PART
I
Background
Global
Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was organized for the purpose of
investing in real estate related to the long-term care industry. Prior to the Company changing its name to Global Healthcare REIT,
Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which
were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company
acquired West Paces Ferry Healthcare REIT, Inc. (WPF). We plan to elect to be treated as a real estate investment trust (REIT)
in the future; however, we do not intend to make that election for the 2018 fiscal year.
We
acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio
will be comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical
office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments within our healthcare segments using the following
five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment
management and (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior
housing operations utilizing the structure permitted by RIDEA.
The
delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to
maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to
the following:
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Compelling
demographics driving the demand for healthcare services;
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Specialized
nature of healthcare real estate investing; and
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Ongoing
consolidation of a fragmented healthcare real estate sector.
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Our
Properties
Acquisition
of West Paces Ferry Healthcare REIT, Inc. (WPF)
On
September 30, 2013, Global acquired all of the outstanding common stock of WPF in consideration of $100. WPF owned a 65% membership
interest in Dodge NH, LLC, which owns a skilled nursing facility located in Eastman, Georgia.
In
2014, we formed and organized Southern Tulsa, LLC as part of our purchase of the Southern Hills Retirement Center in Tulsa, Oklahoma.
Southern Tulsa, LLC was formed as a wholly-owned subsidiary of WPF.
Acquisition
of Middle Georgia Nursing Home
Effective
July 1, 2012, Georgia Healthcare REIT, Inc., (“Georgia REIT”) a private company owned and controlled by a former affiliate,
consummated its first acquisition: the Middle Georgia Nursing Home. Middle Georgia Nursing Home is located at 556 Chester Highway
in Eastman, Georgia (“Middle Georgia” or the “Facility”). The Facility was acquired through Dodge NH,
LLC, a limited liability company formed for the purpose of acquiring Middle Georgia that was initially wholly-owned by Georgia
REIT. Dodge Investors, LLC was formed and organized as a financing entity to raise $1.1 million in funding to complete the financing
required to complete the acquisition, as more fully described below.
The
terms of the acquisition of Middle Georgia were as follows: The purchase price was $5.0 million, of which $4.2 million was paid
with the proceeds of a commercial mortgage with Colony Bank, as senior lender, which accrued interest at 6.25% per annum; and
the balance of $1.0 million was provided by Dodge Investors, LLC. Dodge Investors LLC funded Dodge NH, LLC with $1.1 million in
consideration of 13% unsecured notes and a carried 35% membership interest in Dodge NH, LLC. Of the $1.1 million raised by Dodge
Investors, LLC, $125,000 was invested by Georgia REIT from loan proceeds from the Company, representing a 4% membership interest
of the total 35% membership interest held by Dodge Investors, LLC. The Dodge NH, LLC notes purchased by Dodge Investors, LLC accrued
interest at the rate of 13% per annum, interest payable monthly, with the outstanding balance of principal and accrued and unpaid
interest due July 1, 2014.
Effective
March 15, 2013, Georgia REIT conveyed its entire 65% membership interest in Dodge NH to WPF. During 2014 and 2015, the Company
acquired the remaining membership interests in Dodge Investors, LLC and holds a 100% membership interest as of December 31, 2017.
The Company has also repaid the entire $1.1 million note to Dodge Investors, LLC.
Dodge
NH, LLC had an operating lease agreement with Eastman Healthcare and Rehab, LLC, owned by a professional skilled nursing facility
operator, having an initial term of five years expiring in June 2017, with an option to renew for an additional five-year period.
On January 22, 2016, the lease operator that operates the facility filed a voluntary petition in bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. In 2018, the lease operator emerged from bankruptcy with a new five year lease.
Acquisition
of Warrenton Nursing Home
Effective
December 31, 2013, the Company consummated the purchase of the 110 bed Warrenton Nursing Home (“Warrenton”) located
in Warrenton, Georgia. Warrenton was purchased by ATL/WARR, LLC, a single purpose Georgia limited liability company (“Warr
LLC”) previously owned 95% by a former affiliate and 5% by an unaffiliated investor. Concurrently, the former affiliate
conveyed his 95% membership interest in Warr LLC to the Company for nominal consideration.
Warr
LLC entered into a Purchase and Sale Agreement dated April 3, 2013 (the “PSA”) with Providence Health Care, Inc.,
as seller, covering the Warrenton facility. The purchase price of Warrenton was $3.5 million, of which $2.72 million was provided
by a commercial senior bank loan, and approximately $984,500 was provided by the Company.
The
facility is covered by a ten year operating lease that began July 2016.
Acquisition
of Southern Hills Retirement Center
Effective
February 7, 2014, the Company acquired the real property and improvements comprising a 100% interest in the Southern Hills Retirement
Center located in Tulsa, Oklahoma (“Southern Hills”). To complete the acquisition, the Company formed and organized
Southern Tulsa, LLC, a Georgia limited liability company, a new wholly-owned subsidiary of WPF.
The
Southern Hills facility is comprised of a senior living campus of three buildings totaling 104,192 square feet sitting on a 4.36-acre
parcel. The Center consists of an Assisted Living facility (“ALF”), an Independent Living facility (“ILF”)
and a Skilled Nursing facility (“SNF”). The Center offers 106 nursing beds, 92 independent living units, and 24 assisted
living beds. The ALF and ILF were split off to a new wholly-owned subsidiary, Southern Tulsa TLC, LLC, in 2014, to accommodate
a new financing through an industrial revenue bond.
The
purchase price for Southern Hills was $2.0 million, of which $1.5 million was provided by a senior mortgage with First Commercial
Bank, with the balance of $500,000 provided by Global. Global also provided a guaranty of the loan from First Commercial Bank.
On
March 1, 2014, the Tulsa County Industrial Authority issued $5.7 million of its First Mortgage Revenue Bonds and lent the net
proceeds to the Company. The Company used the proceeds to pay off the $1.5 million bridge loan, to pay certain costs of the bond
issuance, to renovate the 86 independent living units and 32-bed assisted living facility, and to establish a debt service reserve
fund and other initial deposits as required by the bond indenture. The debt is secured by a first mortgage lien on the independent
living units and assisted living facility (facilities), an assignment of the facilities leases, a first lien on all personal property
located in the facilities, and a guaranty by the Company. The debt bears interest at rates ranging from 7.0% to 8.5% with principal
and interest due monthly beginning in May 2014 through maturity on March 1, 2044. The loan agreement also contains financial covenants
required to be maintained by the Company.
The
SNF was refinanced with a commercial bank for $1,750,000. The SNF was under a five-year lease to Healthcare Management of Oklahoma
for an initial rent of $35,000 per month commencing February 1, 2015. On May 10, 2016, the Company obtained a Court Order appointing
a Receiver to control and operate the SNF. The former lease operator represented that it was unable to meet the financial commitments
of the facility, including the payment of rent, payroll, and other operating requirements. The transition to the Receiver resulted
in our engaging in a turnaround effort to restore viable operations at the SNF. Under the oversight of the Receiver, we have undertaken
substantial renovations at the SNF at a cost of over $1,500,000. In 2017, we and the Receiver entered into a Management Agreement
with a new operator.
The
ILF is undergoing a $2.2 million renovation project and is expected to open in the second quarter of 2019. When the renovation
is complete the Company plans to enter into a management agreement to operate the facility in conjunction with the nursing home.
The
ALF renovations were substantially complete until a fire incident at the facility in November 2018. This incident resulted in
a $200,000 insurance claim. To date we have expended in excess of $2.0 million in upgrades at the ALF and expect to begin operations
once the ILF is operating and further stabilized.
In
November 2017 we obtained a new line of credit for Southern Hills in the principal amount of $7.3 million. The line of credit
matures April 28, 2019; and we expect it to convert into an amortizing loan thereafter. The line of credit was used to
refinance the $1.75 million loan on the SNF and opportunistically repurchase some of the Industrial Revenue Bonds (“IRB’s”)
on the ALF and ILF. The Company repurchased $1.62 million of the IRB’s for $1.17 million in cash through open market purchases
and various tender offers at discounted prices. On November 1, 2018, the remaining IRB’s outstanding were called and retired
utilizing the proceeds from the line of credit.
Acquisition
of Archway Transitional Care (formerly Goodwill Nursing Home)
Effective
May 19, 2014, the Company entered into a Membership Interest Purchase Agreement pursuant to which it acquired from Christopher
and Connie Brogdon (i) units representing an undivided 45% Membership Interest in Goodwill Hunting, LLC, a Georgia limited liability
company, and (ii) units representing an undivided 36.7% Membership Interest in GWH Investors, LLC, a Delaware limited liability
company (collectively, the “Units”). GWH Investors, LLC owns a 40% membership interest in Goodwill Hunting, LLC. Together,
the Company acquired, directly and indirectly, a 59.7% interest in Goodwill Hunting, LLC. The purchase price for the Units was
$800,000. The facility is subject to an aggregate of $4,601,009 in senior debt and $1,344,000 in non-affiliated subordinated debt.
Goodwill
Hunting, LLC owns the Archway Transitional Care, formerly named Goodwill Nursing Home, a 172 bed skilled nursing facility located
in Macon, Georgia. It was leased to Goodwill Healthcare and Rehabilitation, LLC under an operating lease that expired in 2017.
In January 2016, concurrently with the Chapter 11 Bankruptcy filing by the lease operator, the Goodwill Nursing Home was closed
by Georgia regulators and all residents were removed. The Company has entered into a new ten year operating lease covering the
facility which became effective in February, 2017 with the new operator having obtained all licenses, permits and other regulatory
approval necessary to recertify and reopen the facility. After receiving regulatory approvals, the lease operator invested approximately
$2.0 million in capital improvements in the property. The facility has been relicensed and began taking patients in December 2016
and is currently building census.
Effective
December 3, 2014, the Company acquired a 96.56% membership interest in GWH Investors, LLC, which holds a 40% membership interest
in Goodwill Hunting, LLC. The purchase price for the 96.56% interest in GWH Investors, LLC was 164,491 shares of common stock
of the Company.
The
subordinated debt in the amount of $1,280,000 matured on July 1, 2015. With accrued and unpaid interest, the outstanding balance
of the subordinated debt at December 31, 2017 was $1,344,000. Investors in the subordinated debt were entitled to an additional
5% equity in Goodwill Hunting, LLC every six months if the debt is not paid by the Company when due. Effective December 31, 2015,
the investors holding all of the outstanding interests in the subordinated debt executed an Agreement Among Lenders pursuant to
which they agreed to exchange their undivided interests in the note held by GWH Investors, LLC for separate, individual notes,
and (i) waived any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017,
in consideration for which Goodwill Hunting, LLC agreed to pay each investor a one-time premium equal to 5% of the principal amount
of the notes at such time as the notes are repaid.
In
April 2017, the former GWH Investors, LLC executed an Allonge and Modification Agreement pursuant to which they agreed to (i)
waive all accrued and unpaid interest (ii) waive further interest payments until January 2018 (iii) fix interest at 13% beginning
January 2018, (iv) extend the maturity date to December 31, 2019 and (v) agreed to accept an additional 15% premium payment upon
repayment of the notes. Giving effect to the foregoing, these investors are now entitled to a one-time 20% premium payment upon
repayment of the notes.
As
of December 31, 2017, the Company owns an 85% interest in Goodwill Hunting, LLC. That interest was 83.62% at December 31, 2015.
The former investors in GWH Investors, LLC still hold subordinated debt in the net amount of $1,280,000 plus accrued interest.
Acquisition
of Edwards Redeemer Health & Rehab
Effective
September 16, 2014, the Company acquired from a former affiliate a 62.5% membership interest in Edwards Redeemer Property Holding,
LLC, which owns the real property and improvements known as the Edwards Redeemer Health & Rehab, a 106 bed nursing home located
on 3.05 acres in Oklahoma City, Oklahoma.
Edwards
Redeemer Health & Rehab is operated under a triple-net operating lease to a regional professional skilled nursing home operator,
which expired in December 2017. On January 22, 2016, the lease operator that operates the facility filed a voluntary petition
in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The lease operator emerged from bankruptcy in 2017 and executed a
new five year lease.
The
purchase price for the 62.5% interest in the facility was $491,487, which was subject to an aggregate of $2,381,500 in debt. The
purchase price was offset in its entirety as a credit against an advance receivable owed by a former affiliate to the Company.
Effective
December 3, 2014, the Company acquired a 100% membership interest in Redeemer Investors, LLC which owned the remaining 37.5% membership
interest in Edwards Redeemer Property Holdings, LLC. The purchase price for the 100% interest in Redeemer Investors, LLC was 269,245
shares of common stock of the Company. As a result of these transactions, the Company now holds a 100% interest in Edwards Redeemer
Property Holdings, LLC.
The
investors in Redeemer Investors, LLC were repaid in full on January 23, 2015.
Acquisition
of Grand Prairie (formerly Golden Years Manor) Nursing Home
Effective
September 16, 2014, the Company acquired from a former affiliate a 44.5% membership interest in GL Nursing, LLC, which owns the
real property and improvements known as the Golden Years Manor Nursing Home located at 1010 Barnes Street in Lonoke, Arkansas.
The facility has 141 licensed beds and comprises 40,737 square feet on 3.17 acres.
Golden
Years Manor Nursing Home is operated under a triple-net operating lease to a regional professional skilled nursing home operator,
which will expire in May 2017. The lease currently generates $763,000 in gross annual rent.
The
purchase price for the 44.5% interest in the facility was 192,767 shares of common stock in Global Healthcare REIT, Inc. The facility
is subject to an aggregate of $4,671,537 in senior debt and $1,650,000 in subordinated debt.
Effective
December 3, 2014, The Company acquired a 26.25% membership interest in GLN Investors, LLC, which owned a 30% interest in GL Nursing,
LLC. The purchase price for the 26.25% interest in GLN Investors, LLC was 31,015 shares of common stock in Global Healthcare REIT,
Inc.
During
2015, the Company acquired an additional 73.48% in GLN Investors, LLC, bringing its interest to 100%. The purchase price for the
additional shares was 107,113 shares of common stock in Global Healthcare REIT, Inc.
In
January 2016, the Company acquired an additional 24.5% interest in GLN Investors, LLC, bringing its interest in GLN Investors
to 100%. The purchase price for the 24.5% interest was 54,000 shares of common stock of Global.
In
August 2016, the Company completed an exchange offering in which it purchased from the former members of GLN Investors, LLC all
of their interest in the $1,650,000 subordinated debt owed to GLN Investors, LLC by GL Nursing, LLC in consideration of 1.35 million
shares of Global.
As
a result of these transactions, at December 31, 2017, the Company held a 100% interest in GL Nursing, LLC. That interest was 75.5%
at December 31, 2015.
In
January 2016, affiliated entities of our lease operator filed a voluntary petition under Chapter 11 of the US Bankruptcy Code.
At the same time, our lease operator agreed to terminate its lease to allow a new operator to take possession of the facility.
At that time, operations at the facility had deteriorated and the operator was delinquent in the payment of bed taxes as well
a rent. The successor operator was unable to restore profitable operations and in August 2016 informed us that it was going to
terminate its lease, which would have resulted in a loss of the Certificate of Need (“CON”) required to operate as
a skilled nursing facility. Effective August 29, 2016, we executed a new operating lease with another operator. The initial lease
term is ten years with two five year renewal options. The lease term does not begin until the end of the straddle period described
below. The lease operator has also been granted an option to purchase the property any time after five years for a purchase price
of $6.4 million.
Under
the terms of the new lease, we agreed to cover all operating losses incurred by the new operator during a “straddle period”
during which the operator is not obligated to pay rent and has agreed to undertake substantial renovations and build the census
which had been significantly depleted during the prior two operator regimes. We have been honoring our commitment to cover these
losses, which to date have been approximately $350,000.
In
2017, we executed an amendment to the operating lease to clarify that the straddle period would end February 28, 2018. On or about
that date, the operator informed us that it would not continue as a lease operator. In March 2018, a new lease operator assumed
operations of the facility under an Operations Transfer Agreement.
Acquisition
of Providence of Sparta Nursing Home
Effective
September 16, 2014, the Company acquired from a former affiliate a 65% membership interest in Providence HR, LLC, which owns the
real property and improvements known as the Providence of Sparta Nursing Home. The facility has 71 licensed beds and is located
on approximately 8 acres in Sparta, Georgia.
Providence
of Sparta is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which expired
in June 2016. A new lease with a new operator currently generates $510,223 in gross annual straight line rent for fiscal year
2017.
