to the Purchase Agreement, as amended (see
Note 16 - Subsequent Events
).
New Beginnings.
On January 22, 2016, New Beginnings filed petitions to reorganize its finances under the U.S. Bankruptcy Code. New Beginnings operated the Oceanside Facility, the Savannah Beach Facility and the Jeffersonville Facility (collectively, the “New Beginnings Facilities”) pursuant to a master lease dated November 3, 2015, with the Company. The Jeffersonville Facility was decertified by CMS in February 2016 for deficiencies related to its operations and maintenance of the facility. From January 1, 2016 until June 4, 2016, New Beginnings paid de minimis rent for the Oceanside and Savannah Beach Facilities and did not pay rent for the Jeffersonville Facility.
On March 4, 2016, due to defaults by New Beginnings, the Company petitioned the Bankruptcy Court to lift the automatic stay to enable the Company to regain possession of the New Beginnings Facilities. Prior to the court ruling on the motion, the Company entered into a consent order (the “Consent Order”) with New Beginnings, the debtors’ creditors’ committee, which represents the unsecured creditors in the proceedings, and Gemino Healthcare Finance, LLC (the debtors’ secured lender), in which the Company agreed to give the creditors’ committee until June 4, 2016 to sell all of New Beginnings’ assets, including the leasehold interests and personal property for the New Beginnings Facilities. The Consent Order further provided that if the creditors’ committee was unable to sell the assets by such date, the automatic stay would be lifted and the Company would be allowed to reclaim possession of the New Beginnings Facilities. The court signed the Consent Order on May 9, 2016, and it was entered on the docket on May 10, 2016. The automatic stay was lifted as of June 4, 2016, thereby allowing the Company to take possession of the New Beginnings Facilities from New Beginnings.
The Oceanside Facility was cited for deficiencies during a state survey on November 6, 2015 and had six months, or until May 5, 2016, to meet the pertinent provisions of Section 1819 and 1919 of the Social Security Act and be deemed in substantial compliance with each of the requirements for long term care facilities established by the Secretary of Health and Human Services in 42 CFR Section 483.1 et seq. (collectively, “CMS Requirements”) with regard to the facility. As of May 3, 2016, out of concern that decertification of the Oceanside Facility was imminent, New Beginnings obtained a preliminary injunction against the Georgia Department of Community Health and CMS and their officers, agents, servants, employees and attorneys prohibiting the termination of the facility’s Medicare and Medicaid provider agreements until the earlier of (i) July 1, 2016; (ii) the completion of the administrative review process pursuant to 42 U.S.C. § 405(g); or (iii) the full administration of the bankruptcy estate pursuant to Title 11 of the U.S. Code, in part in order to give New Beginnings time to market its leasehold interests and assets to potential buyers pursuant to the Consent Order. On May 9, 2016, a Notice of Involuntary Termination from CMS was issued to New Beginnings indicating that its operations at the Oceanside Facility were not in substantial compliance with CMS Requirements and that its provider agreements with CMS were terminated as of such date. The letter noted that the effectuation of the involuntary termination was stayed by the terms of the Bankruptcy Court’s order.
Peach Health.
On June 18, 2016, ADK Georgia, entered into the Peach Health Sublease with Peach Health Sublessee, providing that Peach Health Sublessee would take possession of the Peach Facilities and operate them as a subtenant.
The Peach Health Sublease became effective for the Jeffersonville Facility, on June 18, 2016 and for the Savannah Beach and Oceanside Facilities on July, 13, 2016, (the date on which ADK Georgia accepted possession of the facilities from New Beginnings).
ADK Georgia shall be responsible for payment of all outstanding bed/provider taxes to the State of Georgia relating to the operation of the Savannah Beach Facility prior to the effective date of the Peach Health Sublease.
The Peach Health Sublease is structured as a triple net lease, except that ADK Georgia assumes responsibility for the cost of certain deferred maintenance at the Savannah Beach Facility and capital improvements that may be necessary for Peach Health Sublessee to recertify the Oceanside and Jeffersonville Facilities with CMS so they are eligible for Medicare and Medicaid reimbursement. The term of the Peach Health Sublease for all three Peach Facilities expires on August 31, 2027.
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 is only
$1
per month for the Oceanside and Jeffersonville Facilities until the Rent Commencement Date. In addition, with respect to the Oceanside and Jeffersonville Facilities, Peach Health Sublessee is entitled to three months of $1 per month rent following the Rent Commencement Date and, following such
three
-month period,
five
months of rent discounted by
50%
. In addition, in the event that the Savannah Beach Facility is decertified due to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to
$1
a month until it is recertified along with the other facilities. The annual rent for each of the Peach Facilities will escalate at a rate of
3%
each year pursuant to the Peach Health Sublease.
Under the terms of the Peach Health Sublease, Peach Health Sublessee agrees to use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with CMS as soon as possible. In connection therewith, Peach Health Sublessee created an operating plan for such recertification, including a timetable and estimate of funds required from ADK Georgia for capital improvements for each such facility and submitted such plan to ADK Georgia for approval within
sixty
days of the commencement date of the Peach Health Sublease (a “Recertification Plan”). During the third quarter of 2016, the parties reached agreement on the terms of the Recertification Plan for both facilities.
