ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in
ten
states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. Additionally, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.
As of
June 30, 2019
, the Company’s continuing operations consist of
72
nursing centers with
8,214
licensed nursing beds. The Company owns
15
and leases
57
of its nursing centers. Our nursing centers range in size from
48
to
320
licensed nursing beds. The licensed nursing bed count does not include
429
licensed assisted living and residential beds.
Key Performance Metrics
Skilled Mix
. Skilled mix represents the number of days our Medicare or Managed Care patients are receiving services at the skilled nursing facilities divided by the total number of days (less days from assisted living patients).
Average rate per day.
Average rate per day is the revenue by payor source for a period at the skilled nursing facility divided by actual patient days for the revenue source for a given period.
Average daily skilled nursing census
. Average daily skilled nursing census is the average number of patients who are receiving skilled nursing care.
Strategic Operating Initiatives
We identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving our facilities' quality metrics, improving skilled mix in our nursing centers, improving our average Medicare rate, implementing and maintaining Electronic Medical Records (“EMR”) to improve Medicaid capture, and completing strategic acquisitions and divestitures. We have experienced success in some of these initiatives and expect to continue to build on these improvements. In light of challenges facing the industry and the Company specifically, including the unresolved governmental investigation, we believe that now is not the time to attempt to engage in a company-wide strategic transaction.
Improving skilled mix and average Medicare rate:
One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships
that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the three months ended
June 30, 2019
and
2018
was
14.3%
and
14.8%
, respectively.
Utilizing Electronic Medical Records to improve Medicaid acuity capture:
As another part of our strategic operating initiatives, all of our nursing centers utilize EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. By using EMR, we have increased our average Medicaid rate despite rate cuts in certain acuity based states by accurate and timely capture of care delivery.
Completing strategic transactions:
Our strategic operating initiatives include a renewed focus on completing strategic acquisitions and divestitures. We continue to pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within our existing geographic areas of operation. As part of our strategic efforts, we have also performed thorough analysis on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business.
On May 22, 2019, the Company announced that it entered into an agreement with Omega Healthcare Investors to amend its master lease to terminate operations of ten nursing facilities, totaling approximately 885 skilled nursing beds, located in Kentucky and to concurrently transfer operations to an operator selected by Omega. The transaction is subject to closing conditions, including but not limited to, state licensure and regulatory approval, due diligence and successful sale of the real estate by Omega. Upon the completion of the transaction, Diversicare will no longer operate any skilled nursing centers in the State of Kentucky. The transaction is expected to become effective in the third quarter of 2019.
The Company recently expanded its participation in QIPP as administered by the Texas Health and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had
one
of its Texas skilled nursing centers participating in the QIPP. During April 2019, the Company enrolled an additional
eleven
of its Texas skilled nursing centers in the program, such that
twelve
of the Company’s centers will participate in the QIPP effective September 1, 2019. To allow
four
of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district already participating in the QIPP, providing for the transfer of the provider license from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district.
On October 30, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and Rehabilitation LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC, Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the operations of Diversicare of Fulton, Diversicare of Clinton and Diversicare of Glasgow (the "Properties"). The purchase price of the Properties was
$18.7 million
and the sale was effective on December 1, 2018.
On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the "Lessor") to lease
34
centers currently owned by the Lessor and operated by Diversicare. The old Master Lease with the Lessor provided for its operation of
23
skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operates
11
centers owned by the Lessor under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by Diversicare and the Lessor consolidates the leases for all
34
centers under one New Master Lease. The Lease has an initial term of
twelve
years with
two
optional
10
year extensions. The Lease has a common date of annual lease fixed escalators of
2.15%
beginning on October 1, 2019.
On July 8, 2018, the Company entered into a membership interest purchase agreement with ALS Ontario Operating, Inc. to transfer all of the issued and outstanding membership units of Ontario Pointe, a stand-alone
50
bed assisted living facility. The termination of this lease was effective on October 1, 2018.
Basis of Financial Statements
Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.
Critical Accounting Policies and Judgments
A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our
2018
Annual Report on Form 10-K.
Revenue Sources
We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and Private Pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. The Private Pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the Private Pay and other payors are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.
The following table sets forth net patient and resident revenues related to our continuing operations by primary payor source for the periods presented (dollar amounts in thousands). The balances below reflect the adoption of ASC 606 in January 2018. Refer to Note 4 "Revenue Recognition" to the interim consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Medicaid
|
$
|
64,284
|
|
47.5
|
%
|
|
$
|
65,603
|
|
46.5
|
%
|
|
$
|
127,815
|
|
47.4
|
%
|
|
$
|
129,489
|
|
45.9
|
%
|
|
Medicare
|
24,291
|
|
17.9
|
%
|
|
27,863
|
|
19.7
|
%
|
|
49,346
|
|
18.3
|
%
|
|
57,614
|
|
20.4
|
%
|
|
Managed Care
|
14,161
|
|
10.5
|
%
|
|
13,303
|
|
9.4
|
%
|
|
28,336
|
|
10.5
|
%
|
|
27,515
|
|
9.7
|
%
|
|
Private Pay and other
|
32,634
|
|
24.1
|
%
|
|
34,313
|
|
24.4
|
%
|
|
64,226
|
|
23.8
|
%
|
|
67,749
|
|
24.0
|
%
|
|
Total
|
$
|
135,370
|
|
100.0
|
%
|
|
$
|
141,082
|
|
100.0
|
%
|
|
$
|
269,723
|
|
100.0
|
%
|
|
$
|
282,367
|
|
100.0
|
%
|
The following table sets forth average daily skilled nursing census by primary payor source for our continuing operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Medicaid
|
4,462
|
|
|
69.2
|
%
|
|
4,645
|
|
|
68.9
|
%
|
|
4,443
|
|
68.9
|
%
|
|
4,617
|
|
68.4
|
%
|
|
Medicare
|
625
|
|
|
9.7
|
%
|
|
715
|
|
|
10.6
|
%
|
|
638
|
|
9.9
|
%
|
|
749
|
|
11.1
|
%
|
|
Managed Care
|
296
|
|
|
4.6
|
%
|
|
281
|
|
|
4.2
|
%
|
|
302
|
|
4.7
|
%
|
|
292
|
|
4.3
|
%
|
|
Private Pay and other
|
1,068
|
|
|
16.5
|
%
|
|
1,105
|
|
|
16.3
|
%
|
|
1,065
|
|
16.5
|
%
|
|
1,093
|
|
16.2
|
%
|
|
Total
|
6,451
|
|
|
100.0
|
%
|
|
6,746
|
|
|
100.0
|
%
|
|
6,448
|
|
100.0
|
%
|
|
6,751
|
|
100.0
|
%
|
Consistent with the nursing home industry in general, changes in the mix of a facility’s patient population among Medicaid, Medicare, Managed Care, and Private Pay and other can significantly affect the profitability of the facility’s operations.