The
purchase price for the 65% interest in the facility was 61,930 shares of common stock of Global Healthcare REIT, Inc. The facility
is subject to an aggregate of $1,655,123 in senior debt and $1,050,000 in subordinated debt.
Effective
December 3, 2014, the Company acquired a 44.4% membership interest in Providence HR Investors, LLC, which owns a 30% membership
interest in Providence HR, LLC. The purchase price for the 44.4% interest in Providence HR Investors, LLC was 45,145 shares of
common stock of the Company.
During
2015, the Company acquired an additional 48.09% of Providence HR Investors, LLC bringing its interest to 92.46%. The purchase
price for the additional shares was 17,333 shares of common stock in Global Healthcare REIT, Inc. In October 2016, we purchased
the remaining 7.54% in outstanding interests in Providence HR Investors, LLC in consideration of 5,365 shares of common stock
of Global and $10.00.
The
subordinated debt in the amount of $1,050,000 matured on August 1, 2015. Providence HR Investors, LLC were entitled to an additional
5% equity in Providence HR, LLC every six months if the debt is not paid when due.
As
a result of these transactions, the Company now holds a 100% interest in Providence HR, LLC. The investors in Providence HR Investors,
LLC still retain $1,050,000 in subordinated debt.
In
March 2017, the former members of Providence HR Investors, LLC which hold the interest in the $1.05 million subordinated debt
all agreed to execute a Forbearance Agreement in which they agreed to (i) extend the maturity date of the note to December 31,
2017, (ii) waive accrued default interest and (iii) waive the equity ratchet that was triggered by the note not being repaid on
the original maturity date.
Effective
October 30, 2017, we completed a HUD refinance of this facility which included the repayment in full of the Providence Investor
HR notes.
Acquisition
of Greene Point Health Care Center
Effective
September 16, 2014, the Company acquired from a former affiliate a 62.145% membership interest in Wash/Greene, LLC, which owns
the real property and improvements known as the Greene Point Healthcare Center, located at 1321 Washington Highway in Union Point,
Georgia. The facility has 71 licensed beds and is located on approximately 9 acres.
The
purchase price for the 62.145% interest in the facility was 73,253 shares of common stock of Global Healthcare REIT, Inc. The
facility was subject to an aggregate of $1,692,000 in senior debt and $1,125,000 in subordinated debt.
Effective
December 3, 2014, the Company acquired 100% of the outstanding membership interests in 1321 Investors, LLC, which owned a 30%
membership interest in Wash/Greene, LLC. The purchase price for the 30% membership interest in 1321 Investors, LLC was 115,000
shares of common stock of the Company.
The
subordinated debt in the amount of $1,125,000 matured on October 1, 2015. Investors in the subordinated debt are entitled to an
additional 5% equity in Providence HR, LLC every six months if the debt is not paid when due. Effective December 31, 2015, the
investors holding all of the outstanding interests in the subordinated debt executed an Agreement Among Lenders pursuant to which
they (i) waived any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017.
Disposition
of Greene Point Health Care Center
Effective
June 30, 2016, the Company sold Greene Point Health Care Center for cash proceeds for $3,800,000 million. Cash proceeds from the
sale were used to pay off the existing mortgage loan in the amount of $1,683,200. The Company received $2,112,970 in cash from
the sale the facility, net of the senior loan, and used some of the proceeds to retire the subordinated debt owed to the former
members of 1321 Investors, LLC.
Meadowview
Healthcare Center
Effective
September 30, 2014, the Company purchased the Meadowview Healthcare Center located in Seville, Ohio (“Meadowview”)
and owns 100% of this facility. The facility is licensed for 100 skilled nursing beds, is 27,500 square feet and located on five
acres of land. Seville, Ohio is located approximately 25 miles west of Akron, Ohio and 40 miles south of Cleveland, Ohio in an
area with attractive population growth in the 65 to 74-year age bracket. The total purchase price for Meadowview was $3.2 million,
which was paid in cash using the proceeds of the Note Offering described below. Meadowview was acquired through High Street Nursing,
LLC, a wholly-owned subsidiary of the Company formed for the sole purpose of completing the purchase.
Effective
October 31, 2017, we completed a refinance of the mortgage notes with a $3.0 million term loan from ServisFirst Bank. We used
the proceeds of the loan to repay the mortgage notes issued in 2014.
Meadowview
was operated under a triple-net operating lease to skilled nursing home operator, which expired in October 2024. The lease was
generating $396,000 in gross annual rent; however, the operator experienced adverse results in late 2017 and throughout 2018.
E
ffective December 1, 2018, the Company completed the operations transfer to an affiliate
of Infinity Health Interests, LLC (“Infinity”). The lease is structured with a lower base rent component than the
prior operator but also includes occupancy-based escalators that will better align facility operations with future rental payments.
As part of the transition, the Company committed a $250,000 Accounts Receivable Line of Credit (“ARLOC”) to Infinity
in order to ensure that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables
of the facility as well as a personal guarantee from the two principals of Infinity. The Company expects facility level operational
performance to quickly improve under Infinity’s stewardship and commitment to the surrounding community.
As of December
31, 2018 the company lent $106,334 to Infinity under this agreement.
Glen
Eagle Healthcare & Rehab
On
April 4, 2017, we successfully bid at foreclosure sale to purchase a 101-bed skilled nursing facility located In Abbeville, Georgia.
We formed a new wholly-owned subsidiary, Global Abbeville Property, LLC (“GAP”) for the purpose of bidding on the
facility. Colony Bank, the senior lender on the facility, was the party undertaking the foreclosure in light of the default of
the prior owner. The purchase transaction was consummated in May 2017.
The
purchase price for the Abbeville facility was $2.1 million which was entirely financed by Colony Bank through a newly approved
closed-end revolving credit facility in the maximum amount of $2.6 million. The additional $500,000 under the credit line was
used for renovations on a dollar-for-dollar matching basis. The loan agreement was executed in May 2017, and the maturity date
is April 25, 2021. It carries an interest rate of prime plus 0.5%, 4.75% minimum, 5.50% maximum, is cross collateralized with
the Eastman note with the same lender, and backed by a corporate guarantee from the Company. The transaction has been treated
as an asset acquisition financed by debt, with $20,000 land, $1,827,000 building, and $253,000 fixed assets allocated in relative
fair value. The Company recognized $38,421 in loan costs, which was amortized over the life of the loan.
The
facility was closed in March 2016 due to uncured deficiencies. On March 17, 2017, in anticipation of our purchase of the facility,
the State of Georgia initially approved a 45 day extension followed by a one-year provisional Certificate of Need (“CON”)
to allow us to complete renovations and reopen the property. The Company assessed that the acquisition of the Abbeville facility
did not qualify as a business combination in accordance with the provisions of ASC 805. The Company accounted for the acquisition
as an acquisition of asset.
We
completed approximately $1.0 million in renovations at this facility and achieved recertification on October 12, 2018. As such,
we have commenced full scale operations at the facility. We still have not collected any governmental revenues but are entitled
to bill back to the recertification date once our billing enrollment with the appropriate government agencies is complete.
Recent
Financings
2016
– 2017 Senior Secured Note Offering
In
November 2016, the Company commenced a private offering of its 10% Senior Secured Promissory Notes in the aggregate amount up
to $1,500,000, on a best efforts basis. As of December 31, 2017, $1,200,000 of the notes have been issued. The notes bear interest
at a rate of 10% payable monthly with principal and unpaid interest due at maturity on December 31, 2018. For every $1.00 in principal
amount of note, each investor received one warrant exercisable for 12 months to purchase one share of common stock at an exercise
price of $0.75 per share. The warrants contained a cashless exercise provision. The notes are secured by a senior UCC security
interest in the tangible and intangible assets of the Company.
2017
Senior Note Offering
In
December 2017, the Company completed a private offering of 10% Senior Notes in the aggregate amount of $300,000. The notes bear
interest at the rate of 10% per annum payable monthly and mature on October 31, 2020. For every $1.00 in principal amount of note,
each investor received one warrant exercisable for 12 months to purchase one share of common stock at an exercise price of $0.75
per share. The warrants contained a cashless exercise provision and have now expired.
2018
Senior Secured Note Offering
In
October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited
investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, and Warrant for each $1.00 in principal
amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share.
The
Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants.
The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600. The Offering also included the
exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants which the Company had previously
sold in the 2016 and 2017 Senior Note Offerings for Units in the Offering. No proceeds were realized from the exchange and no
fees were paid to the Placement Agent for such exchanges. As a result of the exchange, all previously outstanding senior notes
have been exchanged for new 11% Senior Secured Notes due in 2021.
Our
Business
Healthcare
Industry
Healthcare
is the single largest industry in the U.S. based on Gross Domestic Product (“GDP”). According to the National Health
Expenditures report by the Centers for Medicare and Medicaid Services (“CMS”): (i) national health expenditures are
expected to grow 1.2 percentage points faster than GDP per year over the 2016 – 2025 period; (ii) the average compounded
annual growth rate for national health expenditures, over the projection period of 2016 through 2027, is anticipated to be 5.6%;
and (iii) health spending is projected to represent 19.9% of US GDP by 2025, up from 17.8% in 2015.
Senior
citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 85-year and older segment
of the population spends 92% more on healthcare than the 65 to 84-year-old segment and over 329% more than the population average.
Business
Strategy
Our
primary goal is to increase shareholder value through profitable growth. Our investment strategy to achieve this goal is based
on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing.
Opportunistic
Investing
We
will make investment decisions that are expected to drive profitable growth and create shareholder value. We will attempt to position
ourselves to create and take advantage of situations to meet our goals and investment criteria.
Portfolio
Diversification
We
believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant and investment
product. Diversification reduces the likelihood that a single event would materially harm our business and allows us to take advantage
of opportunities in different markets based on individual market dynamics. While pursuing our strategy of diversification, we
will monitor, but will not limit, our investments based on the percentage of our total assets that may be invested in any one
property type, investment product, geographic location, the number of properties which we may lease to a single operator or tenant,
or mortgage loans we may make to a single borrower. With investments in multiple segments and investment products, we can focus
on opportunities with the most attractive risk/reward profile for the portfolio as a whole. We may structure transactions as master
leases, require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters
of credit or security deposits, and take other measures to mitigate risk.
Financing
We
will strive to manage our debt-to-equity levels and maintain multiple sources of liquidity, access to capital markets and secured
debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets.
Our debt obligations will be primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates
on our operations.
We
plan to finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may arrange
for short-term borrowings from banks or other sources. We may also arrange for longer-term financing through offerings of equity
and debt securities, placement of mortgage debt and capital from other institutional lenders and equity investors.
Competition
Investing
in real estate serving the healthcare industry is highly competitive. We will face competition from REITs, investment companies,
private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors,
some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging
for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted
by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction
and renovation costs, existing laws and regulations, new legislation and population trends.
Income
from our facilities is dependent on the ability of our operators and tenants to compete with other companies on a number of different
levels, including: the quality of care provided, reputation, the physical appearance of a facility, price and range of services
offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location,
the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. Private,
federal and state payment programs as well as the effect of laws and regulations may also have a significant influence on the
profitability of our tenants and operators.
Healthcare
Segments
Senior
housing
. Senior housing facilities include assisted living facilities (“ALFs”), independent living facilities
(“ILFs”) and continuing care retirement communities (“CCRCs”), which cater to different segments of the
elderly population based upon their needs. Services provided by our operators or tenants in these facilities are primarily paid
for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid
and Medicare. Senior housing property types are further described below.
Assisted
Living Facilities
. ALFs are licensed care facilities that provide personal care services, support and housing for those who
need help with activities of daily living (“ADL”) yet require limited medical care. The programs and services may
include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities,
community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like
buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal
assistance for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in
part on local regulations.
Independent
Living Facilities
. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their
peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with ADL, such
as bathing, eating and dressing. However, residents have the option to contract for these services.
Continuing
Care Retirement Communities.
CCRCs provide housing and health-related services under long-term contracts. This alternative
is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents
to “age in place.” Some CCRCs require a substantial entry or buy-in fee and most also charge monthly maintenance fees
in exchange for a living unit, meals and some health services. CCRCs typically require the individual to be in relatively good
health and independent upon entry.
Post-acute/skilled
nursing
. Skilled Nursing Facilities (SNF) offer restorative, rehabilitative and custodial nursing care for people not requiring
the more extensive and sophisticated treatment available at hospitals. Ancillary revenues and revenues from sub-acute care services
are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory
and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales of pharmaceutical
products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis.
Post-acute/skilled
nursing services provided by our operators and tenants in these facilities will be primarily paid for either by private sources
or through the Medicare and Medicaid programs.
Life
science
. These properties contain laboratory and office space primarily for biotechnology and pharmaceutical companies, scientific
research institutions, government agencies and other organizations involved in the life science industry. While these properties
contain similar characteristics to commercial office buildings, they generally contain more advanced electrical, mechanical, and
heating, ventilating, and air conditioning (“HVAC”) systems. The facilities generally have equipment including emergency
generators, fume hoods, lab bench tops and related amenities. In many instances, life science tenants make significant investments
to improve their leased space, in addition to landlord improvements, to accommodate biology, chemistry or medical device research
initiatives.
Medical
office
. Medical office buildings (“MOBs”) typically contain physicians’ offices and examination rooms, and
may also include pharmacies, hospital ancillary service space and outpatient services such as diagnostic centers, rehabilitation
clinics and day-surgery operating rooms. While these facilities are similar to commercial office buildings, they require additional
plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, and special
equipment such as x-ray machines. In addition, MOBs are often built to accommodate higher structural loads for certain equipment
and may contain “vaults” or other specialized construction. We expect our MOBs will be typically multi-tenant properties
leased to healthcare providers (hospitals and physician practices).
Hospital.
Services provided by our operators and tenants in these facilities are paid for by private sources, third-party payors (e.g.,
insurance and Health Maintenance Organizations or “HMOs”), or through the Medicare and Medicaid programs. Hospital
property types include acute care, long-term acute care, and specialty and rehabilitation hospitals.
Investment
Products
Properties
under lease
. We plan to primarily generate revenue by leasing properties under long-term leases. Most of our rents and other
earned income from leases will be received under triple-net leases or leases that provide for a substantial recovery of operating
expenses. However, some of our MOBs and life science facility rents will be structured under gross or modified gross leases. Accordingly,
for such gross or modified gross leases, we may incur certain property operating expenses, such as real estate taxes, repairs
and maintenance, property management fees, utilities and insurance.
Our
ability to grow income from properties under lease depends, in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels, (ii) maximize tenant recoveries and (iii) control non-recoverable
operating expenses. Most of our leases will include contractual annual base rent escalation clauses that are either predetermined
fixed increases and/or are a function of an inflation index.
Debt
investments.
Our mezzanine loans will generally be secured by a pledge of ownership interests of an entity or entities, which
directly or indirectly own properties, and are subordinate to more senior debt, including mortgages and more senior mezzanine
loans. Our interest in mortgages and construction financing will typically be issued by healthcare providers and will generally
be secured by healthcare real estate.
Developments
and redevelopments
. We will generally commit to development projects that are at least 50% pre-leased or when we believe that
market conditions will support speculative construction. We will work closely with our local real estate service providers, including
brokerage, property management, project management and construction management companies to assist us in evaluating development
proposals and completing developments. Our development and redevelopment investments will likely be in the life science and medical
office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition
cost or existing basis) to achieve property stabilization or to change the primary use of the properties.
Investment
management
. We may co-invest in real estate properties with institutional investors through joint ventures structured as partnerships
or limited liability companies. We may target institutional investors with long-term investment horizons who seek to benefit from
our expertise in healthcare real estate. Predominantly, we plan to retain noncontrolling interests in the joint ventures ranging
from 20% to 30% and serve as the managing member. These ventures generally allow us to earn acquisition and asset management fees,
and have the potential for promoted interests or incentive distributions based on performance of the joint venture.
Operating
properties (“RIDEA”)
. We may enter into contracts with healthcare operators to manage communities that are placed
in a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”). Under
the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a taxable
REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible
independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation
entry points, where repositioning with a new operator that is aligned with health care providers can bring scale, operating efficiencies,
and/or ancillary services to drive growth.