In connection with the Peach Health Sublease, the Company has extended to Peach Health Sublessee a working capital line of credit of up to
$1.0 million
for operations at the Peach Facilities (the “LOC”), with interest accruing on the unpaid balance under the LOC at an interest rate of
13.5%
per annum. The entire principal amount due under the LOC, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The LOC is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Peach Health Sublessee. At
September 30, 2016
, there was a
$0.4 million
outstanding balance on the LOC.
Future minimum lease receivables from the Company’s facilities leased and subleased to third party operators for each of the next
five
years ending December 31, are as follows:
|
|
|
|
|
|
|
|
(Amounts in
000's)
(b) (c)
|
2016
(a)
|
|
$
|
5,082
|
|
2017
|
|
20,564
|
|
2018
|
|
21,825
|
|
2019
|
|
22,298
|
|
2020
|
|
22,329
|
|
Thereafter
|
|
152,652
|
|
Total
|
|
$
|
244,750
|
|
(a)
Estimated minimum lease receivables for the year ending
December 31, 2016
, include only payments to be received after
September 30, 2016
.
(b)
Excludes estimated minimum lease receivables for the nine Arkansas Facilities sold to the Purchaser on October 6, 2016.
(c)
Assumes recertification of the Oceanside and Jeffersonville Facilities on April 1, 2017.
For further details regarding the Company’s leased and subleased facilities to third-party operators, see 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)
|
|
September 30, 2016
|
|
December 31, 2015
|
Accrued employee benefits and payroll related
|
|
$
|
622
|
|
|
$
|
1,332
|
|
Real estate and other taxes
|
|
1,113
|
|
|
411
|
|
Self-insured reserve
|
|
1,530
|
|
|
221
|
|
Accrued interest
|
|
438
|
|
|
484
|
|
Other accrued expenses
|
|
575
|
|
|
677
|
|
Total accrued expenses
|
|
4,278
|
|
|
3,125
|
|
Earnest deposit
|
|
1,750
|
|
|
—
|
|
Prepaid sublease rent
|
|
61
|
|
|
—
|
|
Total accrued expenses and other
|
|
$
|
6,089
|
|
|
$
|
3,125
|
|
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
(a)
:
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
September 30, 2016
|
|
December 31, 2015
|
Senior debt—guaranteed by HUD
|
|
$
|
28,767
|
|
|
$
|
25,469
|
|
Senior debt—guaranteed by USDA
|
|
25,929
|
|
|
26,463
|
|
Senior debt—guaranteed by SBA
|
|
3,427
|
|
|
3,548
|
|
Senior debt—bonds, net of discount
|
|
6,950
|
|
|
7,025
|
|
Senior debt—other mortgage indebtedness
|
|
41,862
|
|
|
51,128
|
|
Other debt
|
|
1,624
|
|
|
2,638
|
|
Convertible debt
|
|
9,200
|
|
|
9,200
|
|
Deferred financing costs
|
|
(2,256
|
)
|
|
(2,712
|
)
|
Total debt
|
|
$
|
115,503
|
|
|
$
|
122,759
|
|
Current debt
|
|
19,164
|
|
|
50,960
|
|
Debt included in liabilities of disposal group held for sale
(b)
|
|
32,036
|
|
|
958
|
|
Notes payable and other debt, net of current portion
|
|
$
|
64,303
|
|
|
$
|
70,841
|
|
|
|
(a)
|
HUD, U.S. Department of Agriculture (“USDA”), U.S. Small Business Administration (“SBA”).
|
(b)
Includes
$0.2 million
and
no
deferred financing costs at
September 30, 2016
and December 31, 2015, respectively.
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)
|
|
September 30, 2016
|
|
December 31, 2015
|
Senior debt - guaranteed by HUD
|
|
|
|
|
|
|
|
|
|
|
The Pavilion Care Center
|
|
Red Mortgage
|
|
12/01/2027
|
|
Fixed
|
|
4.16%
|
|
$
|
1,459
|
|
|
$
|
1,534
|
|
Hearth and Care of Greenfield
|
|
Red Mortgage
|
|
08/01/2038
|
|
Fixed
|
|
4.20%
|
|
2,206
|
|
|
2,251
|
|
Woodland Manor
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
5,475
|
|
|
5,556
|
|
Glenvue
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
3.75%
|
|
8,501
|
|
|
8,628
|
|
Autumn Breeze
|
|
KeyBank
|
|
01/01/2045
|
|
Fixed
|
|
3.65%
|
|
7,390
|
|
|
7,500
|
|
Georgetown
|
|
Midland State Bank
|
|
01/10/2046
|
|
Fixed
|
|
2.98%
|
|
3,736
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
28,767
|
|
|
$
|
25,469
|
|
Senior debt - guaranteed by USDA
|
|
|
|
|
|
|
|
|
Attalla
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
$
|
7,244
|
|
|
$
|
7,400
|
|
Coosa
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
5.50%
|
|
6,531
|
|
|
6,671
|
|
Mountain Trace
|
|
Community B&T
|
|
01/24/2036
|
|
Prime + 1.75%
|
|
5.75%
|
|
4,414
|
|
|
4,507
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 1.50%
|
|
6.00%
|
|
4,491
|
|
|
4,576
|
|
Homestead
(b)
|
|
Square 1
|
|
10/14/2036
|
|
Prime + 1.00%
|
|
