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PART
I
Background
Selectis
Health, Inc. (“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries,
Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions
of the US. In 2019 the Company shifted from leasing long-term care facilities to third-party, independent operators towards a model where
a wholly owned subsidiary would operate but is owned by another wholly owned subsidiary.
Prior
to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. from September 30, 2013,
to May 2021. Prior to this, 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”). WPF was merged into the Company in 2019.
In
May 2021, the Company successfully rebranded to Selectis Health, Inc., from Global Healthcare REIT, Inc. to better align with the current
and future business model, which is to own and operate its facilities.
We
acquire, develop, lease, manage, and dispose of healthcare real estate, provide financing to healthcare providers, and provide healthcare
operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following healthcare segments: (i)
senior housing (including independent and assisted living) and (ii) post-acute/skilled nursing. We make investments within our healthcare
segments using the following six strategies: (i) direct ownership of properties, (ii) debt investments, (iii) developments and
redevelopments, (iv) investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents
investments in senior housing operations utilizing the structure permitted by RIDEA and (vi) owning healthcare operations.
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.
In
the future, the Company intends to continue to search for operations that will enhance our portfolio of healthcare centers.
Real
Estate Industry
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.
The
Company owns 13 healthcare facilities. Initially, the Company simply owned the physical property and real estate and leased or subleased
the facility to third-party operators. In 2019, the Company intentionally decided to begin moving towards operations through newly created
independent operating subsidiaries. In the future, the Company intends to own and operate all future facilities. As of December 31, 2022,
the Company, through wholly-owned subsidiaries, operates 11 healthcare facilities.
Business
Strategy
As
an organization, our primary goal is to increase shareholder value through profitable growth and professional healthcare. Our investment
strategy to achieve this goal is based on four principles: (i) quality healthcare for our residents, (ii) opportunistic investing, (iii)
portfolio diversification and (iv) conservative financing.
Quality
Healthcare for our Residents
Our
healthcare operations continue to bolster our revenue. Over the last two years, our operational footprint has grown from one facility
to nine. The mix of our revenues, from leasing facilities to our owner operator model has shifted drastically from rents to healthcare
as well. To ensure this continues our operational teams and staff at our facilities are dedicated to maintaining the highest of standards
and quality care metrics in line with, but not limited to, the CDC, ADA, CMS, and all state and local guidelines.
Opportunistic
Investing
We
will make investment decisions that are expected to drive profitable growth and create shareholder value. We will perform in depth due
diligence and quantitative and qualitative analyses to ensure that we position ourselves to create and take advantage of situations to
meet our goals and investment criteria that will continue to add to the Company’s strategic and financial value.
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 this 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. 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 operations and tenants to compete with other healthcare 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
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 operations and tenants in these facilities will be primarily paid for either by private sources or through
the Medicare and Medicaid programs.
Independent
Living Facilities (“ILFs”). 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 activities
of daily living (“ADL”), such as bathing, eating, and dressing. However, residents have the option to contract for these
services.
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 operations 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 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.
Continuing
Care Retirement Communities (“CCRCs”). 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.
Investments
Direct
Ownership. We plan to primarily generate revenue by purchasing properties and operating the facilities internally. Most of our revenue
will be received from government agencies, hospice companies, managed care contracts and private pay receipts that will provide for a
substantial recovery of operating expenses including but not limited to staffing, supplies, bed taxes, real estate taxes, repairs and
maintenance, utilities, and insurance. For existing properties with leases in place, our rents will be received from leases under triple
net leases.
Operating
Properties. We may enter 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”). Additionally, as an owner operator, our local
teams work to create alignment with our internal health care providers to scale operating efficiencies, and/or ancillary services to
drive profitable growth.
Our
ability to grow income from our properties depends, in part, on our ability to (i) increase revenue and other earned income by increasing
occupancy levels and improving rates, (ii) manage bad debt and (iii) control operating expenses. For properties under lease, 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 federal, state, and/or local banks 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.