Health Care Industry
The health care industry is subject to regulation by numerous federal, state, and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of patient care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of a number of statutes and regulations, including those regulating fraud and abuse, false claims, patient privacy and quality of care issues. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time.
In recent years, the U.S. Congress and some state legislatures have considered and enacted significant legislation concerning health care and health insurance. The most prominent of these efforts, the Affordable Care Act, affects how health care services are covered, delivered and reimbursed. As currently structured, the Affordable Care Act expands coverage through a combination of public program expansion and private sector reforms, provides for reduced growth in Medicare program spending, and promotes initiatives that tie reimbursement to quality and care coordination. Some of the provisions, such as the requirement that large employers provide health insurance benefits to full-time employees, have increased our operating expenses. The Affordable Care Act expands the role of home-based and community services, which may place downward pressure on our sustaining population
of Medicaid patients. Reforms that we believe may have a material impact on the long-term care industry and on our business include, among others, possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. However, there is considerable uncertainty regarding the future of the Affordable Care Act. The Presidential administration and certain members of Congress have made and expressed their intent to repeal or make additional significant changes to the law, its implementation or its interpretation. For example, effective January 1, 2019, Congress eliminated the financial penalty associated with the individual mandate. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire law was unconstitutional. However, the law remains in place pending appeal.
Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay. CMS has instituted a number of test programs designed to extend the reimbursement and financial responsibilities under consolidating billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to, home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Currently, these test programs for bundled reimbursement are confined to a small set of clinical conditions, but CMS has indicated that it is developing additional bundled payment models. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. The potential impact on skilled nursing center utilization and reimbursement is currently unknown.
On July 31, 2018, CMS issued a final rule outlining Medicare payment rates for skilled nursing facilities that became effective October 1, 2018. In addition, CMS updated the SNF market basket percentage to 2.4%, as required by the Bipartisan Budget Act of 2018. CMS finalized a payment system called the Patient-Driven Payment Model ("PDPM") to replace the Resource Utilization Group ("RUG-IV") model. The PDPM is an updated version of the 2017 Advanced Notice of Proposed Rulemaking Resident Classification System Version 1 ("RCS-1"). CMS notes RCS-1 was revised based on stakeholder input. The implementation date for the final system is October 1, 2019. CMS will use a budget neutrality factor to satisfy the requirement that PDPM be budget neutral relative to RUG-IV. CMS stated that it intends for the new model not to change the aggregate amount of Medicare payments to SNFs, but to more accurately reflect resource utilization.
CMS publishes rankings based on performance scores on the Nursing Home Compare website, which is intended to assist the public in finding and comparing skilled care providers. The Nursing Home Compare website also publishes for each nursing home a rating between 1 and 5 stars as part of CMS’s Five-Star Quality Rating System. An overall star rating is determined based on three components (information from the last three years of health inspections, staffing information, and quality measures), each of which also has its own five-star rating. The ratings are based, in part, on the quality data nursing centers are required to report. For example, nursing centers must report the percentage of short-stay residents who are successfully discharged into the community and the percentage who had an outpatient emergency department visit.
In March 2019, CMS announced changes to the Five-Star Quality Rating System, effective April 2019. These changes include revisions to the inspection process, adjustment of staffing rating thresholds, including increased emphasis on registered nurse staffing, implementation of new quality measures, and changes in the scoring of various quality measures. CMS added two new quality measures: Long-stay emergency department transfers and long-stay hospitalizations. CMS also established separate quality ratings for short-stay and long-stay residents, and will now provide separate short-stay and long-stay ratings in addition to the overall quality measure rating. Ratings for the quality measures are based on 17 of the quality measures posted on the Nursing Home Compare website.
The impact of the most recent five star rating methodology is expected to be significant across the industry. The change in star ratings may be confusing to consumers. A center could lose stars as a result of these changes despite not changing its operations. These changes will also make comparisons to prior reporting periods not relevant. We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results. Our focus has been and continues to be on the delivery of quality care to our patients and residents.