Government
Regulations, Licensing and Enforcement
Overview
Our
tenants and operators will typically be subject to extensive and complex federal, state and local healthcare laws and regulations
relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing
the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased
regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services,
among others. These regulations are wide-ranging and can subject our tenants and operators to civil, criminal and administrative
sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory
environment because of a relative lack of guidance in many areas as certain of our healthcare properties will be subject to oversight
from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement
enforcement activity and regulatory non-compliance by our tenants and operators can all have a significant effect on their operations
and financial condition, which in turn may adversely impact us.
We
will seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our tenants and operators
by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operator base to limit
our exposure to any single entity, and seeking tenants and operators who are not largely dependent on Medicaid reimbursement for
their revenues. In addition, we ensure in each instance that our operators have obtained all necessary licenses and permits before
beginning operations, and require that those operators covenant that they will comply with all applicable laws and regulations
in connection with the facility operations.
The
following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Fraud
and Abuse Enforcement
There
are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements
and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts,
which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare,
Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including
the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or
recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as
the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate
family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things,
the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws,
including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide
for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal
and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid
reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced
by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal
and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our
operators and tenants are subject to these laws, and some of them may in the future become the subject of governmental enforcement
actions if they fail to comply with applicable laws.
Reimbursement
Sources
of revenue for many of our tenants and operators will include, among other sources, governmental healthcare programs, such as
the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and HMOs. As
federal and state governments focus on healthcare reform initiatives, and as many states face significant budget deficits, efforts
to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain
services provided by some of our tenants and operators.
Healthcare
Licensure and Certificate of Need
Certain
healthcare facilities in our portfolio will be subject to extensive federal, state and local licensure, certification and inspection
laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle
radioactive materials and operate equipment. Many states require certain healthcare providers to obtain a certificate of need,
which requires prior approval for the construction, expansion and closure of certain healthcare facilities. The approval process
related to state certificate of need laws may impact some of our tenants’ and operators’ abilities to expand or change
their businesses.
Americans
with Disabilities Act (the “ADA”)
Our
properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations”
as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with
the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons
with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that
may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one,
and we continue to assess our properties and make modifications as appropriate in this respect.
Environmental
Matters
A
wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare
facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of
which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact
us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured
lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed
of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government
fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal
or property damages and the owner’s or secured lender’s liability therefore could exceed or impair the value of the
property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly
dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow
using such property as collateral which, in turn, could reduce our revenues.
Taxation
Federal
Income Tax Considerations
The
following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity
securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may
be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt
entities, financial institutions or broker-dealers, persons holding shares of common stock as part of a hedging, integrated conversion,
or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their
securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United
States).
This
summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant to you in light of your particular
investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income
taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S.
federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have
a material effect on the U.S. federal income tax consequences of purchasing, owning and disposing of our securities as set forth
in this summary. Before you purchase our securities, you should consult your own tax advisor regarding the particular U.S. federal,
state, local, foreign and other tax consequences of acquiring, owning and selling our securities.
General
We
will elect to be taxed as a real estate investment trust (a “REIT”) at such time as the Board of Directors, with the
consultation of our professional advisors, determines that we qualify as a REIT under applicable provisions of the Internal Revenue
Code. We cannot predict for which tax year that election will be made; however, we do not intend to make such an election for
2016. Therefore, applicable taxes have been recorded in the accompanying consolidated financial statements. Once we make the election
to be treated as a REIT, we intend to continue to operate in such a manner as to qualify as a REIT, but there is no guarantee
that we will qualify or remain qualified as a REIT for subsequent years. Qualification and taxation as a REIT depends upon our
ability to meet a variety of qualification tests imposed under federal income tax law with respect to income, assets, distribution
level and diversity of share ownership. There can be no assurance that we will be owned and organized and will operate in a manner
so as to qualify or remain qualified.
In
any year in which we qualify as a REIT, in general, we will not be subject to federal income tax on that portion of our REIT taxable
income or capital gain that is distributed to stockholders. We may, however, be subject to tax at normal corporate rates on any
taxable income or capital gain not distributed. If we elect to retain and pay income tax on our net long-term capital gain, stockholders
are required to include their proportionate share of our undistributed long-term capital gain in income, but they will receive
a refundable credit for their share of any taxes paid by us on such gain.
Despite
the REIT election, we may be subject to federal income and excise tax as follows:
|
●
|
To
the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our “REIT
taxable income,” as adjusted, we will be subject to tax on the undistributed amount at regular corporate tax rates;
|
|
|
|
|
●
|
If
we have net income from the sale or other disposition of “foreclosure property” that is held primarily for sale
to customers in the ordinary course of business or other non-qualifying income from foreclosure property, such income will
be taxed at the highest corporate rate;
|
|
|
|
|
●
|
Any
net income from prohibited transactions (which are, in general, sales or other dispositions of property held primarily for
sale to customers in the ordinary course of business, other than dispositions of foreclosure property and dispositions of
property due to an involuntary conversion) will be subject to a 100% tax;
|
|
●
|
If
we fail to satisfy either the 75% or 95% gross income tests, but nonetheless maintain our qualification as a REIT because
certain other requirements are met, we will be subject to a 100% tax on an amount equal to (1) the gross income attributable
to the greater of (i) 75% of our gross income over the amount of qualifying gross income for purposes of the 75% gross income
test or (ii) 95% of our gross income over the amount of qualifying gross income for purposes of the 95% gross income test
multiplied by (2) a fraction intended to reflect our profitability;
|
|
|
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●
|
If
we fail to distribute during each year at least the sum of (1) 85% of our REIT ordinary income for the year, (2) 95% of our
REIT capital gain net income for such year (other than capital gain that we elect to retain and pay tax on) and (3) any undistributed
taxable income from preceding periods, we will be subject to a 4% excise tax on the excess of such required distribution over
amounts actually distributed;
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●
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We
will be subject to a 100% tax on the amount of any rents from real property, deductions or excess interest paid to us by any
of our “taxable REIT subsidiaries” that would be reduced through reallocation under certain federal income tax
principles in order to more clearly reflect income of the taxable REIT subsidiary;
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●
|
We
may be subject to the corporate “alternative minimum tax” on any items of tax preference, including any deductions
of net operating losses; and
|
|
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|
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●
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For
any investments which may qualify as prohibited transactions or restricted assets, we may elect to form a taxable REIT subsidiary
to hold such investments or operations. Income from the taxable REIT subsidiary is subject to taxes at the usual federal and
state tax rates.
|
On
March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders
who meet certain requirements and are individuals, estates or certain trusts to pay an additional 3.8% tax on, among other things,
dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012.
U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition
of shares of our stock.
EMPLOYEES
As
of December 31, 2018, we had two full time salaried employees, and our CEO received stock-based compensation. The Company also
engages the services of consultants from time to time, some of which may be provided by affiliates of the Company at no cost.
Not
applicable.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
As
of December 31, 2018, we owned nine senior living facilities. The following table provides summary information regarding these
facilities.
Property Name
|
|
Location
|
|
Effective Percentage Equity Ownership
|
|
|
Date Acquired
|
|
Gross Square Feet
|
|
|
Purchase Price
|
|
|
Outstanding Debt at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle GA Nursing Home (a/k/a Crescent Ridge)
|
|
Eastman, GA
|
|
|
100
|
%
|
|
3/15/2013
|
|
|
28,808
|
|
|
$
|
5,000,000
|
|
|
$
|
3,561,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrenton Health and Rehabilitation
|
|
Warrenton, GA
|
|
|
100
|
%
|
|
12/31/2013
|
|
|
26,894
|
|
|
$
|
3,500,000
|
|
|
$
|
2,287,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Hills Retirement Center
|
|
Tulsa, OK
|
|
|
100
|
%
|
|
2/7/2014
|
|
|
104,192
|
|
|
$
|
2,000,000
|
|
|
$
|
7,119,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill Nursing Home
|
|
Macon, GA
|
|
|
85
|
%
|
|
5/19/2014
|
|
|
46,314
|
|
|
$
|
7,185,000
|
|
|
$
|
5,926,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwards Redeemer Health & Rehab
|
|
Oklahoma City, OK
|
|
|
100
|
%
|
|
9/16/2014
|
|
|
31,939
|
|
|
$
|
3,142,233
|
|
|
$
|
2,138,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Providence of Sparta Nursing Home
|
|
Sparta, GA
|
|
|
100
|
%(2)
|
|
9/16/2014
|
|
|
19,441
|
|
|
$
|
2,836,930
|
|
|
$
|
2,975,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meadowview Healthcare Center
|
|
Seville, OH
|
|
|
100
|
%
|
|
9/30/2014
|
|
|
27,500
|
|
|
$
|
3,000,000
|
|
|
$
|
2,936,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Prairie Nursing Home
|
|
Lonoke, AR
|
|
|
100
|
%
|
|
9/16/2014
|
|
|
40,737
|
|
|
$
|
6,742,767
|
|
|
$
|
4,618,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glen Eagle Healthcare & Rehab (Formerly Abbeville Health & Rehab)
|
|
Abbeville, GA
|
|
|
100
|
%
|
|
5/25/2016
|
|
|
29,393
|
|
|
$
|
2,100,000
|
|
|
$
|
2,881,690
|
|
Property Name
|
|
2018 Base Revenue Per Lease
|
|
|
Operating Lease Expiration
|
|
|
|
|
|
|
|
|
Middle Georgia Nursing Home (a/k/a Crescent Ridge) (3)
|
|
$
|
720,000
|
|
|
|
October 31, 2022
|
|
Warrenton Health and Rehabilitation
|
|
$
|
630,240
|
|
|
|
June 30, 2026
|
|
Southern Hills Retirement Center
|
|
$
|
463,000
|
|
|
|
May 31, 2019
|
|
Goodwill Nursing Home (1) (3) (4)
|
|
$
|
486,367
|
|
|
|
February 1, 2027
|
|
Edwards Redeemer Health & Rehab (3)
|
|
$
|
563,688
|
|
|
|
October 31, 2022
|
|
Providence of Sparta Nursing Home (2)
|
|
$
|
484,800
|
|
|
|
June 30, 2026
|
|
Meadowview Healthcare Center (5)
|
|
$
|
-
|
|
|
|
September
30
, 2023
|
|
Grand Prairie Nursing Home (3)(6)
|
|
$
|
-
|
|
|
|
-
|
|
Glen Eagle Healthcare & Rehab
|
|
$
|
-
|
|
|
|
-
|
|
|
(1)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding
the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets
and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed
to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time
as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors
pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13%
beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed
that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the
principal balance of the notes
|
|
|
|
|
(2)
|
The
subordinated note on Sparta matured on August 1, 2016. Investors in the Sparta note were entitled to an additional 5% equity
in Providence HR, LLC every six months if the note is not paid when due. In March 2017, all of the former members of Providence
HR Investors, LLC executed a Forbearance Agreement in which each agreed to (i) waive default interest, (ii) waive any equity
ratchet adjustment and (iii) extend the maturity date of the note to December 31, 2017. As of December 31, 2017, the notes
were repaid.
|
|
(3)
|
On
January 22, 2016, the lease operator that operates Middle Georgia, Edwards Redeemer, Golden Years (until January 1, 2016)
and Goodwill filed a voluntary petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. In 2017 the lease operator
emerged from bankruptcy and executed a new five year lease.
|
|
|
|
|
(4)
|
Goodwill
was closed by regulators in January 2016 and did not generate any revenue in 2016. In a transaction related to the sale of
the Greene Point facility, an affiliate of the buyer of Greene Point has executed a ten year operating lease covering Goodwill.
The operator expended approximately $2.0 million on renovations and in December 2016 took its first patients. In the first
quarter of 2017, the operator completed all relicensing and Medicare/Medicaid reimbursement approvals, at which time the lease
became effective. First residents were admitted in December 2016. Rent for the first year which began February 1, 2017 is
$16,667 per month plus an occupancy rent based on census, payable at the rate of $2,000 per month for every ten residents,
with an annual cap of $312,000.
|
|
|
|
|
(5)
|
E
ffective
December 1, 2018, the Company completed the operations transfer to an affiliate of Infinity Health Interests, LLC (“Infinity”).
The lease is structured with a lower base rent component than the prior operator but also includes occupancy-based escalators
that will better align facility operations with future rental payments.
|
|
|
|
|
(6)
|
We
executed a new lease in August 2016 with a new operator, which renamed the facility Grand Prairie Nursing Home. Under the
new lease, the operator agreed to undertake significant renovations and we agreed to cover its operating losses during what
was characterized as a “straddle period”. The lease does not formally commence unit the end of the straddle period.
During the straddle period the operator does not have an obligation to pay rent, and any operating profits must be paid to
us as reimbursement for our advances to cover the tenant’s operating losses. The straddle period ended February 2018
and the lease operator informed us that it would no longer operate the facility. In March 2018, a new operator assumed operations
of the facility under an OTA.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From
time to time in the ordinary course of business, we may become subject to legal proceedings, claims, or disputes. We are or were
a party to the following pending legal proceedings.
Southern
Tulsa, LLC v. Healthcare Management of Oklahoma, LLC,
District Court of Tulsa County, State of Oklahoma, Case No. CJ –
2016- 01781.
This
matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former
operator at that facility. The Court has ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters
are pending.
Thomas
v. Edwards Redeemer Property Holdings, LLC, et.al.,
District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This
action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility. We are entitled
to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As
we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s
insurance carrier is providing a defense and indemnity; and as a result we believe the likelihood of a material adverse result
is remote.
In
March 2019, a civil complaint was filed in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, captioned Bailey v. Skyline,
et.al. GL Nursing, LLC, the Company’s wholly owned subsidiary, was named as a co-defendant in the action arising out of
a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL
Nursing. As of this date, no responsive pleadings have been filed and no further information is known regarding the merits of
the claim.
After
initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering
the GL Nursing, as landlord, as required by the operating lease.
As
we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the
operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend
to assert.
While
it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
ITEM
4.
|
MINE SAFETY DISCLOSURES
|
Not
applicable.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Directors
and Executive Officers
The
name, position with the Company, age of each Director and executive officer of the Company is as follows:
Name
|
|
Age
|
|
Position
|
|
Director/Officer
Since
|
Lance
Baller
|
|
45
|
|
Director,
CEO
|
|
2015
|
Clifford
L. Neuman
|
|
70
|
|
Director
|
|
2014
|
Andrew
L. Sink
|
|
52
|
|
Director,
Interim COO
(1)
|
|
2015
|
Zvi
Rhine
|
|
39
|
|
Director,
President, CFO
|
|
2015
|
Adam
Desmond
|
|
48
|
|
Director
|
|
2017
|
Josh
Mandel
|
|
44
|
|
Director
(2)
|
|
2017
|
|
(1)
|
Mr.
Sink resigned as Interim COO in March 2017.
|
|
(2)
|
Mr.
Mandel resigned as Director in March 2019.
|
Lance
Baller
serves as a director and sole or principal shareholder of several privately owned businesses, including Baller Enterprises,
Inc. from 1993 to the present (personal holding company), High Speed Mines, LLC and High Speed Aggregate, LLC (gold, sand, rock
and gravel mining), RM Investments, LLC (fast food real estate), HSA Bedrock, LLC (landscape material supply) and Baller Family
Foundation, Inc. (personal family foundation). He is also the co-founder, former CEO and President of Iofina plc, a technology
leader in the production of iodine and iodine derivatives, where he continues to serve as Chairman. He is the former managing
partner of Shortline Equity Partners, Inc. (2004 to 2010), a mid-market merger and acquisitions consulting and investment company.
Mr. Baller is also the former Managing Partner of Elevation Capital Management, LLC (2005 to 2010) and is the former alternative
investment hedge fund manager of the Elevation Fund. He is also a former Vice-President of Corporate Development and Communications
(2003 to 2004) of Integrated Biopharma, Inc. and prior to that a vice-president of the investment banking firms UBS and Morgan
Stanley. He was also a director of Equal Earth, Inc. (2013 to 2014). He has served on numerous boards of directors of both private
and public companies, including Index Asset Management, Inc., where he has served on the Board of Trustees since 2014.