Recent
Financings
2021
Senior Secured Note Extension
On
January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering of 11%
Senior Secured Notes. The total amount of the Offering was increased to $2,500,000. Effective February 5, 2020 and March 3, 2020, the
Company completed the sale of $60,000 and $100,000, respectively, of Units in the Offering. The sale of $100,000 Units on March
3, 2020 was to a related party. Effective October 31, 2020 the Company completed the exchange of $150,000 of Units in the Offering for
matured Senior Unsecured Notes. No fees or commissions were paid on the sale of the Units. The proceeds were used for general working
capital.
In
October 2021, the Company renegotiated the Senior Secured Notes, originally issued in 2018. The new terms were for 10% annual interest
through June 30, 2023. The warrants issued and associated with these notes were extended through the same date. All other terms remain
the same.
Exchange
of Senior Notes for Common Stock
In
the fourth quarter of 2021 and first quarter of 2022, the Company completed the exchange of an aggregate of $795,000 in principal amount
of Senior Secured Notes for 159,000 shares of Common Stock valued at $5.00 per share.
COVID-19
Pandemic
In
December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization
declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported globally.
Starting
in March 2020, the COVID-19 pandemic, and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio,
occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices
began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to
rise materially, including for services, labor and personal protective equipment and other supplies, as our operations took appropriate
actions to protect residents and caregivers. These trends accelerated in fiscal year 2021, and are expected to continue through at least
December 2023, impacting revenues and net operating income.
The
Centers for Disease Control & Prevention (“CDC”) will provide final confirmation of the cases. The Company is engaging
in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health and safety of
residents while respecting their rights. Employees at all of our facilities are taking several precautions as they care for residents,
including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the
skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Our operations
have also reported to us that they currently have adequate supply levels, including appropriate quantities of Personal Protective Equipment
(PPE) for staff.
The
federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support
to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers, and
managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic,
and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them
closely and have been in active dialogue with our tenants, operators, borrowers, and managers regarding ways in which these programs
could benefit them or us.
The
COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely change
as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential
to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational
and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operations,
employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties,
we cannot reasonably estimate the related impact to our business, operating results, and financial condition.
We
expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The
extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future developments,
including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions
begin to lift, the availability of government financial support to our business, tenants, and operators and whether a resurgence of the
outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on
our business, results of operations, financial condition, and cash flows but it could be material.
PPP and CARES Act
On
April 1, 2021, the Company received confirmation that the request for forgiveness for the second round of Paycheck Protection Program
(“PPP”) finding was forgiven. In April and May of 2020, we applied for and were approved for an aggregate of $1,610,169 in
Paycheck Protection Program (“PPP”) loans issued by the SBA. As a result of newly adopted amendments to the PPP program,
60% of the PPP loan amount must be expended on payroll in the 24 week-period following the loan date. On November 19, 2020, the Company
received notice of forgiveness of the entire balance on two of its three loans obtained through the PPP (the “PPP Loans”)
of the CARES Act. The forgiveness included principal of $324,442 and $710,752, as well as interest payable of $1,794 and $3,869. The
Company applied for forgiveness on the remaining $574,975 principal and interest payable of $4,017, which was approved by the SBA on
June 16, 2021.
Government
Regulations, Licensing and Enforcement
Overview
Our
operations, and tenants 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 our operations 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 operations can all have a significant effect on the financial condition of the property, 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 operations and tenants by
diversifying our portfolio among property types and geographical areas, diversifying our tenant and operations base to limit our exposure
to any single entity, and seeking tenants and operations that are not largely dependent on Medicaid reimbursement for their revenues.
In addition, we ensure in each instance that our operations 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 operations and tenants.
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 operations 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.
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 our ability to expand or operative effectively.
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 the aspects of U.S. federal income taxation that may be relevant to you considering 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 U.S. federal, state, local, foreign, and other tax consequences of
acquiring, owning, and selling our securities.
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.