Contractual Obligations and Commercial Commitments
We have certain contractual obligations of continuing operations as of
June 30, 2019
, summarized by the period in which payment is due, as follows (dollar amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
After
5 Years
|
|
Long-term debt obligations
(1)
|
$
|
84,384
|
|
|
$
|
15,412
|
|
|
$
|
68,829
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
Settlement obligations
(2)
|
2,010
|
|
|
2,010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Operating leases
(3)
|
595,517
|
|
|
58,853
|
|
|
121,114
|
|
|
125,584
|
|
|
289,966
|
|
|
Required capital expenditures under operating leases
(4)
|
24,319
|
|
|
2,516
|
|
|
5,032
|
|
|
5,032
|
|
|
11,739
|
|
|
Total
|
$
|
706,230
|
|
|
$
|
78,791
|
|
|
$
|
194,975
|
|
|
$
|
130,759
|
|
|
$
|
301,705
|
|
|
|
|
|
(1)
|
Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our finance lease obligations. Our long-term debt obligations decreased
$0.5 million
between December 31, 2018 and
June 30, 2019
. See Note 5, "Long-Term Debt and Interest Rate Swap," to the interim consolidated financial statements included in this report for additional information.
|
|
|
|
|
(2)
|
Settlement obligations relate to professional liability cases that are expected to be paid within the next twelve months. The professional liabilities are included in our current portion of self-insurance reserves.
|
|
|
|
|
(3)
|
Represents minimum annual lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease agreements, which does not include renewals. Our operating lease obligations decreased
$29.4 million
between
December 31, 2018
and
June 30, 2019
. See Note 6, "Leases," to the interim consolidated financial statements included in this report for additional information.
|
|
|
|
|
(4)
|
Includes annual expenditure requirements under operating leases. Our required capital expenditures decreased
$2.2 million
between
December 31, 2018
and
June 30, 2019
.
|
Employment Agreements
We have employment agreements with certain members of management that provide for the payment to these members of amounts up to
two
times their annual salary in the event of a termination without cause, a constructive discharge (as defined therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately
$1.7 million
as of
June 30, 2019
. The terms of such agreements are for
one
year and automatically renew for
one
year if not terminated by us or the employee.
Civil Investigative Demand
In July 2013, the Company learned that the United States Attorney for the Middle District of Tennessee DOJ had commenced a civil investigation of potential violations of the FCA.
In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the
two
centers that were subject of the original CID. In connection with this matter, between July 2013 and early February 2016, the Company received
three
civil investigative demands (a form of subpoena) for documents. The Company has responded to those demands and also provided voluntarily additional information requested by the DOJ. The DOJ has also taken testimony from current and former employees of the Company. In May 2018, the Company learned that a second FCA complaint had been filed in late 2016 relating to the Company’s practices and policies for rehabilitation therapy at some of its facilities. The government’s investigation relates to the Company’s practices and policies for rehabilitation and other services at all of its facilities, for PAEs required by TennCare and for PASRRs required by the Medicare program.
In June, 2019, the Company and the U.S. DOJ reached an agreement in principle on the financial terms of a settlement regarding this investigation in the amount of $9.5 million. The Company has agreed to the settlement in principle in order to avoid the uncertainty and expense of litigation.
See additional description of our contingencies in Note 7 "Commitments and Contingencies" to the interim consolidated financial statements.
Results of Operations
The following tables present the unaudited interim consolidated statements of operations and related data for the three and six month periods ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Change
|
|
%
|
|
PATIENT REVENUES, net
|
$
|
135,370
|
|
|
$
|
141,082
|
|
|
$
|
(5,712
|
)
|
|
(4.0
|
)%
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Operating
|
108,641
|
|
|
111,440
|
|
|
(2,799
|
)
|
|
(2.5
|
)%
|
|
Lease and rent expense
|
15,802
|
|
|
13,725
|
|
|
2,077
|
|
|
15.1
|
%
|
|
Professional liability
|
2,957
|
|
|
3,182
|
|
|
(225
|
)
|
|
(7.1
|
)%
|
|
Litigation contingency expense
|
3,100
|
|
|
—
|
|
|
3,100
|
|
|
100.0
|
%
|
|
General and administrative
|
7,594
|
|
|
9,295
|
|
|
(1,701
|
)
|
|
(18.3
|
)%
|
|
Depreciation and amortization
|
3,002
|
|
|
2,847
|
|
|
155
|
|
|
5.4
|
%
|
|
Total expenses
|
141,096
|
|
|
140,489
|