Clifford
L. Neuman
has been engaged as a principal in his own law firms for over 45 years, emphasizing corporate and securities law
in the representation of companies in matters of corporate finance, mergers, acquisitions, reorganizations and public and private
offerings. Mr. Neuman has served on the boards of directors of numerous public, private and non-profit companies and has been
actively involved in the process of capital formation on behalf of his clients for many years. He is also the President of Gemini
Gaming, Inc., which owns and operates a gaming casino in Blackhawk, Colorado. He currently serves as a Director and CEO of Mindfulness
Peace Project, f/k/a Ratna Foundation, a non-profit charitable foundation, and a member of the Governing Council of Shambhala
Mountain Center, a non-profit retreat center in Red Feather Lakes, Colorado. Mr. Neuman received his Juris Doctorate degree from
the University of Pennsylvania (1973) and his Bachelor of Arts degree,
magna cum laude
from Trinity College, Hartford,
Connecticut (1970), where he was elected to Phi Beta Kappa.
Andrew
L. Sink
is currently the Managing Director of the Investment Advisory division and Principal for Colliers International |
Alabama. His team provides investment property advisory, investment property brokerage, investment fund structuring and real estate
investment management to high net worth families and individuals. His team also provides advisory services to privately held operating
companies seeking to enhance enterprise value via various real estate strategies including sale leaseback and private fund structuring.
Mr. Sink has more than 20 years’ experience in the real estate industry with a broad range of expertise in real estate brokerage
and investments. Prior to his role at Colliers International, Mr. Sink was Managing Director of Founders Investment Properties
(FIP) which spun out of Founders Investment Banking in December 2011. Prior to the formation of FIP, Mr. Sink was a partner at
Founders Investment Banking, LLC where he served as Managing Director of the firm’s real estate advisory practice from 2004-2011.
During this same time period he and his partners formed Foundation Fund Management Company (FFMC). FFMC has created multiple niche
private equity funds, which included Foundation Sale Leaseback Fund, Foundation Cypress Development Fund, Foundation Retail Development
Fund, Foundation Residential Acquisition Fund and Foundation New Media Fund. Prior to joining Founders, he was a partner in the
commercial real estate firm Eason, Graham & Sandner, Inc. (EGS) from 1993-2004 and was responsible for the Industrial Services
Division. Mr. Sink earned a Bachelor of Science degree in finance with a concentration in real estate from the University of Alabama,
graduating in 1990. He holds a state of Alabama real estate broker’s license.
Zvi
Rhine
has nearly 20 years of experience in the securities industry. He is the principal and managing member of Sabra Capital
Partners which he founded in 2012, a multi-strategy hedge fund that focuses on event-driven, value and special situations investments
primarily in North America. Prior to founding Sabra Capital Partners, he worked at Hilco Real Estate concentrating on asset-backed
investments and sale-leaseback transactions. From 2005 to 2008, he was a Director of Boone Capital, an event-driven hedge fund
concentrating on small to mid-cap companies. Mr. Rhine has also worked in various investment capacities for Banc of America Securities
and US Bancorp Piper Jaffray. He is a graduate of the University of Illinois where he was the recipient of the Bronze Tablet for
being in the top 1% of his graduating class.
Adam
Desmond
is the founder and CEO of Needle Rock Capital, an investment banking firm located in Carbondale, Colorado. Prior to
founding Needle Rock Capital, Mr. Desmond founded ASG Securities in 1998 that focused exclusively on small/mid-cap banks and thrift
markets. In 2004 ASG Securities became FIG Partners LLC which expanded the business from a sales and trading platform to a full-service
investment banking firm. Mr. Desmond assembled a team of principals at Fig Partners that raised over $2.5 billion in equity since
2007 and completed more than 95 whole bank transactions throughout the United States, with offices in Chicago, Los Angeles, San
Francisco, Dallas, New Jersey and Charlotte, employing over 60 people. Mr. Desmond began his career at the Chicago Mercantile
Exchange in the financial quadrant and went on to Raymond James and Associates where he helped develop a high yield fixed income
department. Mr. Desmond enjoys supporting and servicing many charitable organizations, including helping fund the building of
a school in the Philippines through St. Mary’s Catholic Church in Aspen, Colorado. Mr. Desmond is a graduate of the University
of Wisconsin – Madison with a Bachelor of Arts in International Economics and Political Science.
Josh
Mandell
is currently Chief Operating Officer of the Gateway Companies, an investor, developer and manager of multifamily housing
properties across the Southeastern USA. From 2014-2017, he served as the Director of Investments for StoneRiver Company, a full-service
private real estate firm focused on the investment, development and management of commercial real estate across the Southeastern
US. Prior to that Mr. Mandell served as General Counsel and later, Chief Development Officer for BSR Trust (formerly Summit Housing
Partners), an owner/operator of approximately 20,000 affordable and conventional multifamily housing units across 10 states in
the SoutheastMr. Mandell is a graduate of the University of Alabama (B.A. History, 1996) and Loyola University (New Orleans) School
of Law (JD, International Law Certificate, 2000), and he is a member of the Louisiana and Alabama State Bar Associations. He also
serves on the Boards of Directors of The Alabama Wildlife Federation, The Eyesight Foundation of Alabama, Birmingham Jewish Federation
and Mountain Brook Athletics.
Family
Relationships
None.
Board
Meeting and Compensation
During
the fiscal year ended December 31, 2018, meetings of the Board of Directors were held telephonically, and business of the board
was also conducted by written unanimous consent. There were six (6) meetings of the Board during 2018. A quorum was present at
all Board meetings. Directors are entitled to reimbursement of their expenses associated with attendance at such meeting or otherwise
incurred in connection with the discharge of their duties as a Director.
During
fiscal 2018, the entire Board of Directors assumed all responsibilities of the Audit, Compensation and Nominating Committees.
The board had no formal standing committees, but plans to create those committees when it determines that those committees would
be beneficial. No member of the Audit, Compensation or Nominating Committees will receive any additional compensation for his
service as a member of that Committee.
During
fiscal 2014, the Board adopted the Director Compensation Plan (the “Plan”), which was amended in January 2018, pursuant
to which each Director of the Company, whether or not independent, and whether or not such Director holds any other position with
the Company, including any position as an executive officer, shall be entitled to an annual grant of restricted common stock in
compensation for services during the year of grant, determined as follows:
|
1.
|
The
grant to each Director shall consist of restricted shares of common stock of the Company having a Market Value equal to $30,000.
For the purposes of the Plan, “Market Value” shall mean the closing price of the Company’s common stock
on its principal trading market on a date determined by the Board of Directors.
|
|
|
|
|
2.
|
All
shares granted to Directors under the Plan shall vest ratably at the rate of 1/12
th
per month for each month of
service during the year.
|
|
|
|
|
3.
|
Should
the Company determine that it is obligated to withhold payroll taxes from the Award, the undersigned Director will consent
to the Company reducing the Award to the extent necessary to satisfy such obligation. Should the Company not withhold payroll
taxes, each Director receiving a grant under the Plan shall be responsible for any and all federal, state or local taxes assessed
as a result of such grant and shall indemnify, defend and hold harmless the Company for any liability therefore.
|
The
third grant date was January 1, 2017, and consisted of 52,632 shares of common stock issued to each of the five Directors, for
a total of 263,160 shares issued under the Plan for 2017. The fourth grant date was January 23, 2018, and consisted of 93,750
shares of common stock to each of the six Directors, for a total of 562,500 shares issued under the Plan for 2018. The fifth grant
date was March 1, 2019 and consisted of 90,909 shares of common stock valued at $0.33 per share issued to each of Baller, Desmond
and Neuman. Mr. Rhine is compensated through his Employment Agreement and did not participate in the Director Compensation Plan.
Mr. Sink did not receive any shares at present.
The
following table summarizes director compensation paid for the year ended December 31, 2018:
DIRECTOR
COMPENSATION TABLE
Name
|
|
Fees
Earned
or Paid
in Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
|
|
|
Total
|
|
Lance Baller
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
30,000
|
|
Zvi Rhine
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
30,000
|
|
Clifford Neuman
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
30,000
|
|
Adam Desmond
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
30,000
|
|
Andrew Sink
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,000
|
|
Josh Mandel
|
|
|
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,000
|
|
Director
Independence
Our
common stock is listed on the OTCPink inter-dealer quotation systems, which does not have director independence requirements.
Nevertheless, for purposes of determining director independence, we have applied the definition set forth in NASDAQ Rule 4200(a)(15).
Mr. Andy Sink, Mr. Adam Desmond and Mr. Josh Mandel would be considered “independent” under the NASDAQ rule.
Audit
Committee
The
Board as a whole serves as the audit committee.
For
this purpose, an audit committee member is deemed to be independent if he does not possess any vested interests related to those
of management and does not have any financial, family or other material personal ties to management.
The
committee is responsible for accounting and internal control matters. The audit committee:
|
-
|
reviews
with management and the independent auditors policies and procedures with respect to internal controls;
|
|
|
|
|
-
|
reviews
significant accounting matters;
|
|
|
|
|
-
|
approves
any significant changes in accounting principles of financial reporting practices;
|
|
|
|
|
-
|
reviews
independent auditor services; and
|
|
|
|
|
-
|
recommends
to the board of directors the independent registered public accounting firm to audit our consolidated financial statements.
|
In
addition to its regular activities, the committee is available to meet with the independent registered public accounting firm
or controller whenever a special situation arises.
The
Audit Committee of the Board of Directors will adopt a written charter, which, when adopted, will be filed with the Commission.
Compensation
Advisory Committee
The
composition of the compensation advisory committee has not been determined.
The
compensation advisory committee did not meet during fiscal 2018. The compensation advisory committee will, when appointed:
|
-
|
recommend
to the board of directors the compensation and cash bonus opportunities based on the achievement of objectives set by the
compensation advisory committee with respect to our chairman of the board and president, our chief executive officer and the
other executive officers;
|
|
|
|
|
-
|
administer
our compensation plans for the same executives;
|
|
|
|
|
-
|
determine
equity compensation for all employees;
|
|
|
|
|
-
|
review
and approve the cash compensation and bonus objectives for the executive officers; and
|
|
|
|
|
-
|
review
various matters relating to employee compensation and benefits.
|
Nomination
Process
The
Board of Directors has not appointed a standing nomination committee and does not intend to do so during the upcoming year. The
process of determining director nominees has been addressed by the board as a whole, which consists of five members. The board
has not adopted a charter to govern the director nomination process.
The
board of directors has not adopted a policy with regard to the consideration of any director candidates recommended by security
holders, since to date the board has not received from any security holder a director nominee recommendation. The board of directors
will consider candidates recommended by security holders in the future. Security holders wishing to recommended a director nominee
for consideration should contact Mr. Lance Baller, Interim President, at the Company’s principal executive offices located
in Greenwood Village, Colorado and provide to Mr. Baller, in writing, the recommended director nominee’s professional resume
covering all activities during the past five years, the information required by Item 401 of Regulation S-K, and a statement of
the reasons why the security holder is making the recommendation. Such recommendation must be received by the Company before December
31, 2019.
The
board of directors believes that any director nominee must possess significant experience in business and/or financial matters
as well as a particular interest in the Company’s activities.
Shareholder
Communications
Any
shareholder of the Company wishing to communicate to the board of directors may do so by sending written communication to the
board of directors to the attention of Mr. Lance Baller, Interim President, at the principal executive offices of the Company.
The board of directors will consider any such written communication at its next regularly scheduled meeting.
Any
transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be
on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will
be approved by a majority of the Company’s independent, outside disinterested directors.
Code
of Ethics
Our
Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees during the fiscal
year ended June 30, 2004. We will provide to any person without charge, upon request, a copy of our Code of Business Conduct and
Ethics. Such request should be made in writing and addressed to Investor Relations, Global Healthcare REIT, Inc., at the Company’s
principal executive offices located in Niwot, Colorado. Further, our Code of Business Conduct and Ethics was filed as an exhibit
to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 and can be reviewed on the website maintained by the
SEC at
www.SEC.gov
.
There
are no material proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially of
more than five percent (5%) of any class of voting securities of the Company, or any associate of any such director, officer,
affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
During
the last ten (10) years no director or officer of the Company has:
(1)
had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
(2)
been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(3)
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities; or
(4)
been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Any
transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be
on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will
be approved by a majority of the Company’s independent, outside disinterested directors.
Indemnification
and Limitation on Liability of Directors
The
Company’s Articles of Incorporation provide that the Company shall indemnify, to the fullest extent permitted by Utah law,
any director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred
by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
The
Company’s Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Utah Business
Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary
duty as directors, except for (i) any breach of the duty of loyalty to the Company or its stockholders, (ii) acts or omissions
not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions
of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws,
or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is
not limited by the Articles. The officers of the Company will dedicate sufficient time to fulfill their fiduciary obligations
to the Company’s affairs. The Company has no retirement, pension or profit sharing plans for its officers and Directors.
Compliance
with Section 16(a) of the Exchange Act
Under
the securities laws of the United States, the Company’s Directors, its Executive (and certain other) Officers, and any persons
holding more than ten percent (10%) of the Company’s common stock are required to report their ownership of the Company’s
common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports
have been established and the Company is required to report in this Report any failure to file by these dates. All of these filing
requirements were satisfied by our Officers, Directors, and ten-percent holders except for Messrs. Neuman and Mandell each failed
to file one (1) report covering one (1) transaction in a timely fashion; Mr. Rhine failed to file one (1) report covering four
(4) transactions in a timely manner, Mr. Baller failed to file two (2) reports covering two (2) transactions in a timely fashion.
In making these statements, the Company has relied on the written representation of its Directors and Officers or copies of the
reports that they have filed with the Commission.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Components
of Compensation.
The
CEO receives exclusively stock based compensation at the discretion of the Board, and on September 6, 2018, a stock-based compensation
grant was made to Lance Baller in consideration of his services as CEO for the six months ended June 30, 2018. The grant consisted
of 250,000 shares of common stock valued at $0.33 per share, total value $82,500. The Company did not provide additional compensation
in the form of annual incentive bonus, long term incentives, retirement benefits, or perquisites.
In
April 2018, the Company approved an Employment Agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year
(which accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000
shares of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000
of the Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter
each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company has
accrued $165,000 in executive salaries, $25,000 in bonuses, and recognized $41,787 in stock-based compensation and $98,105 in
option based compensation.
The
following table and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by
or paid to the Chief Executive Officer (“CEO”), and the Company’s four (4) most highly compensated executive
officers other than the CEO, for all services rendered in all capacities to the Company and its subsidiaries for each of the Company’s
last three (3) completed fiscal years; provided, however, that no disclosure has been made for any executive officer, other than
the CEO, whose total annual salary and bonus does not exceed $100,000.
SUMMARY
COMPENSATION TABLE
Name and
Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Options
Awards
|
|
|
Non equity
Incentive Plan
Compensation
|
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lance Baller,
|
|
|
2018
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
82,500
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
82,500
|
|
CEO
|
|
|
2017
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
157,558
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
157,558
|
|
|
|
|
2016
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
172,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
172,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zvi Rhine,
|
|
|
2018
|
|
|
$
|
165,000
|
|
|
$
|
25,000
|
|
|
$
|
41,787
|
|
|
$
|
98,105
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
329,892
|
|
President & CFO
|
|
|
2017
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
157,558
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
157,558
|
|
|
|
|
2016
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
172,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
172,000
|
|
|
(1)
|
Does
not include stock based compensation for services as Directors.
|
Company
Stock Incentive Plans
In
1993, the Board of Directors and the Shareholders of the Company adopted the Global Casinos, Inc., Stock Incentive Plan (the “Incentive
Plan”). An aggregate of 100,000 shares of the Company’s Common Stock were reserved for issuance under the Incentive
Plan. As of December 31, 2017, no options were outstanding under the Plan and all options to purchase shares of Common Stock have
expired. The Plan has terminated in accordance with its terms, and as a result no shares are available for future option grants.
Equity
Awards at Year End
Except
for the awards and option grants to Mr. Rhine under his Employment Agreement, there were no other unexercised options, unvested
stock awards or equity incentive plan awards for any named executive officer outstanding as of the end of the most recently completed
fiscal year.
Stock
Based Compensation
For
the quarter ended March 31, 2017, Messrs. Baller and Rhine were each granted 86,364 shares of restricted common stock valued at
$0.44 per shares, or $38,000 per quarter for services rendered in their capacities of CEO and CFO, respectively. For the quarter
ended June 30, 2017, Messrs. Baller and Rhine were each granted 84,444 shares of restricted common stock valued at $0.4211 per
shares, or $38,000 per quarter for services rendered in their capacities of CEO and CFO, respectively. For the six months ended
December 31, 2017, Messrs. Baller and Rhine were each granted 168,889 shares of restricted common stock valued at $0.4211 per
shares, or $38,000 per quarter for services rendered in their capacities of CEO and CFO, respectively. In addition, Messrs. Baller
and Rhine were each granted an additional bonus stock award consisting of 29,268 shares each, valued at $0.44 per share.