5.75%
|
|
3,249
|
|
|
3,309
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
25,929
|
|
|
$
|
26,463
|
|
Senior debt - guaranteed by SBA
|
|
|
|
|
|
|
|
|
College Park
|
|
CDC
|
|
10/01/2031
|
|
Fixed
|
|
2.81%
|
|
$
|
1,633
|
|
|
$
|
1,697
|
|
Stone County
(b)
|
|
CDC
|
|
07/01/2032
|
|
Fixed
|
|
2.42%
|
|
1,081
|
|
|
1,123
|
|
Southland
|
|
Bank of Atlanta
|
|
07/27/2036
|
|
Prime + 2.25%
|
|
5.75%
|
|
713
|
|
|
728
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
3,427
|
|
|
$
|
3,548
|
|
|
|
(a)
|
Represents cash interest rates as of
September 30, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
(b)
Debt included in liabilities of disposal group held for sale. On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see
Note 16 - Subsequent Events).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate
(a)
|
|
September 30, 2016
|
|
December 31, 2015
|
Senior debt - bonds, net of discount
|
|
|
|
|
|
|
|
|
|
|
Eaglewood Bonds Series A
|
|
City of Springfield, Ohio
|
|
05/01/2042
|
|
Fixed
|
|
7.65%
|
|
$
|
6,452
|
|
|
$
|
6,449
|
|
Eaglewood Bonds Series B
|
|
City of Springfield, Ohio
|
|
05/01/2021
|
|
Fixed
|
|
8.50%
|
|
498
|
|
|
576
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
6,950
|
|
|
$
|
7,025
|
|
|
|
(a)
|
Represents cash interest rates as of
September 30, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
September 30,
|
|
December 31,
|
Facility
|
Lender
|
Maturity
|
|
Interest Rate
(a)
|
|
2016
|
|
2015
|
Senior debt - other mortgage indebtedness
|
|
|
|
|
|
|
|
|
Sumter Valley
(c)
|
PrivateBank
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
4.71%
|
|
$
|
5,866
|
|
|
$
|
5,123
|
|
Georgetown
(g)
|
PrivateBank
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
4.71%
|
|
—
|
|
|
4,026
|
|
Northridge
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
3,627
|
|
|
4,230
|
|
Woodland Hills
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
3,050
|
|
|
3,557
|
|
Abington/Cumberland
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 4.25%
|
|
5.50%
|
|
3,455
|
|
|
4,029
|
|
Heritage Park
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 3.50%
|
|
6.00%
|
|
2,853
|
|
|
3,370
|
|
River Valley
(b)
|
PrivateBank
(d)
|
09/01/2016
|
|
LIBOR + 3.50%
|
|
6.00%
|
|
3,472
|
|
|
3,989
|
|
Little Rock/West Markham
(b), (f)
|
PrivateBank
(d)
|
12/31/2016
|
|
LIBOR + 4.00%
|
|
6.00%
|
|
9,788
|
|
|
11,399
|
|
Quail Creek
(e)
|
Congressional Bank
|
09/30/2017
|
|
LIBOR + 4.75%
|
|
5.75%
|
|
4,462
|
|
|
5,000
|
|
Northwest
|
First Commercial
|
12/31/2017
|
|
Prime
|
|
5.00%
|
|
1,227
|
|
|
1,285
|
|
Stone County
(b)
|
Metro City
|
06/08/2022
|
|
Prime + 2.25%
|
|
6.25%
|
|
1,669
|
|
|
1,697
|
|
College Park
(f)
|
Bank of Las Vegas
|
05/01/2031
|
|
Prime + 2.00%
|
|
6.25%
|
|
2,393
|
|
|
2,465
|
|
Hembree Rd. Building
|
Fidelity Bank
|
12/01/2017
|
|
Fixed
|
|
5.50%
|
|
—
|
|
|
958
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
41,862
|
|
|
$
|
51,128
|
|
|
|
(a)
|
Represents cash interest rates as of
September 30, 2016
as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
|
|
(b)
|
Debt included in liabilities of disposal group held for sale. On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see
Note 16 - Subsequent Events).
|
|
|
(c)
|
On
March 24, 2016
, the Company obtained a lender commitment to extend the maturity date of the Sumter Credit Facility from September 2016 to June 2017, subject to definitive documentation and certain closing conditions, which commitment expires on November 30, 2016. On June 13, 2016, the Company received a commitment to refinance the Sumter Credit Facility, subject to definitive documentation and certain closing conditions. The Company expects to close on such financing arrangement with HUD in the fourth quarter of 2016.
|
|
|
(d)
|
On March 24, 2016, the Company obtained the release of approximately
$3.9 million
of restricted cash funds and applied the amounts as additional principal payments related to certain of the above debt facilities with the PrivateBank.
|
|
|
(e)
|
On September 19, 2016, the Company obtained an option to extend the maturity date of the Quail Creek Credit Facility from September 2017 to September 2018, which management intends to exercise.
|
(f)
On October 6, 2016, the related debt was repaid as part of the sale of the Arkansas Facilities (see
Note 16 - Subsequent Events
).