|
|
607
|
|
|
0.4
|
%
|
|
OPERATING INCOME (LOSS)
|
(5,726
|
)
|
|
593
|
|
|
(6,319
|
)
|
|
N/M
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
308
|
|
|
(308
|
)
|
|
(100.0
|
)%
|
|
Other income
|
45
|
|
|
28
|
|
|
17
|
|
|
60.7
|
%
|
|
Interest expense, net
|
(1,556
|
)
|
|
(1,661
|
)
|
|
105
|
|
|
6.3
|
%
|
|
Total other expenses
|
(1,511
|
)
|
|
(1,325
|
)
|
|
(186
|
)
|
|
(14.0
|
)%
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
(7,237
|
)
|
|
(732
|
)
|
|
(6,505
|
)
|
|
N/M
|
|
BENEFIT (PROVISION)FOR INCOME TAXES
|
(17,351
|
)
|
|
425
|
|
|
(17,776
|
)
|
|
N/M
|
|
LOSS FROM CONTINUING OPERATIONS
|
$
|
(24,588
|
)
|
|
$
|
(307
|
)
|
|
$
|
(24,281
|
)
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Change
|
|
%
|
|
PATIENT REVENUES, net
|
$
|
269,723
|
|
|
$
|
282,367
|
|
|
$
|
(12,644
|
)
|
|
(4.5
|
)%
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Operating
|
216,754
|
|
|
223,718
|
|
|
(6,964
|
)
|
|
(3.1
|
)%
|
|
Lease and rent expense
|
31,606
|
|
|
27,438
|
|
|
4,168
|
|
|
15.2
|
%
|
|
Professional liability
|
6,378
|
|
|
5,957
|
|
|
421
|
|
|
7.1
|
%
|
|
Litigation contingency expense
|
3,100
|
|
|
—
|
|
|
3,100
|
|
|
100.0
|
%
|
|
General and administrative
|
15,107
|
|
|
17,434
|
|
|
(2,327
|
)
|
|
(13.3
|
)%
|
|
Depreciation and amortization
|
5,496
|
|
|
5,728
|
|
|
(232
|
)
|
|
(4.1
|
)%
|
|
Total expenses
|
278,441
|
|
|
280,275
|
|
|
(1,834
|
)
|
|
(0.7
|
)%
|
|
OPERATING INCOME (LOSS)
|
(8,718
|
)
|
|
2,092
|
|
|
(10,810
|
)
|
|
N/M
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
308
|
|
|
(308
|
)
|
|
(100.0
|
)%
|
|
Other income
|
205
|
|
|
79
|
|
|
126
|
|
|
100.0
|
%
|
|
Interest expense, net
|
(3,016
|
)
|
|
(3,330
|
)
|
|
314
|
|
|
9.4
|
%
|
|
Total other expenses
|
(2,811
|
)
|
|
(2,943
|
)
|
|
132
|
|
|
4.5
|
%
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
(11,529
|
)
|
|
(851
|
)
|
|
(10,678
|
)
|
|
N/M
|
|
BENEFIT (PROVISION) FOR INCOME TAXES
|
(16,396
|
)
|
|
463
|
|
|
(16,859
|
)
|
|
N/M
|
|
LOSS FROM CONTINUING OPERATIONS
|
$
|
(27,925
|
)
|
|
$
|
(388
|
)
|
|
$
|
(27,537
|
)
|
|
N/M
|
N/M = Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Revenues
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
PATIENT REVENUES, net
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Operating
|
80.3
|
|
|
79.0
|
|
|
80.4
|
|
|
79.2
|
|
|
Lease and rent expense
|
11.7
|
|
|
9.7
|
|
|
11.7
|
|
|
9.7
|
|
|
Professional liability
|
2.2
|
|
|
2.3
|
|
|
2.4
|
|
|
2.1
|
|
|
Litigation contingency expense
|
2.3
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
General and administrative
|
5.6
|
|
|
6.6
|
|
|
5.6
|
|
|
6.2
|
|
|
Depreciation and amortization
|
2.2
|
|
|
2.0
|
|
|
2.0
|
|
|
2.0
|
|
|
Total expenses
|
104.3
|
|
|
99.6
|
|
|
103.2
|
|
|
99.2
|
|
|
OPERATING INCOME (LOSS)
|
(4.3
|
)
|
|
0.4
|
|
|
(3.2
|
)
|
|
0.8
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.1
|
|
|
Other income
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
Interest expense, net
|
(1.0
|
)
|
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(1.2
|
)
|
|
Total other expenses
|
(1.0
|
)
|
|
(0.9
|
)
|
|
(1.0
|
)
|
|
(1.1
|
)
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
(5.3
|
)
|
|
(0.5
|
)
|
|
(4.3
|
)
|
|
(0.3
|
)
|
|
BENEFIT (PROVISION) FOR INCOME TAXES
|
(12.8
|
)
|
|
0.3
|
|
|
(6.1
|
)
|
|
0.2
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
(18.1
|
)%
|
|
(0.2
|
)%
|
|
(10.4
|
)%
|
|
(0.1
|
)%
|
Three Months Ended
June 30, 2019
Compared To Three Months Ended
June 30, 2018
Patient Revenues
Patient revenues were
$135.4 million
and
$141.1 million
for the three months ended
June 30, 2019
and
2018
, respectively, a decrease of
$
5.7 million
.
The following summarizes the revenue fluctuations attributable to changes in our portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Change
|
|
Same-store revenue
|
$
|
135,370
|
|
|
$
|
136,544
|
|
|
$
|
(1,174
|
)
|
|
2018 disposition revenue
|
—
|
|
|
4,538
|
|
|
(4,538
|
)
|
|
Total revenue
|
$
|
135,370
|
|
|
$
|
141,082
|
|
|
$
|
(5,712
|
)
|
The three Kentucky centers we sold in December 2018 contributed
$4.5 million
of the
$5.7 million
decreases in patient revenues. Our same-store patient revenues decreased by
$1.2 million
. Our average Medicaid rate per patient day for the
second
quarter of
2019
increased compared to the
second
quarter of
2018
, resulting in an increase in revenue of
$1.6 million
, or
2.1%
. Our Hospice and Managed Care average daily census for the
second
quarter of
2019
increased
14.2%
and
7.6%
, respectively, resulting in
$1.0 million
and
$0.8 million
in additional revenue, respectively. Conversely, our Medicare, Medicaid and Private average daily census for the
second
quarter of
2019
decreased
9.6%
,
0.6%
and
13.3%
, respectively, resulting in revenue losses of
$2.7 million
,
$0.4 million
and
$1.4 million
, respectively.