On
September 6, 2018, a stock-based compensation grant was made to Lance Baller in consideration of his services as CEO for the six
months ended June 30, 2018. The grant consisted of 250,000 shares of common stock valued at $0.33 per share, total value $82,500.
In
April 2018, the Company approved an Employment Agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year
(which accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000
shares of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000
of the Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter
each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company has
accrued $165,000 in executive salaries, $25,000 in bonuses, and recognized $41,787 in stock-based compensation and $98,105 in
option based compensation.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The
following table sets forth, as of April 1, 2019 the stock ownership of (i) each person known by the Company to be the beneficial
owner of five (5%) percent or more of the Company’s Common Stock, (ii) all Directors individually, (iii) all Officers individually,
and (iv) all Directors and Officers as a group. Each person has sole voting and investment power with respect to the shares shown,
except as noted. In presenting the information contained in this Item 12, the Company has relied upon publicly available reports
of beneficial ownership filed by persons required to do so pursuant to Section 13 of the Exchange Act.
Title
|
|
Name & Address
|
|
Shares Beneficially Owned
|
|
Of Class
|
|
of Beneficial Owner
|
|
Number
|
|
|
Percent
(1)(6)
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clifford L. Neuman (2)
6800 N. 79
th
St., Ste. 200
Niwot, CO 80503
|
|
|
1,081,762
|
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lance Baller(3)
8480 E. Orchard Rd., Ste. 4900 Greenwood Village, CO 80111
|
|
|
2,510,145
|
|
|
|
9.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew Sink(5)
3412 Sherwood Rd.
Birmingham, AL 35233
|
|
|
599,278
|
|
|
|
2.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zvi Rhine(4)
401 E. Ontario St., #2301
Chicago, Ill. 60611
|
|
|
2,523,000
|
|
|
|
9.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adam Desmond
PO Box 2036
Carbondale, CO 81623
|
|
|
302,823
|
|
|
|
1.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Josh Mandel
c/o 6800 N. 79
th
St., Ste. 200
Niwot, CO 80503
|
|
|
109,315
|
|
|
|
0.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Officers and Directors as a Group (6 persons)
|
|
|
7,126,323
|
|
|
|
25.91
|
%
|
(1)
|
Shares
not outstanding but beneficially owned by virtue of the individuals’ right to acquire them as of the date of this annual
report or within sixty days of such date, are treated as outstanding when determining the percent of the class owned by such
individual.
|
|
|
(2)
|
Includes
952,974 shares owned individually; and 128,788 shares owned of record Mindfulness Peace Project (formerly Ratna Foundation),
of which Mr. Neuman is a Director, as to which Mr. Neuman disclaims beneficial ownership for purposes of Section 16 under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
|
|
|
(3)
|
Includes
1,614,654 shares owned individually, 266,156 shares owned by High Speed Aggregate, Inc. of which Mr. Baller is an owner and
control person, but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act, 629,335 shares owned
by Ultimate Investments Corp., Inc. of which Mr. Baller is an owner and control person, but disclaims beneficial ownership
for purposes of Section 16 under the Exchange Act.
|
|
|
(4)
|
Includes
1,368,000 shares owned individually which includes 150,000 shares subject to future vesting, 555,000 shares owned by Sabra
Investments, LP, of which Mr. Rhine is a control person. Also includes options exercisable to purchase 600,000 shares subject
to future vesting.
|
|
|
(5)
|
Includes
541,278 shares owned individually and 58,000 shares owned by Andrew L. Sink IRA
|
|
|
(6)
|
Based
on 26,902,403 shares issued and outstanding on April 1, 2019.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|
Throughout
its history, the Company has experienced shortages in working capital and has relied, from time to time, upon loans from affiliates
to meet immediate cash demands. There can be no assurance that these affiliates or other related parties will continue to provide
funds to the Company in the future, as there is no legal obligation to provide such loans.
Related
Party Transactions
During
2018, among the $225,000 senior secured notes that were extended to December 31, 2018, $125,000 were to related parties and
among the $1.075 million senior secured notes that were extended to October 31, 2021, $875,000 were to related parties.
In
the fourth quarter of 2016 and the first quarter of 2017, the Company undertook a private offering (“Offering”) of
Units, each Unit consisting of a 10% Senior Secured Note and one warrant for every dollar in principal amount of Note purchased.
In the Offering, Ultimate Investments, Ltd and the Baller Family Foundation, Inc., each entity controlled by Mr, Baller, invested
$300,000 and $200,000 respectively. Zvi Rhine invested $50,000, while his brother David Rhine invested $50,000 and his father
Gary Rhine invested $25,000. In addition, Adam Desmond invested $100,000 in the Offering and his father Robert Desmond invested
$150,000.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
following table details the aggregate fees billed to the Company by MaloneBailey, LLP, its current registered independent public
accounting firm, since their appointment in 2015:
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
100,500
|
|
|
$
|
101,186
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
All Other Fees
|
|
|
-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,500
|
|
|
$
|
101,186
|
|
The
caption “Audit Fees” includes professional services rendered for the audit of the annual consolidated financial statements
and the review of the quarterly interim consolidated financial statements.
It
is the policy of the Board of Directors, acting as the audit committee, to pre-approve all services to be performed by the independent
registered public accounting firm.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of the Business
Global
Healthcare REIT, Inc. (the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT)
for the purpose of investing in real estate and other assets related to the healthcare industry. Prior to the Company changing
its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos,
Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale
of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as
a reverse acquisition whereby WPF was deemed to be the accounting acquirer.
The
Company intends to make a REIT election under sections 856 through 859 of the Internal Revenue Code of 1986, as amended. Such
election will be made by the Board of Directors at such time as the Board determines that we qualify as a REIT under applicable
provisions of the Internal Revenue Code and that such election is in the best interest of our stockholders.
The
Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers.
As of December 31, 2018, the Company owned eleven healthcare properties which are leased to third-party operators under triple-net
operating terms.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities
(VIE’s) for which the Company has determined itself to be the primary beneficiary. Third party equity interests in subsidiaries
and VIE’s are recognized as noncontrolling interests in the consolidated financial statements. All significant inter-company
balances and transactions have been eliminated in consolidation.
The
Company is the primary beneficiary of a VIE if the Company has the power to direct the activities of the VIE that most significantly
impact its economic performance and the obligation to absorb losses or receive benefits from the VIE that could be significant
to the Company. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based
on legal form, economic substance, and the extent to which the Company has control and/or substantive participating rights under
the respective ownership agreement.
There
are judgments and estimates involved in determining if an entity in which the Company has an investment is a VIE. The entity is
evaluated to determine if it is a VIE by, among other things, determining if the equity investors as a group have a controlling
financial interest in the entity and if the entity has sufficient equity at risk to finance its activities without additional
subordinated financial support.
Reclassifications
Certain
reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.
Use
of Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make 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 amounts of revenues and expenses during the reporting periods. Significant
estimates included herein relate to the recoverability of assets, the purchase price allocation for properties acquired, and the
fair value of certain assets and liabilities. Actual results may differ from estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted
Cash
Restricted
cash consisted of the following as of December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Funds held in escrow under the terms of notes or bonds payable for purposes of paying future debt service costs
|
|
$
|
206,989
|
|
|
$
|
817,582
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
206,989
|
|
|
$
|
817,582
|
|
Concentration
of Credit Risk
The
Company maintains deposits in financial institutions that at times exceed the insured amount of $250,000 provided by the U.S.
Federal Deposit Insurance Corporation (FDIC). The excess amounts at December 31, 2018 and 2017 were $741,197 and $315,955, respectively.
The Company believes the financial institutions it uses are credit worthy and stable. The Company does not believe that it is
exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Property
and Equipment
In
accordance with purchase accounting guidance established for entities under common control, the property and equipment acquired
from entities under common control are stated at their carrying value on the date of acquisition. Property and equipment not acquired
from entities under common control is recorded at its estimated fair value. Estimated fair value is determined with the assistance
from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties
using standard industry valuation techniques.
Upon
acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price
based on the fair value of tangible assets and intangible assets, if any, acquired and any liabilities assumed. Information used
to determine fair value includes comparable sales values, discount rates, capitalization rates, and lease-up assumptions from
a third party appraisal or other market sources.
Acquisition-related
costs such as due diligence, legal and accounting fees are expensed as incurred.
Any
subsequent betterments and improvements are stated at historical cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets, and tenant improvements are depreciated over the remaining term of the lease. Useful
lives of the assets are summarized as follows:
Land
Improvements
|
|
15
years
|
Buildings
and Improvements
|
|
30
years
|
Furniture,
Fixtures and Equipment
|
|
10
years
|
Impairment
of Long Lived Assets
When
circumstances indicate the carrying value of property and equipment may not be recoverable, the Company reviews the property for
impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to
result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating
income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other
factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded
to the extent that the carrying value exceeds the estimated fair value of the property and equipment. Estimated fair value is
determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions
or projected cash flows of the property using standard industry valuation techniques. In 2017, the Company determined that the
carrying value of the High Street Nursing’s property and equipment was greater than their estimated fair value. In accordance
with the guidance for the impairment of long-lived assets, the Company recorded an impairment loss of $1,560,000 in 2017 to adjust
the carrying value of the asset to our estimate of its fair value. We estimated that fair value using the comparable sales method.
Notes
Receivable
The
Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made
in accordance with the contractual terms of the note agreements. Once a note has been determined to be impaired, it is measured
to establish the amount of the impairment, if any, based on the fair value of the note using present value of expected future
cash flows discounted at the note’s effective interest rate. If the fair value of the impaired note receivable is less than
the recorded investment in the note, a valuation allowance is recognized.
Deferred
Loan Costs
Deferred
loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest
method. For the years ended December 31, 2018 and 2017, deferred loan costs paid in cash totaled $43,680 and $16,900, respectively;
deferred loan costs paid using proceeds from loans totaled $73,900 and $219,005, respectively. Amortization expense for the years
ended December 31, 2018 and 2017 totaled $155,011 and $283,601, respectively. Deferred loan cost amortization is included as a
component of interest expense in the consolidated statements of operations.
Warrant
Liability
Warrants
to purchase the Company’s common stock with nonstandard antidilution provisions, regardless of the probability or likelihood
that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their
estimated fair value at each reporting period in accordance with ASC 815 “Derivatives and Hedging.” Any change in
fair value of these warrants during the reporting period is recorded as a component of Other (Income) Expense on the Company’s
Consolidated Statements of Operations.
Revenue
Recognition
The
Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying
consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments
associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets
and totaled $665,307 and $541,649 as of December 31, 2018 and 2017, respectively. Adjustments to reflect rental income on a straight-line
basis totaled $127,184 and $321,612 for the years ended December 31, 2018 and 2017, respectively.
Rent
receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is
maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their
lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight line recognition
of rents. Such allowances are charged to bad debt expense in the accompanying consolidated statements of operations. Our determination
of the adequacy of these allowances is based primarily upon evaluations of the tenant’s financial condition, security deposits,
lease guarantees and current economic conditions and other relevant factors.
When
the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease
incentive and amortized as a reduction of revenue over the lease term. As of December 31, 2018 and 2017, there were no deferred
lease incentives recorded.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which is a comprehensive new revenue recognition model
that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that
reflects the consideration expected to be received in exchange for those goods or services. The Company adopted this standard
as of January 1, 2018 using the modified retrospective approach.
We
have evaluated our various revenue streams to identify whether they would be subject to the provisions of ASC 606 and any differences
in timing, measurement, or presentation of revenue recognition. A significant source of our revenue is generated through leasing
arrangements, which are specifically excluded from ASU 2014-09. As leasing arrangements, which are excluded from ASU 2014-09,
represent the primary source of revenue for the Company, the impact of adopting this standard was limited to the Company’s
recognition and presentation of non-lease revenues. Accordingly, the adoption of this standard did not have a significant impact
on its consolidated financial statements and related disclosures. The adoption of this standard did not require any adjustments
to the opening balance of retained earnings as of January 1, 2018.
For
our Nursing Home Operations in Abbeville, the adoption of ASU 2014-09 resulted in changes to Abbeville’s presentation for
and disclosure of revenue primarily related to uninsured or underinsured patients. Prior to the adoption of ASU 2014-09, a significant
portion of Glen Eagle’s provision for doubtful accounts would have related to self-pay patients, as well as co-pays, co-insurance
amounts and deductibles owed to us by patients with insurance. Under ASU 2014-09, the estimated uncollectable amounts due from
these patients are generally considered implicit price concessions that are a direct reduction to net operating revenues, with
a corresponding material reduction in the amounts presented separately as provision for doubtful accounts. Under ASU 2014-09,
the estimated uncollectable amounts due from these patients are generally considered implicit price concessions that are a direct
reduction to net operating revenues, with a corresponding material reduction in the amounts presented separately as provision
for doubtful accounts.
Under
ASU 2014-09 and in accordance with FASB ASC 606-10-05-4
An
entity recognizes revenue in accordance with that core principle by applying the following steps:
|
a.
|
Step
1: Identify the contract(s) with a customer
|
|
b.
|
Step
2: Identify the performance obligations in the contract
|
|
c.
|
Step
3: Determine the transaction price
|
|
d.
|
Step
4: Allocate the transaction price to the performance obligations in the contract
|
|
e.
|
Step
5: Recognize revenue when (or as) the entity satisfies a performance obligation”
|
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) ASC 718,
“Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize
it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the
vesting period.
The
Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees”
(“ASC 505”), which requires that such equity instruments are recorded at their fair value on the measurement date.
The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options
and warrants and the closing price of the Company’s common stock for common share issuances.
Fair
Value Measurements
The
Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities.
As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability
in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels, which are described below:
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level
2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level
3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority
to Level 3 inputs.
Income
Taxes
The
Company will elect to be taxed as a REIT at such a time as the Board of Directors, with the consultation of professional advisors,
determines the Company qualifies as a REIT under applicable provisions of the Internal Revenue Code. The Company cannot predict
for which tax year that election will be made. Therefore, applicable taxes have been recorded in the accompanying consolidated
financial statements.
The
Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the
period of enactment. A valuation allowance is established against deferred tax assets when management concludes that the “more
likely than not” realization criteria has not been met. The Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained.
Income
(Loss) Per Common Share
Basic
income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed based
on the weighted average number of common shares and potentially dilutive common shares outstanding. The calculation of diluted
net income (loss) per share excludes potential common shares if the effect would be anti-dilutive. Potential common shares consist
of incremental common shares issuable upon the exercise of warrants and shares issuable upon the conversion of preferred stock.
As of December 31, 2018, the Company has 3,142,586 common stock warrants outstanding, which could be converted into 3,142,586
shares of common stock; 200,500 shares of Series A Preferred Stock outstanding, which could be converted into 200,500 shares of
commons stock; 375,000 shares of Series D Preferred Stock outstanding, which could be converted into 375,000 shares of common
stock.
The
following table details the calculation of the weighted average number of common shares and dilutive common shares used in diluted
loss per share as of December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Used in
Basic Loss Per Share
|
|
|
26,913,045
|
|
|
|
25,849,025
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
Common Stock Warrants
|
|
|
-
|
|
|
|
-
|
|
Convertible Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares and
Dilutive Potential Common Shares Used in Diluted Loss
Per Share
|
|
|
26,913,045
|
|
|
|
25,849,025
|
|
Comprehensive
Income
For
the periods presented, there were no differences between reported net income (loss) and comprehensive income (loss).
Recently
Issued Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases: Topic 842 (ASU 2016-02)”,
to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their
balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first
quarter of our fiscal year ending December 31, 2019 using a modified retrospective approach with the option to elect certain practical
expedients. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial
statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging
Issues Task Force),
which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement
of cash flows. The Company adopted this standard as of January 1, 2018 using the retrospective approach. The impact of this adoption
was disclosure only for periods presented on the Company’s Statements of Cash Flows.
The
Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting
guidance during 2018. Management has carefully considered the new pronouncements that altered generally accepted accounting principles
and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial
position or operations in the near term.
2.
GOING CONCERN
The
accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For
the year ended December 31, 2018, the Company incurred a net loss of $2,007,006 and has an accumulated deficit of $11,070,606.