(g)
On September 29, 2016, the Company closed a HUD-guaranteed financing in the amount of
$3.7 million
, which refinanced approximately
$3.1 million
in debt previously owed to the PrivateBank with respect to the Georgetown Facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Maturity
|
|
Interest Rate
|
|
September 30, 2016
|
|
December 31, 2015
|
Other debt
|
|
|
|
|
|
|
|
|
|
|
First Insurance Funding
|
|
02/28/2017
|
|
Fixed
|
|
3.99%
|
|
$
|
80
|
|
|
$
|
14
|
|
Key Bank
|
|
10/17/2017
|
|
Fixed
|
|
0.00%
|
|
680
|
|
|
680
|
|
Reliant Rehabilitation
|
|
11/15/2016
|
|
Fixed
|
|
7.00%
|
|
193
|
|
|
944
|
|
Pharmacy Care of Arkansas
|
|
02/08/2018
|
|
Fixed
|
|
2.00%
|
|
671
|
|
|
1,000
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,624
|
|
|
$
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Maturity
|
|
Interest Rate
(a)
|
|
September 30, 2016
|
|
December 31, 2015
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
Issued July 2012
|
|
10/31/2017
|
|
Fixed
|
|
10.00%
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
Issued March 2015
|
|
04/30/2017
|
|
Fixed
|
|
10.00%
|
|
7,700
|
|
|
7,700
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
9,200
|
|
|
$
|
9,200
|
|
|
|
(a)
|
Represents cash interest rates as of
September 30, 2016
. The rates exclude amortization of deferred financing costs which range from
0.08%
to
1.92%
per annum.
|
Debt Covenant Compliance
As of
September 30, 2016
, the Company had approximately
38
credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on 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 quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, the Company has not been in compliance with certain financial covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including, as necessary, modifications to future covenant requirements or the elimination of certain requirements in future periods.
The Company’s credit-related instruments were all in compliance as of
September 30, 2016
.
Scheduled Maturities
The schedule below summarizes the scheduled maturities for the twelve months ended
September 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 September 30,
|
(Amounts in 000’s)
|
2017
|
$
|
51,408
|
|
2018
|
8,779
|
|
2019
|
1,708
|
|
2020
|
1,796
|
|
2021
|
1,883
|
|
Thereafter
|
52,380
|
|
Subtotal
|
$
|
117,954
|
|
Less: unamortized discounts
|
(195
|
)
|
Less: deferred financing costs
|
(2,256
|
)
|
Total notes and other debt
|
$
|
115,503
|
|
NOTE 10.
DISCONTINUED OPERATIONS
For the discontinued operations, the patient care revenue, related cost of services, and facility rental expense 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 nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(Amounts in 000’s)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total revenues
|
|
$
|
—
|
|
|
$
|
12,447
|
|
|
$
|
—
|
|
|
$
|
84,357
|
|
Cost of services
|
|
2,247
|
|
|
14,949
|
|
|
6,030
|
|
|
83,572
|
|
Net loss
|
|
(2,210
|
)
|
|
(3,057
|
)
|
|
(6,513
|
)
|
|
(2,328
|
)
|
Interest expense, net
|
|
11
|
|
|
266
|
|
|
36
|
|
|
882
|
|
Assets and liabilities of the disposal group held for sale at
September 30, 2016
and
December 31, 2015
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Actual
|
|
Comparative
(a)
|
(Amounts in 000’s)
|
|
September 30, 2016
|
|
December 31, 2015
|
|
December 31, 2015
|
Restricted cash
|
|
$
|
3,624
|
|
|
$
|
—
|
|
|
$
|
5,887
|
|
Buildings and improvements, net
|
|
38,583
|
|
|
1,249
|
|
|
40,407
|
|
Land, net
|
|
2,813
|
|
|
—
|
|
|
2,814
|
|
Equipment and other, net
|
|
2,686
|
|
|
—
|
|
|
2,866
|
|
Goodwill
|
|
2,078
|
|
|
—
|
|
|
2,078
|
|
Other assets
|
|
40
|
|
|
—
|
|
|
35
|
|
Assets of disposal group held for sale
|
|
$
|
49,824
|
|
|
$
|
1,249
|
|
|
$
|
54,087
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
32,036
|
|
|
$
|
958
|
|
|
$
|
37,187
|
|
Liabilities of disposal group held for sale
|
|
$
|
32,036
|
|
|
$
|
958
|
|
|
$
|
37,187
|
|
(a)
Balance as of December 31, 2015 for the assets and liabilities of the disposal group held for sale at September 30, 2016, inclusive of the Arkansas and Roswell office buildings sold as detailed below and included in the actual balance at December 31, 2015.
On February 9, 2016, the Company sold an office building in Arkansas for
$0.3 million
. The office space was unencumbered.
On April 25, 2016, the Company completed the sale of an owned office building located in Roswell, Georgia for
$0.7 million
. Debt obligations on the transaction exceeded proceeds by
$0.2 million
.
On July 28, 2016, the Company completed the sale of
one
of its unencumbered office buildings located in Roswell, Georgia for
$0.2 million
.
On October 6, 2016, the Company completed the sale of the Arkansas Facilities (see
Note 16 - Subsequent Events).
NOTE 11.
COMMON AND PREFERRED STOCK
Common Stock Repurchase Activity and Dividends
In the
nine months ended
September 30, 2016
, the Company repurchased
150,000
shares of common stock pursuant to the share repurchase program announced on November 12, 2015 (the “Repurchase Program”) at an average purchase price of approximately
$2.05
per share, exclusive of commissions and related fees. Pursuant to the Repurchase Program, the Company was authorized to repurchase up to
500,000
shares of its outstanding common stock during a
twelve
-month period. The Repurchase Program expired in accordance with its terms upon completion of such twelve-month period on November 12, 2016. During the quarter ended
September 30, 2016
, the Company made no repurchases of common stock. For information on the Company’s new share repurchase programs, see
Note 16 - Subsequent Events
.
There were
no
cash dividends paid to shareholders of common stock of record during the
three and nine
month periods ended
September 30, 2016
.