The following table summarizes key revenue and census statistics for continuing operations for each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Skilled nursing occupancy
|
78.5
|
%
|
|
79.8
|
%
|
|
As a percent of total census:
|
|
|
|
|
Medicare census
|
9.7
|
%
|
|
10.6
|
%
|
|
Medicaid census
|
69.2
|
%
|
|
68.9
|
%
|
|
Managed Care census
|
4.6
|
%
|
|
4.2
|
%
|
|
As a percent of total revenues:
|
|
|
|
|
Medicare revenues
|
17.9
|
%
|
|
19.7
|
%
|
|
Medicaid revenues
|
47.5
|
%
|
|
46.5
|
%
|
|
Managed Care revenues
|
10.5
|
%
|
|
9.4
|
%
|
|
Average rate per day:
|
|
|
|
|
Medicare
|
$
|
458.33
|
|
|
$
|
455.29
|
|
|
Medicaid
|
$
|
181.42
|
|
|
$
|
177.58
|
|
|
Managed Care
|
$
|
393.81
|
|
|
$
|
397.49
|
|
Operating Expense
Operating expense decreased in the
second
quarter of
2019
to
$108.6 million
from
$111.4 million
in the
second
quarter of
2018
, a decrease of
$2.8 million
. Operating expense increased as a percentage of revenue at
80.3%
for the
second
quarter of
2019
as compared to
79.0%
for the
second
quarter of
2018
. The following table summarizes the expense increases attributable to changes in our portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
2018
|
|
Change
|
|
Same-store operating expense
|
$
|
108,447
|
|
|
$
|
107,850
|
|
|
$
|
597
|
|
|
2018 disposition operating expenses
|
194
|
|
|
3,590
|
|
|
(3,396
|
)
|
|
Total expense
|
$
|
108,641
|
|
|
$
|
111,440
|
|
|
$
|
(2,799
|
)
|
The three Kentucky centers we sold in December 2018 reduced operating expenses by
$3.4 million
. Our same-store operating expenses increased by
$0.6 million
, which is mostly attributable to increases in health insurance costs of $1.5 million in the
second
quarter of
2019
compared to the
second
quarter of
2018
. This was partially offset by decreases in nursing and ancillary expenses and maintenance and utility costs of $0.8 million and $0.2 million, respectively, in the
second
quarter of
2019
compared to the
second
quarter of
2018
.
One of the largest components of operating expenses is wages, which decreased from $67.8 million in the
second
quarter of
2018
, to $65.2 million during the
second
quarter of
2019
.
Lease Expense
Lease expense in the
second
quarter of
2019
increased to
$15.8 million
as compared to
$13.7 million
in the
second
quarter of
2018
. The increase in lease expense was due to rent increases resulting from the new master lease agreement with Omega Healthcare Investors and the impact of non-cash straight-line rent expense.
Professional Liability
Professional liability expense was
$3.0 million
and
$3.2 million
in the
second
quarters of
2019
and
2018
, respectively. Our cash expenditures for professional liability costs of continuing operations were
$1.7 million
for the
second
quarters of
2019
and
2018
. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies and cash expenditures are incurred to defend and settle existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.
Litigation contingency expense
In June, 2019, the Company and the U.S. Department of Justice reached an agreement in principle on the financial terms of a settlement regarding a civil investigative demand. In anticipation of the execution of final agreements and payment of a settlement amount of
$9.5 million
, we recorded an additional loss contingency expense of $3.1 million in the second quarter of 2019 to increase our previously estimated and recorded liability related to this investigation. The Company denies any wrong doing and is prepared to vigorously defend its actions. Refer to Note 7 to the interim consolidated financial statements for further discussion.
General and Administrative Expense
General and administrative expense was
$7.6 million
in the
second
quarter of
2019
as compared to
$9.3 million
in the
second
quarter of
2018
. General and administrative expense decreased as a percentage of revenue to
5.6%
in the
second
quarter of
2019
from
6.6%
in the
second
quarter of
2018
. The decrease in general and administrative expense is mainly attributable to $1.2 million of executive severance expense in the
second
quarter of
2018
. The remaining change is due to a decrease in salaries and related taxes of $0.7 million in the
second
quarter of
2019
as compared to the
second
quarter of
2018
.
Depreciation and Amortization
Depreciation and amortization expense was
$3.0 million
in the
second
quarter of
2019
as compared to
$2.8 million
in the
second
quarter of
2018
. The increase in depreciation expense relates to the acceleration of depreciation for the leasehold improvements in Kentucky, which are expected to be abandoned in the third quarter of 2019. See Note 10, "Business Developments and Other Significant Transactions" to the interim consolidated financial statements.
Interest Expense, Net
Interest expense was
$1.6 million
in the
second
quarter of
2019
and
$1.7 million
in the
second
quarter of
2018
. The decrease of $0.1 million is due to a decrease in the outstanding borrowings on our loan facilities.
Income Tax Benefit (Provision)
The Company recorded an income tax provision of
$17.4 million
during the second quarter of 2019 and an income tax benefit of
$0.4 million
during the
second
quarter of
2018
. The increase in income tax expense is attributable to a non-cash charge for a valuation allowance recognized against our deferred tax assets in the amount of
$20.0 million
in the second quarter of 2019.
Loss from Continuing Operations before Income Taxes; Loss from Continuing Operations per Common Share
As a result of the above, continuing operations reported a loss of
$7.2 million
before income taxes for the
second
quarter of
2019
as compared to a loss of
$0.7 million
for the
second
quarter of
2018
. Both basic and diluted loss per common share from continuing operations were
$3.80
for the
second
quarter of
2019
as compared to both basic and diluted loss per common share from continuing operations of
$0.05
in the
second
quarter of
2018
.