These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s
ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues and cash
flows to operate profitably and meet contractual obligations or raise additional capital through debt financing or through sales
of common stock.
The
failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the
Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
3.
INVESTMENTS IN DEBT SECURITIES
At
December 31, 2018 and 2017, the Company held investments in marketable securities that were classified as held-to-maturity and
carried at amortized costs. Held-to-maturity securities consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
States and Municipalities
|
|
$
|
162,106
|
|
|
$
|
243,469
|
|
Contractual
maturities of held-to-maturity securities at December 31, 2018 are as follows:
|
|
Net Carrying Amount
|
|
|
|
|
|
Due in One Year or Less
|
|
$
|
162,006
|
|
Actual
maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or
without call or prepayment penalties
.
The
Company had net cash proceeds from the sale of investment in debt securities during 2018 of $274,416
4.
PROPERTY AND EQUIPMENT
The
gross carrying amount and accumulated depreciation of the Company’s property and equipment as of December 31, 2018 and 2017
are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,597,500
|
|
|
$
|
1,597,500
|
|
Land Improvements
|
|
|
200,000
|
|
|
|
200,000
|
|
Buildings and Improvements
|
|
|
36,076,630
|
|
|
|
35,312,194
|
|
Furniture, Fixtures and Equipment
|
|
|
1,469,977
|
|
|
|
1,430,502
|
|
Construction in Progress
|
|
|
3,916,187
|
|
|
|
3,956,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,260,295
|
|
|
|
42,497,037
|
|
Less Accumulated Depreciation
|
|
|
(5,815,150
|
)
|
|
|
(4,556,805
|
)
|
Less Impairment
|
|
|
(1,560,000
|
)
|
|
|
(1,560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,885,145
|
|
|
$
|
36,380,232
|
|
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
$
|
1,258,345
|
|
|
$
|
1,239,865
|
|
|
|
|
|
|
|
|
|
|
Impairment Expense
|
|
$
|
-
|
|
|
$
|
1,560,000
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Capital Expenditures
|
|
$
|
763,258
|
|
|
$
|
860,368
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment financed with Debt
|
|
$
|
-
|
|
|
$
|
2,156,847
|
|
On
April 4, 2017, the Company successfully bid at foreclosure sale to purchase a 101-bed skilled nursing facility located In Abbeville,
Georgia. The Company formed a new wholly-owned subsidiary, Global Abbeville Property, LLC (“GAP”) for the purpose
of bidding on the facility. Colony Bank, the senior lender on the facility, was the party undertaking the foreclosure in light
of the default of the prior owner. The purchase transaction was consummated in May 2017.
The
purchase price for the Abbeville facility was $2.1 million which was entirely financed by Colony Bank through a newly approved
closed-end revolving credit facility in the maximum amount of $2.6 million. The additional $500,000 under the credit line was
used for renovations on a dollar-for-dollar matching basis. The loan agreement was executed in May 2017, and the maturity date
is April 25, 2021. It carries an interest rate of prime plus 0.5%, 4.75% minimum, 5.50% maximum, is cross collateralized with
the Eastman note with the same lender, and backed by a corporate guarantee from the Company. The transaction has been treated
as an asset acquisition financed by debt, with $20,000 land, $1,827,000 building, and $253,000 fixed assets allocated in relative
fair value. The Company recognized $38,421 in loan costs, which is amortized over the life of the loan.
The
facility was closed in March 2016 due to uncured deficiencies. On March 17, 2017, in anticipation of the Company’s purchase
of the facility, the State of Georgia approved a 45 day extension followed by a one-year provisional Certificate of Need (“CON”)
to allow the Company to complete renovations and reopen the property. The Company assessed that the acquisition of the Abbeville
facility did not qualify as a business combination in accordance with the provisions of ASC 805. The Company accounted for the
acquisition as an acquisition of asset.
We
completed approximately $1.0 million in renovations at this facility and achieved recertification on October 12, 2018. As such,
we have commenced full scale operations at the facility. We still have not collected any governmental revenues but are entitled
to bill back to the recertification date once our billing enrollment with the appropriate government agencies is complete.
5.
Notes receivable
Note
Receivable – Receiver for Healthcare Management of Oklahoma, LLC
On
May 10, 2016, the Company obtained a Court Order appointing a receiver to control and operate the skilled nursing facility in
Southern Hills, Tulsa. The former lease operator represented that it was unable to meet the financial commitments of the facility,
including the payment of rent, payroll, and other operating requirements. The transition to the receiver was part of a turnaround
effort to restore viable operations at the facility. The Court ordered the Company to provide the receiver a revolving line of
credit not to exceed $250,000 of which the Company advanced $150,000 during 2016. The receiver is to repay the revolving unsecured
line of credit from the operation or sale of the facility or other sources. The Company has determined the note as no longer being
collectible based on the ability to repay and has recorded bad debt expense of $150,000 in the consolidated statements of operations
for the year ended December 31, 2016. During November 2017, the company made a short-term loan in the amount of $84,000 to the
operator with the understanding that it would be repaid immediately; the loan was repaid during 2018.
Note
Receivable: Accounts Receivable Line of Credit (“ARLOC”) – Infinity Health Interests, LLC
As
part of the transition to a new tenant at High Street Nursing facility, the Company committed a $250,000 Accounts Receivable Line
of Credit (“ARLOC”) to an affiliate of Infinity Health Interests, LLC (“Infinity”) in order to ensure
that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables of the facility
as well as a personal guarantee from the two principals of Infinity. The Company expects facility level operational performance
to quickly improve under Infinity’s stewardship and commitment to the surrounding community.
As
of December 31, 2018 the company lent $106,334 to Infinity under this agreement.
6.
DEBT AND DEBT – RELATED PARTIES
The
following is a summary of the Company’s debt and debt – related parties outstanding as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Senior Secured Promissory Notes
|
|
$
|
1,485,000
|
|
|
$
|
325,000
|
|
Senior Unsecured Promissory Notes
|
|
|
300,000
|
|
|
|
300,000
|
|
Senior Secured Promissory Notes - Related Parties
|
|
|
875,000
|
|
|
|
875,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
21,049,981
|
|
|
|
18,750,685
|
|
Variable-Rate Mortgage Loans
|
|
|
4,618,006
|
|
|
|
7,210,372
|
|
Bonds Payable
|
|
|
-
|
|
|
|
5,061,000
|
|
Line of Credit
|
|
|
7,240,183
|
|
|
|
1,873,733
|
|
Other Debt
|
|
|
1,536,000
|
|
|
|
1,536,000
|
|
|
|
|
37,104,170
|
|
|
|
35,931,790
|
|
|
|
|
|
|
|
|
|
|
Premium, Unamortized Discount and Debt Issuance Costs
|
|
|
(507,829
|
)
|
|
|
(809,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,596,341
|
|
|
$
|
35,122,091
|
|
|
|
|
|
|
|
|
|
|
As presented in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, Net
|
|
$
|
35,721,341
|
|
|
$
|
34,282,407
|
|
|
|
|
|
|
|
|
|
|
Debt - Related Parties, Net
|
|
$
|
875,000
|
|
|
$
|
839,684
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,596,341
|
|
|
$
|
35,122,091
|
|
Meadowview
Convertible Notes Payable
6.5%
Notes Due September, 2017
On
September 26, 2014, the Company completed a private offering of its 6.5% Senior Secured Convertible Promissory Notes in the amount
of $3,200,000 which mature on September 25, 2017. Deferred loan costs incurred of $180,963 related to the loan were amortized
to interest expense over the life of the loan. Amortization expense related to deferred loan costs totaled $45,241 for the year
ended December 31, 2017. The Notes are secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio.
On
November 1, 2017, the Company, through its wholly-owned subsidiary High Street Nursing, LLC consummated a refinancing of its senior
notes on its skilled nursing facility in Seville, Ohio with ServisFirst Bank pursuant to term note in the principal amount of
$3,000,000 (the “Meadowview Note”).
Proceeds
from the Meadowview Note were used to pay off $3,000,000 of Senior Secured Convertible Promissory Notes and the remaining $200,000
balance of the Senior Secured Convertible Promissory Notes was paid using cash. The interest rate on Meadowview Note is 6.0%.
Monthly payments of interest only begin on November 30, 2017 until January 2018, at which time monthly payments of principal and
accrued interest shall be due until the Meadowview Note is paid in full on October 30, 2022 (the “Maturity Date”).
The Note is secured by an Open-End Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the “Mortgage”).
Deferred loan costs incurred of $46,517 related to the loan are amortized to interest expense over the life of the loan. Amortization
expense related to deferred loan costs totaled $9,303 for the year ended December 31, 2018.
Corporate
Senior and Senior Secured Promissory Notes
From
November through December 2016, the Company undertook a private offering of its 10% Senior Secured Promissory Notes. As of December
31, 2016, $600,000 of the notes had been issued of which $450,000 were issued to the directors of the Company or entities or persons
affiliated with these directors. The notes bear interest at a rate of 10% payable monthly with principal and unpaid interest due
at maturity, originally January 13, 2018. The notes were issued with warrants to purchase 600,000 shares of common stock at an
exercise price of $0.75 per share. The warrants have a cashless exercise provision.
The
notes are secured by all assets of the Company not serving as collateral for other notes. As of December 31, 2017, $500,000 in
notes had their maturity date extended to December 31, 2018, and all notes’ maturity dates were extended prior to their
original maturity. The maturity date of the 600,000 warrants issued along with the notes was extended to December 31, 2018 as
well. The transaction was accounted for as a debt extinguishment with a loss on modification of warrant in the amount of $62,696
recorded in the consolidated statement of operations for the year ended December 31, 2017.
In
2017, an additional $600,000 in notes were sold and issued, of which $425,000 were to related parties. At December 31, 2017, there
were outstanding an aggregate of $1.2 million in senior secured notes. The maturity date of all the senior secured notes was extended
to December 31, 2018 prior to their original maturity date, $225,000 of which occurred in 2018. During 2018, among the $225,000
senior secured notes that were extended to December 31, 2018, $125,000 were to related parties. For every $1.00 in principal
amount of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise
price of $.75 per share. The warrants have a cashless exercise provision and were valued using the Black-Scholes pricing model.
The maturity date of the 1.2 million warrants issued along with the notes was extended to December 31, 2018 as well, 225,000 warrants
of which occurred in 2018.
In
October 2017, the Company sold an aggregate of $300,000 in senior unsecured notes. The notes bear interest at the rate of 10%
per annum and are due in 2020. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year
to purchase an additional share of common stock at an exercise price of $.75 per share. The warrants have a cashless exercise
provision.
In
October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited
investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, and Warrant for each $1.00 in principal
amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share.
The
Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants.
The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600, and issued 111,000 warrants
to the Placement Agent with $21,453 of the fair value of the warrants recorded as loan cost. The Offering also included the
exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants for Units in the Offering. No
proceeds were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. During 2018, among the
$1.075 million senior secured notes that were extended to October 31, 2021, $875,000 were to related parties. As of December
31, 2018 the Company had not renewed or repaid $125,000 in 10% notes with a maturity date of December 31, 2018, and were technically
in default.
The
value of the warrants issued to the note holders was calculated using the Black-Scholes pricing model using the following significant
assumptions:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
122%
- 123
|
%
|
|
|
110%
- 157
|
%
|
Risk-free
Interest Rate
|
|
|
2.76%
- 2.94
|
%
|
|
|
0.82%
- 1.6
|
%
|
Exercise
Price
|
|
$
|
0.50
|
|
|
$
|
0.75
|
|
Fair
Value of Common Stock
|
|
$
|
0.30 - $0.35
|
|
|
$
|
0.40
- $0.50
|
|
Expected
Life
|
|
|
2.9
– 3 years
|
|
|
|
1
– 1.5 years
|
|
During
the year ended December 31, 2017, the Company issued 900,000 warrants in connection with its note offerings with a value on the
issue date estimated to be $121,435, bifurcated from the value of the note. As of December 31, 2017, the unamortized balance of
discount on notes was $77,105. During the year ended December 31, 2018, the Company issued 1,160,000 warrants with a value on
the issue date estimated to be $207,025 bifurcated from the value of the note and exchanged 1,075,000 existing warrants for new
ones in connection with its note offerings. As a result of the modification the Company recognized a loss on extinguishment of
$248,346. As of December 31, 2018, the unamortized balance of discount on notes was $184,013. Amortization expense was $93,138and
$140,203 for the years ended December 31, 2018 and December 31, 2017 respectively.
Mortgage
Loans and Lines of Credit Secured by Real Estate
Mortgage
loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an
assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage
loans for the periods presented consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
|
|
Face
|
|
|
Principal Outstanding at
|
|
|
Interest
|
|
Maturity
|
Property
|
|
Amount
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
Rate
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
Hills Retirement Center Line of Credit
(1)
|
|
|
7,229,052
|
|
|
|
7,119,743
|
|
|
|
1,873,733
|
|
|
5.25% Fixed
|
|
April 28, 2019
|
Middle
Georgia Nursing Home
(2,8)
|
|
$
|
3,570,000
|
|
|
$
|
3,561,461
|
|
|
$
|
3,643,545
|
|
|
5.50% Fixed
|
|
October 26, 2021
|
Goodwill
Nursing Home
(2)
|
|
|
4,976,316
|
|
|
|
4,390,082
|
|
|
|
4,466,375
|
|
|
5.50% Fixed
|
|
March 19, 2020
|
Goodwill
Nursing Home
(3)
|
|
|
80,193
|
|
|
|
-
|
|
|
|
23,904
|
|
|
5.50% Fixed
|
|
June 12, 2018
|
Warrenton
Nursing Home
(4)
|
|
|
2,720,000
|
|
|
|
2,287,323
|
|
|
|
2,376,101
|
|
|
5.50% Fixed
|
|
January 20, 2020
|
Edward Redeemer Health & Rehab
|
|
|
2,303,815
|
|
|
|
2,138,128
|
|
|
|
2,205,934
|
|
|
5.50% Fixed
|
|
January 16, 2020
|
Glen
Eagle Health & Rehab
(5)
|
|
|
2,761,250
|
|
|
|
2,761,250
|
|
|
|
2,592,366
|
|
|
5.50% Fixed
|
|
May 25, 2021
|
Glen
Eagle Health & Rehab Line of Credit
(5)
|
|
|
200,365
|
|
|
|
120,440
|
|
|
|
|
|
|
6.50% Fixed
|
|
September 30, 2019
|
Providence
of Sparta Nursing Home
(6)
|
|
|
3,039,300
|
|
|
|
2,975,337
|
|
|
|
3,034,826
|
|
|
3.88% Fixed
|
|
November 1, 2047
|
Meadowview
Healthcare Center
(7)
|
|
|
3,000,000
|
|
|
|
2,936,400
|
|
|
|
3,000,000
|
|
|
6.00% Fixed
|
|
October 30, 2022
|
GL Nursing Home
(9)
|
|
|
5,000,000
|
|
|
|
4,618,006
|
|
|
|
4,618,006
|
|
|
Prime Plus 1.50%/ 5.75% Floor
|
|
August 3, 2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,908,170
|
|
|
$
|
27,834,790
|
|
|
|
|
|
|
(1)
|
On October 31, 2017, the
Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated
a new Line of Credit with First Commercial Bank pursuant to a Promissory Note in the principal amount of $7,229,052 (the
“Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on its skilled nursing
facility in Tulsa for $1,546,801,funded open market and tender offer purchases of its Industrial Revenue Bonds covering
the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of December 31, 2017, a total
of $1,873,733 was drawn under the Line of Credit, and as of December 31, 2018, a total of $7,119,743 was drawn under the
Line of Credit.
The interest rate on Line of Credit
is 5.25%. Monthly payments of interest began on November 30, 2017 and continue until the Promissory Note is paid in full
on the Maturity Date. On May 3, 2018 the Maturity Date was extended from April 30, 2018 to October 30, 2018. The Maturity
Date was further extended to February 28, 2019 and subsequently to April 28, 2019, with the intent to convert to an amortizing
loan thereafter. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern
Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for it Southern Hills Independent
Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location.