On
March 31, 2015
, the Board declared a cash dividend of
$0.05
per share to shareholders of common stock of record as of
April 15, 2015
. The cash dividend was paid on
April 30, 2015
.
On
June 30, 2015
, the Board declared a cash dividend of
$0.055
per share to shareholders of common stock of record as of
July 15, 2015
. The cash dividend was paid on
July 31, 2015
.
On
September 29, 2015
, the Board declared a cash dividend of
$0.06
per share to shareholders of common stock of record as of
October 15, 2015
. The
$1.2 million
dividend payable is recorded as part of accrued expenses at
September 30, 2015
. The cash dividend was paid on
October 31, 2015
.
Preferred Stock
The liquidation preference of the Series A Preferred Stock is
$25
per share. Cumulative dividends accrue and are paid in the amount of
$2.72
per share each year, which is equivalent to
10.875%
of the
$25
liquidation preference per share. The dividend rate may increase under certain circumstances.
Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a “Change of Control,” as defined in the Company’s Articles of Incorporation. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying
$25
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.
Preferred Stock Offerings and Dividends
The following table summarizes the shares of the Series A Preferred Stock issued by the Company and net proceeds received from issuance of the Series A Preferred Stock for the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued and Outstanding
|
|
Net Proceeds Received (in 000's)
|
|
Dividends Paid (in 000’s)
|
Balance, December 31, 2015
|
|
2,426,930
|
|
|
$
|
54,714
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Activity for the three months ended :
|
|
|
|
|
|
|
March 31, 2016
|
|
186,905
|
|
|
3,677
|
|
|
1,777
|
|
June 30, 2016
|
|
43,204
|
|
|
870
|
|
|
1,801
|
|
September 30, 2016
|
|
106,796
|
|
|
2,243
|
|
|
1,879
|
|
Total
|
|
336,905
|
|
|
6,790
|
|
|
5,457
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
2,763,835
|
|
|
$
|
61,504
|
|
|
$
|
—
|
|
NOTE 12.
STOCK BASED COMPENSATION
For the
three and nine months ended
September 30, 2016
and
2015
, the Company recognized stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(Amounts in 000’s)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Employee compensation:
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
112
|
|
|
$
|
301
|
|
Stock options
|
|
62
|
|
|
11
|
|
|
213
|
|
|
56
|
|
Warrants
|
|
118
|
|
|
54
|
|
|
494
|
|
|
139
|
|
Total employee stock-based compensation expense
|
|
$
|
180
|
|
|
$
|
175
|
|
|
$
|
819
|
|
|
$
|
496
|
|
Non-employee compensation:
|
|
|
|
|
|
|
|
|
|
Board restricted stock
|
|
(23
|
)
|
|
57
|
|
|
$
|
34
|
|
|
$
|
144
|
|
Board stock options
|
|
13
|
|
|
13
|
|
|
37
|
|
|
37
|
|
Total non-employee stock-based compensation expense
|
|
$
|
(10
|
)
|
|
$
|
70
|
|
|
$
|
71
|
|
|
$
|
181
|
|
Total stock-based compensation expense
|
|
$
|
170
|
|
|
$
|
245
|
|
|
$
|
890
|
|
|
$
|
677
|
|
Stock Incentive Plan
The 2011 Stock Incentive Plan, which expires March 28, 2021, provides for a maximum of
2,152,500
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. The number of securities remaining available for future issuance is
671,469
, which includes
45,075
of pending forfeitures and excludes
59,258
pending issuances from a warrant exercise.
In addition to the Company’s stock option 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
nine months ended
September 30, 2016
and
September 30, 2015
, using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
*
|
2015
|
Dividend yield
|
—
|
%
|
|
4.76
|
%
|
Expected volatility
|
41
|
%
|
|
39
|
%
|
Risk-free interest rate
|
1.43
|
%
|
|
1.09
|
%
|
Expected term in years
|
5.0 years
|
|
|
3.9 years
|
|
*
No outstanding issuances during the current period.
Common Stock Options
The following table summarizes the Company’s common stock option activity for the
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in 000's)
|
Outstanding, December 31, 2015
|
266,514
|
|
|
$
|
3.96
|
|
|
|
|
|
|
Granted
|
141,507
|
|
|
$
|
2.07
|
|
|
|
|
|
|
Forfeited
|
(8,334
|
)
|
|
$
|
4.06
|
|
|
|
|
|
|
Expired
|
(44,905
|
)
|
|
$
|
3.86
|
|
|
|
|
|
Outstanding, September 30, 2016
|
354,782
|
|
|
$
|
3.21
|
|
|
5.8
|
|
$
|
—
|
|
Vested at September 30, 2016
|
285,628
|
|
|
$
|
3.05
|
|
|
5.2
|
|
$
|
—
|
|
On January 27, 2016, the Board granted
77,186
and
64,321
common stock options to its Chief Executive Officer and Chief Financial Officer, respectively, as part of their 2015 performance bonuses. The options vested immediately upon grant and are exercisable at
$2.07
per share. The weighted-average grant date fair value for the options granted was approximately
$0.78
per option.