Six Months Ended
June 30, 2019
Compared To Six Months Ended
June 30, 2018
Patient Revenues
Patient revenues were
$269.7 million
and
$282.4 million
for the
six
months ended
June 30, 2019
and
2018
, respectively, a decrease of
$12.6 million
.
The following summarizes the revenue fluctuations attributable to changes in our portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Change
|
|
Same-store revenue
|
$
|
269,723
|
|
|
$
|
273,115
|
|
|
$
|
(3,392
|
)
|
|
2018 disposition revenue
|
—
|
|
|
9,252
|
|
|
$
|
(9,252
|
)
|
|
Total revenue
|
$
|
269,723
|
|
|
$
|
282,367
|
|
|
$
|
(12,644
|
)
|
The three Kentucky centers we sold in December 2018 contributed
$9.3 million
of the
$12.6 million
patient revenues decrease. Our same-store patient revenues decreased by
$3.4 million
. Our average Medicaid and Medicare rates per patient day for the for the
six
months ended
June 30, 2019
increased compared to the
six
months ended
June 30, 2018
, resulting in increases in revenue of
$3.3 million
and
$0.3 million
, respectively, or
2.3%
and
0.4%
, respectively. Our Hospice and Managed Care average daily census for the
six
months ended
June 30, 2019
increased
15.0%
and
4.9%
, respectively, resulting in
$2.1 million
and
$1.0 million
in additional revenue, respectively. Conversely, our Medicare, Medicaid and Private average daily census for the
six
months ended
June 30, 2019
decreased
11.6%
,
0.4%
and
11.9%
, respectively, resulting in revenue losses of
$6.9 million
,
$0.5 million
and
$2.6 million
, respectively.
The following table summarizes key revenue and census statistics for continuing operations for each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Skilled nursing occupancy
|
78.5
|
%
|
|
79.8
|
%
|
|
As a percent of total census:
|
|
|
|
|
Medicare census
|
9.9
|
%
|
|
11.1
|
%
|
|
Medicaid census
|
68.9
|
%
|
|
68.4
|
%
|
|
Managed Care census
|
4.7
|
%
|
|
4.3
|
%
|
|
As a percent of total revenues:
|
|
|
|
|
Medicare revenues
|
18.3
|
%
|
|
20.4
|
%
|
|
Medicaid revenues
|
47.4
|
%
|
|
45.9
|
%
|
|
Managed Care revenues
|
10.5
|
%
|
|
9.7
|
%
|
|
Average rate per day:
|
|
|
|
|
Medicare
|
$
|
457.70
|
|
|
$
|
455.51
|
|
|
Medicaid
|
$
|
181.28
|
|
|
$
|
177.19
|
|
|
Managed Care
|
$
|
394.19
|
|
|
$
|
394.64
|
|
Operating Expense
Operating expense decreased for the
six
months ended
June 30, 2019
to
$216.8 million
from
$223.7 million
for the
six
months ended
June 30, 2018
, a decrease of
$7.0 million
. Operating expense increased as a percentage of revenue at
80.4%
for the
six
months ended
June 30, 2019
as compared to
79.2%
for the
six
months ended
June 30, 2018
. The following table summarizes the expense increases attributable to changes in our portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
2018
|
|
Change
|
|
Same-store operating expense
|
$
|
216,511
|
|
|
$
|
216,903
|
|
|
$
|
(392
|
)
|
|
2018 disposition operating expenses
|
243
|
|
|
6,815
|
|
|
(6,572
|
)
|
|
Total expense
|
$
|
216,754
|
|
|
$
|
223,718
|
|
|
$
|
(6,964
|
)
|
The three Kentucky centers we sold in December 2018 contributed
$6.6 million
of the
$7.0 million
operating expense decrease. Our same-store operating expenses decreased by
$0.4 million
, which is mostly attributable to decreases in nursing and ancillary costs, salaries and related taxes and maintenance and utility expense of $1.3 million, $0.6 million and $0.4 million, respectively, for the
six
months ended
June 30, 2019
compared to the
six
months ended
June 30, 2018
. This was offset by increases in health insurance costs of $2.0 million for the
six
months ended
June 30, 2019
compared to the
six
months ended
June 30, 2018
.
One of the largest components of operating expenses is wages, which decreased from $134.9 million for the
six
months ended
June 30, 2018
to $130.3 million for the
six
months ended
June 30, 2019
.
Lease Expense
Lease expense for the
six
months ended
June 30, 2019
increased to
$31.6 million
as compared to
$27.4 million
for the
six
months ended
June 30, 2018
. The increase in lease expense was due to rent increases resulting from the new master lease agreement with Omega Healthcare Investors and the impact of non-cash straight-line rent expense.
Professional Liability
Professional liability expense was
$6.4 million
and
$6.0 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Our cash expenditures for professional liability costs of continuing operations were
$3.6 million
and
$2.8 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies, and cash expenditures are incurred to defend and settle existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.
Litigation contingency expense
In June, 2019, the Company and the U.S. Department of Justice reached an agreement in principle on the financial terms of a settlement regarding a civil investigative demand. In anticipation of the execution of final agreements and payment of a settlement amount of
$9.5 million
, we recorded a contingent liability related to the DOJ investigation of $3.1 million during the
six
months ended
June 30, 2019
to increase our previously estimated and recorded liability related to this investigation. The Company denies any wrong doing and is prepared to vigorously defend its actions. Refer to Note 7 to the interim consolidated financial statements for further discussion.