With the retirement of the Tulsa Industrial Authority Bonds effective November 1, 2018, First Commercial Bank moved into
a senior position on the ALF and ILF properties.
|
|
(2)
|
Mortgage loans are non-recourse to the Company except for the senior loans held by ServisFirst Bank on Meadowview (Ohio), held by Colony Bank on Abbeville, and the Southern Hills line of credit owed to First Commercial Bank, discussed under line of credit.
|
|
(3)
|
The $80,193 debt at Goodwill Nursing Home was incurred to pay off accrued interest on the original primary note. The balance of this note was paid in full on June 12, 2018.
|
|
(4)
|
Amortization expense related to loan costs of this loan totaled $6,160 for the year ended December 31, 2018. The loan was extended on January 19, 2019 to January 20, 2020. The Company has incurred $43,681 in unamortized loan costs to refinance this debt with another lender.
|
|
(5)
|
Proceeds
of $2,138,126 were disbursed directly to the seller of the property for acquisition and $597,799 was disbursed to the
Company as reimbursement for renovation cost, and $38,421 of loan costs and interest were capitalized. The loan has been
fully drawn as of December 31, 2018, and amortization expense related to loan costs of this loan totaled $5,342 for the year
ended December 31, 2018. Amortizing payments will begin in January 2019. In June 2018 the Company converted the original note
to a fixed note which qualified as debt extinguishment, unamortized debt discount on the original note was expensed as a loss
on extinguishment of $27,794. In April 2018, the Company capitalized $22,800 in fees and interest and added it to principal.
The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the
covenants of all other notes and bonds. As of December 31, 2018, the Company was not in compliance with some unrelated notes
and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes
that it is in good standing with the Lender. In October 2018 the Lender extended the Company a line of credit with a limit of
$200,365 to provide working capital to scale operations at the facility.
As
of December 31, 2018 the Company had drawn $120,440 on the line.
The line of credit was expanded in February 2019 to $400,000 with a maturity of September 30, 2019.
|
|
(6)
|
The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during 2017. The total amount borrowed under the new loan is $3,039,300 at time of debt issuance, with the Company receiving only $28,596 in cash. The senior note balance of $1,655,123 on December 31, 2016 was paid off using $29,747 in cash and $1,625,376 using the proceeds from the new loan. The subordinated note balance of $1,050,000 was paid off using loan proceeds, $218,619 went to restricted cash and the rest was used to pay fees. Amortization expense related to loan costs totaled $4,984 for the year ended December 31, 2018.
|
|
(7)
|
Amortization expense related to loan costs of this loan totaled $9,303 for the year ended December 31, 2018. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of December 31, 2018, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender.
|
|
(8)
|
The
loan at Middle Georgia was renewed on November 26, 2018 with the maturity extended to October 26, 2021.
|
|
(9)
|
Effective September 19, 2016, we executed a Modification to the mortgage note pursuant to which some accrued payments were deferred and the lender agreed to permit interest only payments through March 2017. The mortgage loan collateralized by the GL Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is subject to financial covenants and customary affirmative and negative covenants. As of September 30, 2018, the Company was not in compliance with certain of these financial and non-financial covenants which is considered to be a technical Event of Default as defined in the note agreement. The Company is also delinquent in installment payments due under the mortgage. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are necessarily limited to the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction from the guarantors. The Company has been notified by the lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility and is dealing with the lender. The Company is in negotiations with Mr. Brogdon to sell him the facility.
|
Other
mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some
instances in an untimely manner. These mortgage loans are technically in default.
Bonds
Payable – Tulsa County Industrial Authority
On
March 1, 2014, Southern Tulsa, LLC (Southern Tulsa), a subsidiary of WPF that owns the Southern Hills Retirement Center, entered
into a loan agreement with the Tulsa County Industrial Authority (Authority) in the State of Oklahoma pursuant to which the Authority
lent to Southern Tulsa the proceeds from the sale of the Authority’s Series 2014 Bonds. The Series 2014 Bonds consisted
of $5,075,000 of principal in Series 2014A First Mortgage Revenue Bonds and $625,000 of principal in Series 2014B Taxable First
Mortgage Revenue Bonds. During the year ended December 31, 2017, $127,000 of Series 2014B Taxable First Mortgage Revenue Bond
were retired with $60,000 in cash payments and 67,000 in non-cash payments; $452,000 of Series 2014A First Mortgage Revenue Bonds
were retired with non-cash payments. The Series 2014 Bonds were issued pursuant to a March 1, 2014 Indenture of Trust between
the Authority and the Bank of Oklahoma. $4,325,000 of the Series 2014A Bonds mature on March 1, 2044 and accrue interest at a
fixed rate of 7.75% per annum. The remaining $750,000 of the Series 2014A Bonds mature on various dates through final maturity
on March 1, 2029 and accrue interest at a fixed rate of 7.0% per annum. The Series 2014B Bonds mature on March 1, 2023 and accrue
interest at a fixed rate of 8.5% per annum. The debt is secured by a first mortgage lien on the independent living units and assisted
living facility (facilities), an assignment of the facilities’ leases, a first lien on all personal property located in
the facilities, and a guarantee by the Company. Deferred loan costs incurred of $478,950 and an original issue discount of $78,140
related to the loan are amortized to interest expense over the life of the loan. Amortization expense related to deferred loan
costs and the original issue discount totaled $18,817 and $2,791 for the year ended December 31, 2018 and $18,817 and $3,044 for
the year ended December 31, 2017. The loan agreement includes certain financial covenants required to be maintained by the Company,
with which we were not compliance as of December 31, 2018. There is $5,061,000 in voluntary non-cash principal reduction payments
during the year ended December 31, 2018. As of December 31, 2018 and December 31, 2017, restricted cash of $1,179 and $565,963,
respectively is related to these bonds.
During
the year ended December 31, 2017, the Company invested $299,277 in debt securities, consisting of the Tulsa County Industrial
Authority Series 2014 Bonds secured by the Southern Hills ALF and ILF. We subsequently used $55,808 of these purchases to settle
and retire debt obligations related to these bonds for the face value of $92,000. This resulted in a gain on extinguishment of
debt of $36,192 based on the difference between investment in debt and the settled debt obligation.
During
the year ended December 31, 2017, the Company executed two tender offers to purchase the debt back from the note holders. The
Company successfully retired $427,000 of principal balance from these two tender offers and recorded a gain on extinguishment
of debt of $138,937.
During
the year ended December 31, 2018 the Company undertook six tender offers with funds from the First Commercial Line of Credit to
purchase bonds from note holders, retiring $608,000 bonds for $509,479 and recording a corresponding gain on settlement of debt
of $98,521. On November 1, 2018, the Company called and retired these bonds with $4,560,010 of proceeds from the First
Commercial Line of Credit in place at the Southern Hills Retirement Center, recognized a net loss on debt settlement of
$383,514, and paid $559,158 cash for bond retirement and accrued interest.
Other
Debt
Other
debt due at December 31, 2018 and 2017 includes unsecured notes payable issued to entities controlled by the Company used to facilitate
the acquisition of the nursing home properties.
|
|
Face
|
|
|
Principal
Outstanding at
|
|
|
Stated
Interest
|
|
Maturity
|
|
Property
|
|
Amount
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
Rate
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Nursing Home
|
|
$
|
2,180,000
|
|
|
$
|
1,536,000
|
|
|
$
|
1,536,000
|
|
|
13%
(1)
Fixed
|
|
|
December
31, 2019
|
|
|
(1)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding
the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets
and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed
to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time
as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors
pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13%
beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed
that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the
principal balance of the notes.
|
For
the years ended December 31, 2018 and 2017, the Company received proceeds from the issuance of debt of $2,053,384 and
$1,386,336, respectively. Cash payments on debt totaled $465,704 and $720,044 for the years ended December 31, 2018
and 2017, respectively
Future
maturities and principal payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:
Years
|
|
|
|
2019
|
|
$
|
19,681,716
|
|
2020
|
|
|
8,991,484
|
|
2021
|
|
|
5,628,778
|
|
2022
|
|
|
64,013
|
|
2023
|
|
|
66,541
|
|
2024 and after
|
|
|
2,671,638
|
|
|
|
|
|
|
|
|
$
|
37,104,170
|
|
7
.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences
as may be determined by the Board of Directors.
Series
A Convertible Redeemable Preferred Stock
The
Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred
stock has a senior liquidation preference value of $2.00 per share and does not bear dividends.
As
of December 31, 2018 and 2017, the Company has 200,500 shares of Series A Preferred Stock outstanding.
Series
D Convertible Preferred Stock
The
Company has established a class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred
stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share. Holders of the Series
D preferred stock are entitled to receive dividends at the annual rate of 8% based on the stated value per share computed on the
basis of a 360-day year and 12 30-day months. Dividends are cumulative, shall be declared quarterly, and are calculated from the
date of issue and payable on the 15th day of April, July, October and January. The dividends may be paid, at the option of the
holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the dividend
record date. Shares of the Series D preferred stock are redeemable at the Company’s option. At the option of the holder,
shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s
common stock at a conversion rate of $1.00 per share.
As
of December 31, 2018 and 2017, the Company had 375,000 shares of Series D Preferred Stock outstanding.
For
years ended December 31, 2018 and 2017, the Company declared $30,000 in preferred dividends. During the years ended December 31,
2018 and 2017, the Company paid $30,000 and $30,000, respectively, for Series D preferred stock dividends. $7,500 were accrued
as of December 31, 2018 and will be paid in 2019; $7,500 were accrued as of December 31, 2017 and were paid in 2018.
Common
Stock
The
Company issued 1,012,060 shares of common stock to two officers for compensation during 2017. The fair value of the common stock
issued for compensation was measured at the volume weighted average price of the Company’s common stock for the ten trading
days prior to issuance. The fair value of the shares in the amount of $488,320 was recognized as general and administrative expense
in the consolidated statements of operations.
The
Company issued 962,500 shares of common stock to directors and executive officers for compensation during 2018. The fair value
of the common stock issued for compensation was measured at the volume weighted average price of the Company’s common stock
for the ten trading days prior to issuance.
Under
the Company’s stock repurchase program approved by the Board in July 2018, in November 2018 the Company completed repurchases
of 458,140 shares of Common Stock for $132,795 in privately negotiated transactions.
For
the years ended December 31, 2018 and 2017, the Company did not pay dividends on common stock.
Restricted
Stock Awards
The
following table summarizes the restricted stock unit activity during the years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Beginning
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
962,500
|
|
|
|
1,273,057
|
|
Vested
|
|
|
(812,500
|
)
|
|
|
(1,273,057
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted Stock Units, Ending
|
|
|
150,000
|
|
|
|
-
|
|
In
connection with director restricted stock grants, the Company recognized stock-based compensation of $402,392 and $488,320 for
the years ended December 31, 2018 and 2017, respectively.
Common
Stock Warrants
As
of December 31, 2018 and 2017, the Company had 2,874,461 and 2,269,596, respectively, of outstanding warrants to purchase common
stock at a weighted average exercise price of $0.57 and $0.80, respectively. Activity for the years ended December 31, 2018 and
2017 related to common stock warrants follows:
|
|
2018
|
|
|
2017
|
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
|
2,269,596
|
|
|
$
|
0.80
|
|
|
|
1,821,736
|
|
|
$
|
0.79
|
|
Issued
|
|
|
2,346,000
|
|
|
|
0.27
|
|
|
|
900,000
|
|
|
|
0.75
|
|
Cancelled
|
|
|
(1,075,000
|
)
|
|
|
0.75
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(398,010
|
)
|
|
|
0.68
|
|
|
|
(452,140
|
)
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
3,142,586
|
|
|
$
|
0.60
|
|
|
|
2,269,596
|
|
|
$
|
0.80
|
|
The
aggregate intrinsic value of common stock warrants outstanding as of December 31, 2018 and 2017 was $0 and $0, respectively.
8
.
RELATED PARTIES
During
2018 the management company involved with the Abbeville facility incurred $15,617 of expenses that are reimbursable by the Company,
and the Company accrued $15,617 of liabilities presented net of “other assets” on the balance sheet.
Mr.
Neuman provides office space for the Company’s Controller at no charge. In 2017, Mr. Neuman was issued 52,632 shares of
common stock with a fair value of $30,000 for directors’ fees. During the year ended December 31, 2017, a gain of $32,073
was recognized from an agreement to reduce the accounts payable due to Mr. Neuman for legal services rendered. As of December
31, 2018 and December 31, 2017, the Company owed Mr. Neuman for legal services rendered $118,230 and $93,114, respectively.
The
Company transitioned the bookkeeping and property management for the Company to Colliers International until Feb 1, 2017. Colliers
International was paid $700 per month per property for this service. Andy Sink, director and the interim Chief Operating Officer
of the Company through his resignation on March 14, 2017, is a partner of Colliers International.
Creative
Cyberweb developed and maintains the Company’s website, and is affiliated with CFO Zvi Rhine’s family. The initial
setup fee was $5,000 and ongoing upkeep is $450 per month.
In
the fourth quarter of 2016 and the year of 2017, the Company undertook a private offering (“Offering”) of Units, each
Unit consisting of a 10% Senior Secured Note and one warrant for every dollar in principal amount of Note purchased. In the Offering,
Ultimate Investments, Ltd and the Baller Family Foundation, Inc., each entity controlled by Mr, Baller, each invested $300,000
and 200,000, respectively. Zvi Rhine invested $50,000, while his brother David Rhine invested $50,000 and his father Gary Rhine
invested $25,000. In addition, Adam Desmond invested $100,000 in the Offering and his father Robert Desmond invested $150,000.
During
the year ended December 31, 2017, Zvi Rhine was issued (i) 52,632 shares of common stock for board compensation, (ii) 87,000 shares
of common stock for CFO services provided in the quarter ended December 31, 2016, which resulted in $35,670 of accrued compensation
being settled and reclassed to equity, (iii) 29,269 shares of common stock for bonus compensation (iv) 86,364 shares of common
stock for CFO services provided in the quarter ended March 31, 2017 (v) 84,444 shares of restricted stock for CFO services provided
in the three months ended June 30, 2017 and (vi) 168,889 shares of restricted stock as a retainer for services rendered for the
remaining months of calendar year 2017.
During
the year ended December 31, 2017, Lance Baller was issued (i) 52,632 shares of common stock for board compensation, (ii) 174,000
shares of common stock for CEO services provided in the quarter ended December 31, 2016, which resulted in $71,340 of accrued
compensation being settled and reclassed to equity, (iii) 29,269 shares of common stock for bonus compensation (iv) 86,364 shares
of common stock for CEO services provided in the quarter ended March 31, 2017, (v) 84,444 shares of restricted stock for CEO services
provided in the three months ended June 30, 2017 and (vi) 168,889 shares of restricted stock as a retainer for services rendered
for the remaining months of calendar year 2017.
During
the year ended December 31, 2017, the directors of the Company (six persons – including the Company CEO and CFO) were granted
a total of 274,125 shares of restricted common stock for services as directors.
In
January 2018, the Directors modified the Directors’ Compensation Plan to provide the annual grants be subject to ratable
vesting over 12 months. The Board approved an annual grant to each of its six Directors of 93,750 shares, subject to vesting.
In connection with these director restricted stock grants, the Company recognized stock-based compensation of $180,000 for the
year ended December 31, 2018.
In
May 2018, the Company approved an Employment Agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year (which
accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000 shares
of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000 of the
Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter
each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company has
accrued $165,000 in salaries and recognized $139,892 in stock-based compensation.
On
September 6, 2018, a stock-based compensation grant was made to Lance Baller in consideration of his services as CEO for the six
months ended June 30, 2018. The grant consisted of 250,000 shares of common stock valued at $0.33 per share, total value $82,500.
9
.