The following table summarizes the common stock options outstanding and exercisable as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Options Exercisable
|
Exercise Price
|
Number of Shares
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested at September 30, 2016
|
|
Weighted Average Exercise Price
|
$1.31 - $3.99
|
289,337
|
|
|
5.5
|
|
$
|
3.01
|
|
|
220,183
|
|
|
$
|
2.73
|
|
$4.00 - $4.30
|
65,445
|
|
|
7.0
|
|
$
|
4.12
|
|
|
65,445
|
|
|
$
|
4.12
|
|
Total
|
354,782
|
|
|
5.8
|
|
$
|
3.21
|
|
|
285,628
|
|
|
$
|
3.05
|
|
For options unvested at
September 30, 2016
,
$0.1 million
in compensation expense will be recognized over the next
1.2
years.
Common Stock Warrants
The following table summarizes the Company’s common stock warrant activity for the
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in 000's)
|
Outstanding, December 31, 2015
|
2,051,475
|
|
|
$
|
3.46
|
|
|
|
|
|
|
Expired
|
(55,125
|
)
|
|
$
|
4.08
|
|
|
|
|
|
Outstanding, September 30, 2016
|
1,996,350
|
|
|
$
|
3.44
|
|
|
4.1
|
|
$
|
170
|
|
Vested at September 30, 2016
|
1,613,017
|
|
|
$
|
3.22
|
|
|
3.2
|
|
$
|
170
|
|
The following table summarizes the common stock warrants outstanding and exercisable as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
Exercise Price
|
Number of Shares
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Vested at September 30, 2016
|
|
Weighted Average Exercise Price
|
$0 - $1.99
|
327,664
|
|
|
1.1
|
|
$
|
1.56
|
|
|
327,664
|
|
|
$
|
1.56
|
|
$2.00 - $2.99
|
335,354
|
|
|
1.8
|
|
$
|
2.58
|
|
|
335,354
|
|
|
$
|
2.58
|
|
$3.00 - $3.99
|
500,355
|
|
|
3.1
|
|
$
|
3.59
|
|
|
500,355
|
|
|
$
|
3.59
|
|
$4.00 - $4.99
|
809,644
|
|
|
6.9
|
|
$
|
4.39
|
|
|
426,311
|
|
|
$
|
4.41
|
|
$5.00 - $5.90
|
23,333
|
|
|
6.6
|
|
$
|
5.90
|
|
|
23,333
|
|
|
$
|
5.90
|
|
Total
|
1,996,350
|
|
|
4.1
|
|
$
|
3.44
|
|
|
1,613,017
|
|
|
$
|
3.22
|
|
For warrants unvested at
September 30, 2016
,
$0.3 million
in compensation expense will be recognized over the next
1.2
years.
Restricted Stock
The following table summarizes the Company’s restricted stock activity for the
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Avg. Grant Date Fair Value
|
Unvested at December 31, 2015
|
294,021
|
|
|
$
|
4.19
|
|
|
Granted
|
196,251
|
|
|
$
|
2.14
|
|
|
Vested
|
(94,808
|
)
|
|
$
|
3.01
|
|
|
Forfeited
|
(11,688
|
)
|
|
$
|
2.49
|
|
Unvested at September 30, 2016
|
383,776
|
|
|
$
|
3.49
|
|
On January 1, 2016, the Company granted to its Chief Accounting Officer and certain employees
7,792
and
26,622
shares of restricted stock, respectively, with a weighted average grant-date fair value of
$2.49
per share, as part of their 2015 performance bonuses. The restricted shares vest as to one-third of the total shares granted on December 31, 2016, December 31, 2017 and December 31, 2018.
On January 27, 2016, the Board granted to the Company’s Chief Executive Officer and Chief Financial Officer
28,986
and
24,155
shares of restricted stock, respectively, with a weighted average grant-date fair value of
$2.07
per share, as part of their 2015 performance bonuses. The restricted shares vested immediately upon grant.
On January 27, 2016, three non-management members of the Board were each granted
36,232
shares of restricted stock with a weighted average grant-date fair value of
$2.07
per share, as compensation for their services as Directors. The restricted shares vest on the following schedule: (i)
12,077
shares on January 27, 2017; (ii)
12,077
shares of January 27, 2018; and (iii)
12,078
shares on January 27, 2019.
For restricted stock unvested at
September 30, 2016
,
$0.8 million
in compensation expense will be recognized over the next
2.2
years.
NOTE 13.
.
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 Sublessees were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of
$29,500
per month payable in advance on or before the first day of each month (except for the first special rent payment, which 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 HAH, for working capital purposes, and, in connection therewith, HAH executed 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, 2015
. On October 6, 2015, HAH and the Company entered into a security agreement, whereby HAH granted the Company a security interest in all accounts arising from the business of HAH and the Aria Sublessees, and all rights to payment from patients, residents, private insurers and others arising from the business of HAH and the Aria Sublessees (including any proceeds thereof), as security for payment of the HAH Note, as amended, and certain rent and security deposit obligations of the Aria Sublessees under Aria Subleases. The Company is currently seeking the repayment of the Note in accordance with its terms and expects full repayment. For further information, see
Note 7 - Leases
.
The Aria Lease Inducement and HAH Note entered into by the Company create a variable interest that may absorb some or all of the VIE’s expected losses. The Company does not consolidate the operating activities of the Aria Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance.
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.
Beacon.
On August 1, 2015, the Company entered into a Lease Inducement Fee Agreement with certain affiliates of Beacon Health Management, LLC (“Beacon”), pursuant to which the Company paid a fee of
$1.0 million
as a lease inducement for certain affiliates of Beacon (the “Beacon Sublessees”) to enter into sublease agreements and to commence such subleases and transfer operations thereunder (the “Beacon Lease Inducement”). The inducement fee was paid net of certain other fees and costs owed by the affiliates of, including the first month of base rent for all of the Beacon facilities and the first month of special rent pertaining to the
four
of such facilities.