General and Administrative Expense
General and administrative expense was
$15.1 million
for the
six
months ended
June 30, 2019
as compared to
$17.4 million
for the
second
quarter of
2018
. General and administrative expense decreased as a percentage of revenue to
5.6%
for the
six
months ended
June 30, 2019
from
6.2%
for the
six
months ended
June 30, 2018
. The decrease in general and administrative expense is mainly attributable $1.2 million of executive severance expense for the
six
months ended
June 30, 2018
. The remaining change is due to a decrease in salaries and related taxes of $1.4 million for the
six
months ended
June 30, 2019
as compared to the
six
months ended
June 30, 2018
.
Depreciation and Amortization
Depreciation and amortization expense was
$5.5 million
for the
six
months ended
June 30, 2019
as compared to
$5.7 million
for the
six
months ended
June 30, 2018
. The decrease in depreciation expense relates to the dispositions of Fulton, Clinton and Glasgow in the fourth quarter of 2018. See Note 10, "Business Developments and Other Significant Transactions" to the interim consolidated financial statements.
Interest Expense, Net
Interest expense was
$3.0 million
for the
six
months ended
June 30, 2019
and
$3.3 million
for the
six
months ended
June 30, 2018
. The decrease of
$0.3 million
is due to a decrease in the outstanding borrowings on our loan facilities.
Income Tax Benefit (Provision)
The Company recorded an income tax provision of
$16.4 million
during the
six
months ended
June 30, 2019
and an income tax benefit of
$0.5 million
during the
six
months ended
June 30, 2018
. The increase in income tax expense is attributable to a non-cash valuation allowance recognized against our deferred tax assets in the amount of
$20.0 million
during the
six
months ended
June 30, 2019
.
Loss from Continuing Operations before Income Taxes; Loss from Continuing Operations per Common Share
As a result of the above, continuing operations reported a loss of
$11.5 million
before income taxes for the
six
months ended
June 30, 2019
as compared to a loss of
$0.9 million
for the
six
months ended
June 30, 2018
. Both basic and diluted loss per common share from continuing operations were
$4.33
for the
six
months ended
June 30, 2019
as compared to both basic and diluted loss per common share from continuing operations of
$0.06
for the
six
months ended
June 30, 2018
.
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity are the net cash flow provided by the operating activities of our centers and draws on our revolving credit facility. We believe that these internally generated cash flows will be adequate to service existing debt obligations and fund required capital expenditures. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long-term. Options for our use of cash include, but are not limited to, capital improvements, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.
Net cash used in operating activities of continuing operations totaled
$0.8 million
for the
six
months ended
June 30, 2019
, compared to net cash provided by operating activities of continuing operations of
$6.6 million
in the same period of
2018
. The primary driver of the decrease in cash provided by operating activities from continuing operations is due to our net loss of
$27.9 million
for the six months ended June 30, 2019, compared to net loss of
$0.4 million
in the same period of 2018. The net loss includes a $20.0 million non-cash charge to record a valuation allowance against our deferred tax assets, additional loss contingency expense of $3.1 million, and $3.5 million of additional rent expense from the straight-line impact of the new Omega master lease, which commenced in the fourth quarter 2018.
Our cash expenditures related to professional liability claims of continuing operations were
$3.6 million
and
$2.8 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our inability to meet all of our cash needs as they become due.
Investing activities of continuing operations used cash of
$2.5 million
and
$3.6 million
for the three months ended in
2019
and
2018
, respectively. The cash used for investing activities relates to the purchase of property and equipment at the centers we operate.
Financing activities of continuing operations provided cash of
$3.6 million
and used cash of
$2.1 million
for the
six
months ended June 30,
2019
and
2018
, respectively. The increase is primarily due to the additional draws on the Company's revolving credit facility, which was partially offset by the dividend and preferred stock payments in 2018.
Professional Liability
The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company's nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy provides coverage limits of at least $1,000 per medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.
As of
June 30, 2019
, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of
$26.1 million
. Our calculation of this estimated liability is based on the Company's best estimate
of the likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.
Capital Resources
As of
June 30, 2019
, we had
$78.6 million
of outstanding long-term debt and finance lease obligations. The
$78.6 million
total includes
$0.9 million
in finance lease obligations and
$17.5 million
currently outstanding on the revolving credit facility. The balance of the long-term debt is comprised of
$60.1 million
owed on our mortgage loan, which includes
$50.7 million
on the term loan facility and
$9.4 million
on the acquisition loan facility.
On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to
$100.0 million
allocated between a
$72.5 million
Mortgage Loan ("Amended Mortgage Loan") and a
$27.5 million
Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of a
$60 million
term loan facility and a
$12.5 million
acquisition loan facility. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of
$2.2 million
and are being amortized over the
five
-year term of the agreements.
Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of
$72.5 million
with a
five
-year maturity through February 26, 2021, and a
$27.5 million
Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of
five
years, with principal and interest payable monthly based on a
25
-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus
4.0%
and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at
5.79%
pursuant to an interest rate swap with an initial notional amount of
$30.0 million
. As of
June 30, 2019
, the interest rate related to the Amended Mortgage Loan was
6.50%
. The Amended Mortgage Loan is secured by
fifteen
owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus
4.0%
and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.
Effective October 3, 2016, the Company entered into the Second Amendment ("Second Revolver Amendment") to amend the Amended Revolver. The Second Revolver Amendment increased the Amended Revolver capacity from the
$27.5 million
in the Amended Revolver to
$52.3 million
; provided that the maximum revolving facility be reduced to
$42.3 million
on August 1, 2017. Subsequently, on June 30, 2017, the Company executed a Fourth Amendment (the "Fourth Revolver Amendment") to amend the Amended Revolver, which modifies the capacity of the revolver to remain at
$52.3 million
.