FACILITY LEASES
The
following table summarizes our leasing arrangements related to the Company’s healthcare facilities:
Facility
|
|
Monthly Lease
Income
(1)
|
|
|
Lease Expiration
|
|
|
Renewal Option, if any
|
Middle Georgia
|
|
$
|
60,000
|
|
|
|
October 31, 2022
|
|
|
None
|
Warrenton
|
|
$
|
55,724
|
|
|
|
June 30, 2026
|
|
|
Term may be extended for one additional ten-year term.
|
Goodwill
(2)
|
|
$
|
40,125
|
|
|
|
February 1, 2027
|
|
|
Term may be extended for one additional five-year term.
|
Edwards Redeemer
|
|
$
|
48,728
|
|
|
|
October 31, 2022
|
|
|
Term may be extended for one additional five-year term.
|
Providence
|
|
$
|
42,519
|
|
|
|
June 30, 2026
|
|
|
Term may be extended for one additional ten-year term.
|
Meadowview
(3)
|
|
$
|
-
|
|
|
|
October 31, 2023
|
|
|
Term may be extended for one additional five-year term.
|
GL Nursing
(4)
|
|
$
|
-
|
|
|
|
-
|
|
|
None
|
Abbeville
(5)
|
|
$
|
-
|
|
|
|
-
|
|
|
None
|
Southern Hills SNF
(6)
|
|
$
|
37,000
|
|
|
|
May 31, 2019
|
|
|
Term may be extended for one additional five-year term.
|
Southern Hills ALF
(7)
|
|
$
|
-
|
|
|
|
-
|
|
|
None
|
Southern Hills ILF
(8)
|
|
$
|
-
|
|
|
|
-
|
|
|
None
|
(1)
|
Monthly
lease income reflects rent income on a straight-line basis over, where applicable, the term of each lease.
|
(2)
|
In
January 2016, the Goodwill facility was closed by Georgia regulators and all residents were removed. In a transaction related
to the sale of the Greene Point facility, an affiliate of the buyer of Greene Point executed a ten year operating lease covering
Goodwill. After investing approximately $2.0 million in capital improvements in the property, the lease operator obtained
all regulatory approvals and began admitting patients in December 2016. The lease became effective on February 1, 2017, and
the facility began generating rental revenue thereafter.
|
(3)
|
The
lease was generating $33,000 in monthly gross rent; however, the operator experienced adverse results in late 2017 and throughout
2018. In April 2018 the Company recognized a bad debt expense of $56,000 related to rent receivables previously booked
in 2018 at the Meadowview facility. E
ffective December 1,
2018, the Company completed the operations transfer to an affiliate of Infinity Health Interests, LLC (“Infinity”).
The lease is structured with a lower base rent component than the prior operator but also includes occupancy-based escalators
that will better align facility operations with future rental payments.
|
(4)
|
Effective
January 1, 2016, the GL Nursing facility was leased to another operator for a period of ten years at a monthly base rent of
$30,000 which was subject to increases based on census levels. Under the terms of the lease, the Company agreed to fund certain
capital expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice that it was terminating the
lease effective August 31, 2016. The Company entered into a Lease Termination Agreement under which it paid the tenant $145,000
and is obligated to make future payments. Effective August 30, 2016, the Company entered into a new lease agreement with another
nursing home operator. The lease term was to commence at the end of a straddle period. During the straddle period, the Company
made working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the
facility. Prior to the end of the straddle period, the lease operator informed the Company that it would vacate the facility.
An entity affiliated with Mr. Brogdon, who is a guarantor of the mortgage, assumed operations of the facility in March 2018
under an OTA. We do not expect the facility to generate any future revenue for the Company.
|
(5)
|
The
Company entered into a management agreement with Cadence Healthcare Solutions to operate Abbeville after expending approximately
$1.0 million in capital improvements. The facility passed its licensure survey and began admitting patients in June 2018.
Effective October 12, 2018, the facility gained its certification and plans to begin billing and collecting revenues from
Medicare and Medicaid going forward.
|
(6)
|
Lease
agreement dated May 21, 2014 with lease payments commencing February 1, 2015. On May 10, 2016, the Company obtained a Court
Order appointing a Receiver to control and operate the Southern Hills SNF. The former lease operator represented that it was
unable to meet the financial commitments of the facility, including the payment of rent, payroll and other operating requirements.
In October 2017, the Receiver engaged a new manager for the facility at the request of the Company.
|
(7)
|
The
lease on the ALF has been abandoned. The Company plans to seek a new tenant for this facility to assume operations at the
completion of construction.
|
(8)
|
The
Southern Hills ILF requires renovation and is not subject to an operating lease.
|
Lessees
are responsible for payment of insurance, taxes and other charges while under the lease. Should the lessees not pay all such charges
as required under the leases, or if there is no tenant, the Company may become liable for such operating expenses. We have been
required to cover those expenses previously at Grand Prairie in Lonoke, Abbeville, and Southern Hills ALF and ILF.
Future
cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows
(excludes Abbeville, Meadowview, Southern Tulsa ALF and Southern Tulsa ILF (due to property being non-operating), as well as and
GL Nursing):
Years
|
|
|
|
|
|
|
|
2019
|
|
$
|
3,477,438
|
|
2020
|
|
|
3,165,946
|
|
2021
|
|
|
3,183,242
|
|
2022
|
|
|
3,015,544
|
|
2023
|
|
|
1,922,794
|
|
2024 and Thereafter
|
|
|
5,120,111
|
|
|
|
|
|
|
|
|
$
|
19,885,075
|
|
10
.
INCOME TAXES
The
Company and its subsidiaries are subject to income taxes on income arising in, or derived from, the tax jurisdictions in which
they operate. The Company is current with all its federal and state tax filings. The Company is open to examination for tax years
1999 through 2018 due to the carry back of net operating losses. On December 22, 2017, H.R. 1, formally known as the Tax Cut and
Jobs Act (the “Act”) was enacted into law. The Act provides for significant tax law changes and modifications with
varying effective dates. The major change that affects the Company is reducing the corporate income tax rate from 35% to 21%.
The
following is a reconciliation of the federal statutory tax rate and the effective tax rate as a percentage for the years ended
December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Statutory Federal Income Tax Rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Warrant Liability
|
|
|
21
|
|
|
|
34
|
|
Tax Rate Reduction
|
|
|
-
|
|
|
|
(13
|
)
|
Effect of Valuation Allowance on Deferred Tax Assets
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
%
|
|
|
-
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The
components of deferred tax assets as of December 31 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
2,730,949
|
|
|
$
|
4,026,943
|
|
Capital Loss Carryforward
|
|
|
-
|
|
|
|
-
|
|
Impairment Loss on Long Term Assets
|
|
|
327,600
|
|
|
|
327,600
|
|
Goodwill Impairment
|
|
|
595,154
|
|
|
|
595,154
|
|
Stock Based Compensation
|
|
|
369,590
|
|
|
|
285,088
|
|
Acquisition Costs
|
|
|
111,099
|
|
|
|
111,099
|
|
Other
|
|
|
147,552
|
|
|
|
195,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,281,944
|
|
|
|
5,541,232
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Bargain Purchase Gain
|
|
|
(1,020,000
|
)
|
|
|
(1,020,000
|
)
|
Property and Equipment
|
|
|
(313,848
|
)
|
|
|
(375,640
|
)
|
Other
|
|
|
(26,709
|
)
|
|
|
(13,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,360,557
|
)
|
|
|
(1,409,102
|
)
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(2,921,387
|
)
|
|
|
(4,132,130
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance at December 31, 2018 and 2017 was primarily related to federal net operating loss carryforwards that, in the
judgment of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the
impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making
this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of
approximately $13,000,000 prior to the expiration of the net operating loss carryforwards beginning in 2018. Taxable loss for
the year ended December 31, 2018 approximated $1,350,000. Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not
that the Company will not realize the benefits of these deductible differences, net of the existing valuation allowance at December
31, 2018.
When
more than a 50% change in ownership occurs, over a three-year period, as defined, the Tax Reform Act of 1986 limits the utilization
of net operating loss carry forwards in the years following the change in ownership. No determination has been made as of December
31, 2018, as to what implications, if any, there will be in the net operating loss carry forwards of the Company.
11
.
FAIR VALUE MEASUREMENTS
Financial
assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon a fair value
hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level
1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level
2— Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level
3— Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing
assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the
instruments.
A
financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
Our
consolidated balance sheets include the following financial instruments: cash and cash equivalents, advances to related parties,
notes receivable, restricted cash, accounts payable, debt and lease security deposit. We consider the carrying values of our short-term
financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the
short period of time between origination of the financial assets and liabilities and their expected settlement, or because of
their proximity to acquisition date fair values. The carrying value of debt approximates fair value based on borrowing rates currently
available for debt of similar terms and maturities.
Upon
acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price
based on the fair value of the tangible assets and intangible assets, if any, acquired and any liabilities assumed based on Level
3 inputs. These Level 3 inputs can include comparable sales values, discount rates, and capitalization rates from a third party
appraisal or other market sources.
Assets
and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 are summarized below:
|
|
|
|
|
Fair Value Measurement
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
2,785
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,785
|
|
Investment in Debt Securities
|
|
|
162,106
|
|
|
|
162,106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018
|
|
$
|
164,891
|
|
|
$
|
162,106
|
|
|
$
|
-
|
|
|
$
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
95,371
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95,371
|
|
Investment in Debt Securities
|
|
|
243,469
|
|
|
|
243,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2017
|
|
$
|
338,840
|
|
|
$
|
243,469
|
|
|
$
|
-
|
|
|
$
|
95,371
|
|
Because
these warrants have full reset adjustments tied to future issuance of equity securities by the Company, it is subject to derivative
liability treatment under ASC 815-40-15.
The
warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other
(Income) Expense on the Company’s Consolidated Statement of Operations until the warrants are exercised, expire, or other
facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability
is determined each reporting period by utilizing the Black-Scholes option pricing model.
The
table presented below is a summary of changes in the fair value of the Company’s level 3 valuation for the warrant liability
for the years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning Balance January 1
|
|
$
|
95,371
|
|
|
$
|
246,451
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
(92,586
|
)
|
|
|
(151,080
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance, December 31
|
|
$
|
2,785
|
|
|
$
|
95,371
|
|
The
significant assumptions used in the Black-Scholes option pricing model as of December 31, 2018 and 2017 include the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
63.58%
- 91.93
|
%
|
|
|
109.3% - 122.22
|
%
|
Risk-free Interest Rate
|
|
|
2.36%
- 2.59
|
%
|
|
|
1.03% - 1.27
|
%
|
Exercise Price
|
|
$
|
0.75
- $1.37
|
|
|
$
|
0.75 - $1.37
|
|
Fair Value of Common Stock
|
|
$
|
0.33
|
|
|
$
|
0.40
|
|
Expected Life
|
|
|
0.45
– 0.99 years
|
|
|
|
0.97 – 1.99 years
|
|
12
.
SEGMENT REPORTING
The
Company had two primary reporting segments during the year ended December 31, 2018, which include real estate services and healthcare
services. The Company reports segment information based on the “management approach” defined in
ASC 280, Segment
Reporting.
The management approach designates the internal reporting used by management for making decisions and assessing
performance as the source of our reportable segments.
Total
assets for the healthcare services and real estate services segments were $145,260 and $38,150,627, respectively, as of December
31, 2018. As of December 31, 2017, all the Company’s assets were in the real estate services segment.
|
|
Statements of Operations Items for the Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Real Estate
Services
|
|
|
Healthcare Services
|
|
|
Consolidated
|
|
|
Real Estate Services
|
|
|
Healthcare Services
|
|
|
Consolidated
|
|
Rental Revenue
|
|
$
|
3,507,366
|
|
|
$
|
-
|
|
|
$
|
3,507,366
|
|
|
$
|
3,129,928
|
|
|
$
|
-
|
|
|
$
|
3,129,928
|
|
Net Healthcare Revenue
|
|
|
-
|
|
|
|
116,025
|
|
|
|
116,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
3,507,366
|
|
|
|
116,025
|
|
|
|
3,623,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
752,812
|
|
|
|
346,367
|
|
|
|
1,099,179
|
|
|
|
1,001,202
|
|
|
|
-
|
|
|
|
1,001,202
|
|
Property Taxes, Insurance and Other Operating
|
|
|
232,090
|
|
|
|
558,864
|
|
|
|
790,954
|
|
|
|
424,348
|
|
|
|
-
|
|
|
|
424,348
|
|
Depreciation
|
|
|
1,256,279
|
|
|
|
2,066
|
|
|
|
1,258,345
|
|
|
|
1,239,865
|
|
|
|
-
|
|
|
|
1,239,865
|
|
Total Expenses
|
|
|
2,241,181
|
|
|
|
907,297
|
|
|
|
3,148,478
|
|
|
|
2,665,415
|
|
|
|
-
|
|
|
|
2,665,415
|
|
Income (Loss) from Operations
|
|
|
1,266,185
|
|
|
|
(791,272
|
)
|
|
|
474,913
|
|
|
|
464,513
|
|
|
|
-
|
|
|
|
464,513
|
|
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Warrant Liability
|
|
|
(92,586
|
)
|
|
|
-
|
|
|
|
(92,586
|
)
|
|
|
(151,080
|
)
|
|
|
-
|
|
|
|
(151,080
|
)
|
(Gain) Loss on Extinguishment of Debt
|
|
|
659,654
|
|
|
|
-
|
|
|
|
659,654
|
|
|
|
(175,129
|
)
|
|
|
-
|
|
|
|
(175,129
|
)
|
Gain on Settlement of Other Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,073
|
)
|
|
|
-
|
|
|
|
(32,073
|
)
|
Gain on Sale of Investments
|
|
|
(193,053
|
)
|
|
|
-
|
|
|
|
(193,053
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Impairment Loss of Long Term Assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,560,000
|
|
|
|
-
|
|
|
|
1,560,000
|
|
Interest Income
|
|
|
(29,983
|
)
|
|
|
-
|
|
|
|
(29,983
|
)
|
|
|
(13,079
|
)
|
|
|
-
|
|
|
|
(13,079
|
)
|
Loss on Modification of Warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,696
|
|
|
|
|
|
|
|
62,696
|
|
Interest Expense
|
|
|
2,137,887
|
|
|
|
-
|
|
|
|
2,137,887
|
|
|
|
2,214,796
|
|
|
|
-
|
|
|
|
2,214,796
|
|
Total Other (Income) Expense
|
|
|
2,481,919
|
|
|
|
-
|
|
|
|
2,481,919
|
|
|
|
3,466,131
|
|
|
|
-
|
|
|
|
3,466,131
|
|
Net Income (Loss)
|
|
|
(1,215,734
|
)
|
|
|
(791,272
|
)
|
|
|
(2,007,006
|
)
|
|
|
(3,001,618
|
)
|
|
|
-
|
|
|
|
(3,001,618
|
)
|
Net Loss Attributable to Noncontrolling Interests
|
|
|
14,843
|
|
|
|
-
|
|
|
|
14,843
|
|
|
|
5,078
|
|
|
|
-
|
|
|
|
5,078
|
|
Net Income (Loss) Attributable to Global Healthcare REIT, Inc.
|
|
$
|
(1,200,891
|
)
|
|
$
|
(791,272
|
)
|
|
$
|
(1,992,163
|
)
|
|
$
|
(2,996,540
|
)
|
|
$
|
-
|
|
|
$
|
(2,996,540
|
)
|
13
.
LEGAL PROCEEDINGS
The
Company and/or its affiliated subsidiaries are or were involved in the following litigation:
In
March 2019, a civil complaint was filed in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, captioned Bailey v. Skyline,
et.al. GL Nursing, LLC, the Company’s wholly owned subsidiary, was named as a co-defendant in the action arising out of
a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL
Nursing. As of this date, no responsive pleadings have been filed and no further information is known regarding the merits of
the claim.
After
initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering
the GL Nursing, as landlord, as required by the operating lease.
As
we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the
operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend
to assert.
While
it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Southern
Tulsa, LLC v. Healthcare Management of Oklahoma, LLC,
District Court of Tulsa County, State of Oklahoma, Case No. CJ –
2016- 01781.
This
matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former
operator at that facility. The Court has ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters
are pending.
Thomas
v. Edwards Redeemer Property Holdings, LLC, et.al.,
District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This
action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility. We are entitled
to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As
we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s
insurance carrier is providing a defense and indemnity; and as a result we believe the likelihood of a material adverse result
is remote.
14
.
SUBSEQUENT EVENTS
In
January 2019, we extended our first mortgage note on the Warrenton property to January 20, 2020. The interest rate increased from
5.0% to 5.5% but our monthly debt service payments were held constant from the prior loan.
In
February 2019, Colony Bank expanded our line of credit to $400,000 to provide additional working capital to scale operations at
our Abbeville facility. The line of credit matures on September 30, 2019.
In
February 2019, the maturity of the line of credit on our Southern Hills Retirement Center was extended to April 28, 2019,
with the intent to convert into an amortizing loan thereafter.
Effective
March 1, 2019, we issued 90,909 shares of common stock to each of Baller, Desmond and Neuman under the Directors’ Compensation
Plan.
On April 12, 2019, the Company entered
into a definitive Asset Purchase Agreement to acquire the Higher Call Nursing Center in Quapaw, Oklahoma. The transaction is subject
to numerous conditions such as completing our due diligence, financing, completion of the operations transfer agreement, and is
not closed as of the date of this report.