On August 1, 2015, the Company made a short-term loan to certain affiliates of Beacon (collectively, the “Beacon Affiliates”) and, in connection therewith, the Beacon Affiliates executed a promissory note maturing on May 31, 2016 in the amount
$0.6 million
(the “Beacon Note”), as amended, in favor of the Company. Interest accrues on the unpaid principal balance of the note at a rate of
18%
per annum. Until all amounts due and owing under the note have been paid, the Beacon Sublessees will not pledge, as security, any of the accounts receivable relating to the respective facilities that such entities sublease from affiliates of the Company. As of June 30, 2016,
$0.6 million
outstanding principal on the Beacon Note was re-paid in full.
The Beacon Lease Inducement and Beacon Note create a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the Beacon Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance.
Peach Health.
In connection with the Peach Health Sublease, the Company extended the LOC to Peach Health Sublessee in an amount of up to
$1.0 million
, with interest accruing on the unpaid balance under the LOC at a rate of
13.5%
per annum. The entire principal amount due under the LOC, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The LOC is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Peach Health Sublessee. As of
September 30, 2016
,
$0.4 million
was outstanding on the LOC. For further information on the Peach Health Sublease, see
Note 7 - Leases
.
The LOC 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 14.
COMMITMENTS AND CONTINGENCIES
Regulatory Matters
Laws and regulations governing federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. In February and May 2016, CMS decertified the Jeffersonville and Oceanside Facilities respectively, meaning the facilities can no longer accept Medicare or Medicaid patients. For further information, 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
. The Company was a defendant in a purported class action lawsuit captioned Amy Cleveland et. al. v. APHR&R Nursing, LLC et al filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit (the “Amy Cleveland Class Action”). On December 16, 2015, the Company’s insurance carrier reached a settlement with each of the individual plaintiffs on behalf of the Company and all other defendants pursuant to which separate payments were to be made by the Company’s insurance carrier to the plaintiffs. The individual settlements were contingent on approval by the probate courts having jurisdiction over the deceased plaintiffs’ respective estates, if applicable. As of June 30, 2016, all of the individual settlement agreements had been approved and the settlement consideration paid to the plaintiffs.
As of September 30, 2016, the Company was a defendant in a total of
33
professional and general liability cases, (some of which may be covered by the Company’s insurance) from current or former patients, including 16 cases recently filed in the State of Arkansas by the same plaintiff attorney who represented the plaintiffs in the Amy Cleveland Class Action. The claims generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured while patients of facilities operated by the Company due to professional negligence and/or understaffing. The Company self-insures against these risks and uses a third party administrator and outside counsel to manage and defend the claims. The cases 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
$1.5 million
and
$0.2 million
at
September 30, 2016
, and
December 31, 2015
, respectively.
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. 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 or results of operations, the Company believes it has meritorious defenses and intends to defend the OAG’s allegations vigorously.
NOTE 15.
RELATED PARTY TRANSACTIONS
Personal Guarantor on Loan Agreements
Christopher Brogdon, a former director of the Company and a greater than
5%
beneficial owner of the common stock, serves as personal guarantor on certain loan agreements, entered into by the Company prior to 2015, related to the following properties: (i) a previously owned office buildings located in Roswell, Georgia, which loan was repaid during the third quarter of 2016; (ii)
College Park, a
95
-bed skilled nursing facility located in College Park, Georgia; (iii) Attalla, a
182
-bed skilled nursing facility located in Attalla, Alabama; and (iv) Coosa Valley,
122
-bed skilled nursing facility located in Glencoe, Alabama. At
September 30, 2016
, the total outstanding principal owed under the loans was approximately
$17.9 million
, including
$2.4 million
of senior debt related to the College Park facility, which was repaid on October 6, 2016 (see
Note 16 - Subsequent Events).
Consulting Agreement
The Company had a Consulting Agreement (as amended, the “Consulting Agreement”) with Mr. Brogdon pursuant to which Mr. Brogdon was compensated by the Company for providing consulting services related to the acquisition and financing of skilled nursing facilities. On March 21, 2016, the Company and Mr. Brogdon entered into a letter agreement whereby the Company and Mr. Brogdon agreed that the Consulting Agreement was terminated as of November 20, 2015. As of
September 30, 2016
, there was an outstanding balance of
$0.3 million
with respect to a promissory note by Mr. Brogdon in favor of the Company. For information on an amendment to such note, (see
Note 16 - Subsequent Events)
.
NOTE 16.
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.
Completion of Sale of Arkansas Facilities
On October 6, 2016, the Company completed the sale of the Arkansas Facilities, together with substantially all of the fixtures, equipment, furniture and other assets relating to such facilities, to the Purchaser, pursuant the Purchase Agreement, as subsequently amended. The Arkansas Facilities consist of:
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River Valley Health and Rehabilitation Center, a
129
-bed skilled nursing facility located in Fort Smith, Arkansas;
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Heritage Park Nursing Center, a
110
-bed skilled nursing facility located in Rogers, Arkansas;
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Homestead Manor Nursing Home, a
104
-bed skilled nursing facility located in Stamps, Arkansas;
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Stone County Nursing and Rehabilitation Center, a
97
-bed skilled nursing facility located in Mountain View, Arkansas;
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Stone County Residential Care Center, a
32
-bed assisted living facility located in Mountain View, Arkansas;
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Northridge Health Care, a
140
-bed skilled nursing facility located in North Little Rock, Arkansas;
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Little Rock Health & Rehabilitation, a
154
-bed skilled nursing facility located in Little Rock, Arkansas;
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Woodland Hills Health & Rehabilitation, a
140
-bed skilled nursing facility located in Little Rock, Arkansas; and
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Cumberland Health & Rehabilitation Center, a
120
-bed skilled nursing facility located in Little Rock, Arkansas.