On December 29, 2016, the Company executed a Third Amendment ("Third Revolver Amendment") to amend the Amended Revolver. The Third Amendment modifies the terms of the Amended Revolving Agreement by increasing the Company’s letter of credit sublimit from
$10.0 million
to
$15.0 million
.
Effective June 30, 2017, the Company entered into a Second Amendment (the "Second Term Amendment") to amend the Amended Mortgage Loan. The Second Term Amendment amends the terms of the Amended Mortgage Loan Agreement by increasing the Company's term loan facility by
$7.5 million
.
Effective February 27, 2018, the Company executed a Fifth Amendment to the Amended Revolver and a Third Amendment to the Amended Mortgage Loan. Under the terms of the Amendments, the minimum fixed charge coverage ratio shall not be less than 1.01 to 1.00 as of March 31, 2018 and for each quarter thereafter.
Effective December 1, 2018, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver. The Sixth Amendment decreased the Amended Revolver capacity from
$52.3 million
to
$42.3 million
. The Company also applied
$4.9 million
of net proceeds from the sale of the Kentucky centers to the outstanding borrowing under the Amended Revolver.
Effective December 1, 2018, the Company executed a Fourth Amendment (the "Fourth Term Amendment") to amend the Amended Mortgage Loan. The Company applied
$11.1 million
and
$2.1 million
of net proceeds from the sale of the Kentucky centers to the Term Loan and Acquisition Loan, respectively. Additionally, we amended the Acquisition Loan availability to include a reserve of
$2.1 million
, and therefore, our borrowing capacity is
$10.4 million
. For further discussion of the sale of the Kentucky centers, refer to Note 10, "Business Development and Other Significant Transactions."
Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of three of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of all four of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by
$2.0 million
. At the same time, the operators of these four facilities entered into a separate revolving loan with the same syndicate
of banks to provide for the temporary working capital requirements of the four QIPP centers. The affiliated revolver, which is guaranteed by the Company, has an initial capacity of
$5.0 million
, which amount is reduced by
$1.0 million
on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of February 26, 2021. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 10, "Business Development and Other Significant Transactions." As of
June 30, 2019
, the Company had
zero
borrowings outstanding under the affiliated revolver.
As of
June 30, 2019
, the Company had
$17.5 million
borrowings outstanding under the Amended Revolver compared to
$15.0
million outstanding as of
December 31, 2018
. The interest rate related to the Amended Revolver was
6.50%
as of
June 30, 2019
. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are
3.00%
of the amount outstanding. The Company has
four
letters of credit with a total value of
$13.6 million
outstanding as of
June 30, 2019
. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of
$36.7 million
, the balance available for borrowing under the Amended Revolver and affiliated revolver was
$5.6 million
at
June 30, 2019
.
Our lending agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. We are in compliance with all such covenants at
June 30, 2019
.
Our calculated compliance with financial covenants is presented below:
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Requirement
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|
Level at
June 30, 2019
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Credit Facility:
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Minimum fixed charge coverage ratio
|
1.01:1.00
|
|
1.02:1.00
|
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Minimum adjusted EBITDA
|
$13.0 million
|
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$15.2 million
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Current ratio (as defined in agreement)
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1.00:1.00
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1.28:1.00
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Affiliated Revolver:
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Minimum fixed charge coverage ratio
|
1.00:1.00
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1.20:1.00
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Minimum adjusted EBITDA
|
$0.825 million
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$0.853 million
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Mortgaged Centers:
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EBITDAR
|
$10.0 million
|
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$14.5 million
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As part of the debt agreements entered into in February 2016, we amended our interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of
$30.0 million
. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of
5.79%
while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.
Off-Balance Sheet Arrangements
We have
four
letters of credit outstanding with an aggregate value of approximately
$13.6 million
as of
June 30, 2019
. The letters of credit serve as a security deposits for certain center leases. These letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.
Forward-Looking Statements
The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our interim consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to:
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•
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our ability to successfully integrate the operations of new nursing centers, as well as successfully operate all of our centers,
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•
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our ability to increase census at our centers and occupancy rates at our centers,
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•
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changes in governmental reimbursement, including the new Patient-Driven Payment Model to be implemented in the fall of 2019
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•
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the impact of the Affordable Care Act, efforts to repeal or further modify the Affordable Care Act, and other health care reform initiatives,
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•
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any increases in the cost of borrowing under our credit agreements,
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•
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our ability to comply with covenants contained in those credit agreements,
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•
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our ability to comply with the terms of our master lease agreements,
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•
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our ability to renew or extend our leases at or prior to the end of the existing lease terms,
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•
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the outcome of professional liability lawsuits and claims,
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•
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our ability to control ultimate professional liability costs,
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•
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the accuracy of our estimate of our anticipated professional liability expense,
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•
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the impact of future licensing surveys,
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•
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the outcome of proceedings alleging violations of state or Federal False Claims Acts,
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•
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laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors,
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•
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the costs of investing in our business initiatives and development,
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•
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our ability to control costs,
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•
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our ability to attract and retain qualified healthcare professionals,
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•
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changes to our valuation of deferred tax assets,
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•
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changing economic and competitive conditions,
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•
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changes in anticipated revenue and cost growth,
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•
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changes in the anticipated results of operations,
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•
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the effect of changes in accounting policies as well as others.
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Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended
December 31, 2018
, for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.