Health
Care Regulatory Climate
Government
Regulation and Reimbursement
The
healthcare industry is heavily regulated. Our operations are subject to extensive and complex federal, state and local healthcare laws
and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation,
rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes,
which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operations, in addition to regulatory
non-compliance by our operations, can have a significant effect on the operations and financial condition of our operations, which in
turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the
broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
The
U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020 following the
World Health Organization’s decision to declare COVID-19 a public health emergency of international concern. This declaration,
which has been extended through April 14, 2022, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed
to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and
documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and
expanding the list of approved services which may be provided via telehealth. These regulatory actions have contributed, and may continue
to contribute, to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when
federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the
public health emergency due to the exercise of enforcement discretion.
These
temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020
and discussed below, continue to have a significant impact on our operations and financial condition. The extent of the COVID-19 pandemic’s
effect on the Company’s operational and financial performance will depend on future developments, including the sufficiency and
timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, the impact of genetic mutations of
the virus into new variants, the impact of vaccine distributions and booster doses on our operations and their populations, the impact
of vaccine mandates on staffing shortages at our operations, as well as the difference in how the pandemic may impact SNFs in contrast
to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to these uncertainties, we are not able at
this time to estimate the effect of these factors on our business; however, the adverse impact on our business, results of operations,
financial condition and cash flows could be material.
A
significant portion of our revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid.
As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will
likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have
a material adverse effect on our results of operations and financial condition. Additionally, new and evolving payor and provider programs
that are tied to quality and efficiency could adversely impact our liquidity, financial condition or results of operations, and there
can be no assurance that payments under any of these government healthcare programs are currently, or will be in the future, sufficient
to fully reimburse us for our operating and capital expenses. In addition to quality and value based reimbursement reforms, the U.S.
Centers for Medicare and Medicaid Services (“CMS”) has implemented a number of initiatives focused on the reporting of certain
facility specific quality of care indicators that could affect our operations, including publicly released quality ratings for all of
the nursing homes that participate in Medicare or Medicaid under the CMS “Five Star Quality Rating System.” Facility rankings,
ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis.
SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures. These rating
changes have impacted referrals to SNFs, and it is possible that changes to this system or other ranking systems could lead to future
reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
The
following is a discussion of certain U.S. laws and regulations generally applicable to our operations.
Reimbursement
Changes Related to COVID-19:
U.S.
Federal Stimulus Funds and Financial Assistance for Healthcare Providers. In response to the pandemic, Congress has enacted a series
of economic stimulus and relief measures. On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted
in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage
(“FMAP”) effective January 1, 2020. The temporary FMAP increase was set to extend through the last day of the calendar quarter
in which the public health emergency terminates. In exchange for receiving the enhanced federal funding, the FFCRA included a requirement
that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminates. However,
as part of the Consolidated Appropriations Act of 2023 signed into law on December 29, 2022, Congress decoupled the Medicaid continuous
enrollment from the public health emergency and terminates this provision effective March 31, 2023. Additionally, starting April 1, 2023,
states that comply with federal rules regarding conducting renewals may begin the phase-down of the enhanced federal funding according
to the following schedule: 6.2 percentage points through March 2023; 5 percentage points through June 2023; 2.5 percentage points through
September 2023 and 1.5 percentage points through December 2023. States cannot restrict eligibility standards, methodologies, and procedures
and states cannot increase premiums as required in FFCRA. Primarily due to the continuous enrollment provision, Medicaid enrollment has
grown substantially compared to before the pandemic and the uninsured rate has dropped. The extent to which this increase in Medicaid
enrollment is sustained following the discontinuation of the continuous enrollment provision is uncertain.
In
further response to the pandemic, the CARES Act authorized approximately $178 billion to be distributed through the Provider Relief Fund
to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that were attributable to coronavirus. Funds
have been allocated since 2020 in targeted and general distributions, the latter over four phases. In September 2021, HHS announced the
release of $25.5 billion in phase four provider funding, including $17 billion of the $178 billion previously authorized through the
CARES Act and $8.5 billion for rural providers, including those with Medicaid and Medicare patients, through the American Rescue Plan
Act, with payments that began in December 2021. The Provider Relief Fund is administered under the broad authority and discretion of
HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements.
HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. We
do not expect our operators will receive additional funding from HHS.