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Prior to the closing of the sale of the Arkansas Facilities (the “Closing”), the Skyline Lessors leased the Arkansas Facilities to the Skyline Lessee pursuant to the Skyline Lease. For further information, see
Note 7 - Leases
.
The aggregate purchase price paid to the Company for the Arkansas Facilities was
$55.0 million
, which purchase price consisted of: (i) a non-refundable deposit of
$1.8 million
; (ii) cash consideration of
$50.3 million
paid to the Skyline Lessors at the Closing; and (iii) the Skyline Note, from JS Highland Holdings LLC, an affiliate of Skyline (the “Borrower”), in favor of the Company with a principal amount of
$3.0 million
.
The principal amount of the Skyline Note, together with all accrued and unpaid interest, is due and payable on March 31, 2022 (the “Maturity Date”). The Borrower is required to make payments of interest only commencing on October 30, 2016 and on the last day of each month thereafter until the Maturity Date. The Skyline Note provides that simple interest shall accrue on the unpaid balance of the Skyline Note at rate of ten percent (
10%
) per annum. Such interest rate will increase by two percent (
2%
) on each anniversary date of the Skyline Note beginning in year
three
if such note is still outstanding at that time. The Skyline Note is guaranteed by Joseph Schwartz and Roselyn Schwartz (collectively, the “Guarantors”), pursuant to a Guaranty Agreement, dated September 30, 2016 (the “Guaranty”), executed by the Guarantors in favor of the Company.
In connection with the Closing, the Company entered into a Subordination and Standstill Agreement, dated September 26, 2016 (the “Subordination Agreement”), with the PrivateBank, as agent for the lenders specified therein (collectively, the “Lenders”). Pursuant to the Subordination Agreement, the Company agreed to subordinate its claims and rights to receive payment under the Skyline Note or any document which may evidence or secure the indebtedness evidenced by such note, other than the Guaranty (collectively, the “Subordinated Debt”), to the claims and rights of the Lenders to receive payment under certain revolving loans, with an initial aggregate principal amount of
$6.0 million
, and certain term loans, with an aggregate principal amount of
$45.6 million
(collectively, the “Loans”), each extended by certain of the Lenders to affiliates of Skyline (collectively, the “Skyline Borrowers”). Pursuant to the Subordination Agreement, the Company may not accept payment of the Subordinated Debt, or take
any action to collect such payment, if: (i) the Company has received notice from the Lenders that the Skyline Borrowers have failed to meet a specified financial covenant with respect to the Loans; or (ii) a default has occurred or is continuing with respect to the Loans. Pursuant to the Guaranty, the Guarantors have agreed to pay the outstanding principal amount of the Skyline Note, together with all accrued and unpaid interest: (x) on the date on which the Borrower or an affiliate thereof repays or refinances any of the Loans; (y) on the date on which the Borrower or its affiliates sells any of the Arkansas Facilities which the Borrower or its affiliates purchased with proceeds from the Loans; or (z) upon written notice from the Company to the Guarantors any time on or after the two year anniversary of the Skyline Note.
New Share Repurchase Programs
On November 10, 2016, the Board approved new share repurchase programs (the “New Repurchase Programs”), pursuant to which the Company is authorized to repurchase up to
1.0 million
shares of the common stock and
100,000
shares of the Series A Preferred Stock during a twelve-month period. The New Repurchase Programs succeed the Repurchase Program announced on November 12, 2015, which terminated in accordance with its terms. Share repurchases under the New Repurchase Programs may be made from time to time through open market transactions, block trades or privately negotiated transactions and are subject to market conditions, as well as corporate, regulatory and other considerations. The New Repurchase Programs may be suspended or discontinued at any time, and the Company has no obligation to repurchase any amount of the common stock or the Series A Preferred Stock under such programs.
Lender Commitment to Refinance Debt, Extend Maturities and Repayment of Debt
On
March 24, 2016
, the Company obtained a lender commitment to extend the maturity date of the credit facility entered into on January 30, 2015 between certain-wholly owned subsidiaries of the Company and the PrivateBank (the “Sumter Credit Facility” from September 2016 to June 2017, subject to definitive documentation and certain closing conditions, which commitment expires on November 30, 2016. On June 13, 2016, the Company received a firm commitment to refinance the Sumter Credit Facility subject to definitive documentation and certain closing conditions. The Company expects to close on such financing arrangement with HUD in the fourth quarter of 2016.
On October 6, 2016, in conjunction with the sale of the Arkansas Facilities, the Company repaid
$2.4 million
of debt associated with the College Park Facility.
Amendment to Promissory Note
As previously indicated, the Company is the holder of a promissory note issued by Mr. Brogdon in favor of the Company, as subsequently amended, which promissory note had an outstanding principal balance of
$0.3 million
as of September 30, 2016. On November 10, 2016, the Company and Mr. Brogdon agreed to further amend such promissory note 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.