The
CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential
to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the
Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash
flow to providers. These payments are loans that providers were scheduled to repay beginning one year from the issuance date of each
provider’s or supplier’s accelerated or advance payment, with repayment made through automatic recoupment of 25% of Medicare
payments otherwise owed to the provider or supplier for eleven months, followed by an increase to 50% for another six months, after which
any outstanding balance would be repaid subject to an interest rate of 4%. We believe these repayments commenced for many of our operators
in April 2021 and have adversely impacted operating cash flows of these operators. While not limited to healthcare providers, the CARES
Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are
otherwise owed for wage payments made after March 27, 2020 through December 31, 2020 to December 31, 2021 with respect to 50% of the
payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
The
Budget Control Act of 2011 established a Medicare Sequestration of 2%, which is an automatic reduction of certain federal spending as
a budget enforcement tool. Originally, the sequester was supposed to be in effect from FY 2013 to FY 2021. However, most recently, the
Infrastructure Investment and Jobs Act extended the sequester through FY 2031. Additional legislation, including the CARES Act and the
Protecting Medicare and American Farmers Act, suspended the application of the sequester to Medicare from May 1, 2020 through March 30,
2022. It also limited Medicare reductions to 1% from April 1, 2022 through June 30, 2022. The full 2% Medicare sequestration went into
effect as of July 1, 2022. The sequestration is currently extended through fiscal year 2031, and gradually increases to 4% from 2030
through 2031.
Quality
of Care Initiatives and Additional Requirements Related to COVID-19. In addition to COVID-19 reimbursement changes, several regulatory
initiatives announced from 2020 to 2022 focused on addressing quality of care in long-term care facilities, including those related to
COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies,
as well as increased inspection of nursing homes. In August 2021, CMS announced it was developing an emergency regulation requiring staff
vaccinations within the nation’s more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS
further announced that the scope of the regulation would be expanded to include workers in hospitals, dialysis facilities, ambulatory
surgical settings, and home health agencies. In addition, recent updates to the Nursing Home Care website and the Five Star Quality Rating
System include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures
and the inclusion of a staff turnover percentage (over a 12-month period). Although the American Rescue Plan Act did not allocate specific
funds directly to SNF or ALF providers, certain funds were allocated to states who then distributed a portion of these funds to SNF and
ALF providers. In addition, the American Rescue Plan Act allocated funds to quality improvement organizations to provide infection control
and vaccination uptake support to SNFs and to the CDC for staffing, training and deployment of state-based nursing home and long-term
care “strike teams” to assist facilities with known or suspected COVID-19 outbreaks. Additionally, the Biden Administration
announced a focus on implementing minimum staffing requirements and increased inspections as part of the nursing home reforms announced
in the 2022 State of the Union Address, and in July 2022, CMS announced it was evaluating a proposed federal staffing mandate for SNFs.
It is uncertain whether such a mandate will be implemented and, if it is, whether it will be accompanied by additional funding to offset
any increased staffing requirements for our operators; an unfunded mandate to increase staff in SNFs may have a material and adverse
impact on the financial condition of our operators.
On
June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation
into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee
continued to be active throughout the remainder of 2020, 2021 and 2022. In March 2021, the Oversight Subcommittee of the House Ways and
Means Committee held a hearing on examining the impact of private equity in the U.S. healthcare system, including the impact on quality
of care provided within the skilled nursing industry. The Biden Administration additionally announced in March 2022 a focus on reviewing
private equity investment specifically in the skilled nursing sector. These initiatives, as well as additional calls for government review
of the role of private equity in the U.S. healthcare industry, could result in additional requirements on our operators.
Reimbursement
Generally:
Medicaid.
Most of our SNF operators derive a substantial portion of their revenue from state Medicaid programs. Whether and to what extent
the level of Medicaid reimbursement covers the actual cost to care for a Medicaid eligible resident varies by state. While periodic rate
setting occurs and, in most cases, has an inflationary component, the state rate setting process not always keep pace with inflation
or, even if it does, there is a risk that is may still not be sufficient to cover all or a substantial portion of the cost to care for
Medicaid eligible residents. Additionally, rate setting is also subject to changes based on state budgetary constraints and political
factors, both of which could result in decreased or insufficient reimbursement to the industry even in an environment where costs are
rising. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid
reimbursement or an increase in the percentage of Medicaid patients has in the past, and may in the future, adversely affect our operators’
results of operations and financial condition, which in turn could adversely impact us.
The
CARES Act and American Rescue Plan Act contained several provisions designed to increase coverage, expand benefits, and adjust federal
financing for state Medicaid programs. While the CARES Act provided for a 6.2% FMAP add-on to the Medicaid program during the PHE, only
certain states passed any of that specifically on to SNF operators either via an enhanced rate or lump sum payments. Additionally, the
American Rescue Plan Act provided for a 10% FMAP add-on for state home and community-based service expenditures from April 1, 2021 through
March 30, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in
nursing homes and other congregate care settings. Both of these programs came with conditions that states had to meet to eligible for
the FMAP add-on. There may be future initiatives proposed to allocate funding available for reimbursement away from SNFs in favor of
home health agencies and community-based care.
The
risks of insufficient Medicaid reimbursement rates along with possible initiatives to push residents historically cared for in SNFs to
alternative settings may impact us more acutely in states where we have a larger presence. We continue to monitor rate adjustment activity
in other states in which we have a meaningful presence, and it is too early to assess whether rates will generally keep pace with increased
operator costs.
Medicare.
On July 29, 2022, CMS issued a final rule regarding the government fiscal year 2023 Medicare payment rates and quality payment programs
for SNFs, with aggregate Medicare Part A payments projected to increase by $904 million, or 2.7%, for fiscal year 2023 compared to fiscal
year 2022. This estimated reimbursement increase is attributable to a 3.9% market basket increase factor plus a 1.5 percentage point
market basket forecast error adjustment and less a 0.3 percentage point productivity adjustment, as well as a $780 million decrease in
the SNF prospective payment system rates as a result of the recalibrated parity adjustment described below, which is being phased in
over two years. The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under
the SNF Quality Reporting Program. CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions
that are estimated to be $186 million in fiscal year 2023. While Medicare reimbursement rate setting, which takes effect annually each
October, has historically included forecasted inflationary adjustments, the degree to which those forecasts accurately reflect current
inflation rates remains uncertain. Additionally, it remains uncertain whether these adjustments will ultimately be offset by non-inflationary
factors, including any adjustments related to the impact of various payment models, such as those described below.
Payments
to providers continue to be increasingly tied to quality and efficiency. The Patient Driven Payment Model (“PDPM”), which
was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019. CMS has stated
that it intended PDPM to be revenue-neutral to operators, with future Medicare reimbursement reductions possible if that was not the
case. In April 2022, CMS issued a proposal for comment, which included an adjustment to obtain that revenue neutrality as early as the
2023 rate setting period. After considering the feedback received in the rulemaking cycle, CMS finalized recalibration of the PDPM parity
adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each
of fiscal years 2023 and 2024. Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings
from increased concurrent and group therapy under PDPM and some had reported early positive results. Given the ongoing impacts of COVID-19,
many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits.
Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value-based purchasing
programs applicable to SNFs under the 2014 Protecting Access to Medicare Act. These reimbursement changes have had and may, together
with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations
and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
On
May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers
for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions. The COVID-19 1135 waiver provisions
also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents
of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023,
the scheduled end of the public health emergency.
Other
Regulation:
Office
of the Inspector General Activities. The Office of Inspector General (“OIG”) of HHS has provided long-standing guidance
for SNFs regarding compliance with federal fraud and abuse laws. More recently, the OIG has conducted increased oversight activities
and issued additional guidance regarding its findings related to identified problems with the quality of care and the reporting and investigation
of potential abuse or neglect at group homes, nursing homes and SNFs. The OIG has additionally reviewed the staffing levels reported
by SNFs as part of its August 2018 and February 2019 Work Plan updates and included a review of involuntary transfers and discharges
from nursing homes in the June 2019 Work Plan updates. In August 2020, the OIG released its findings regarding its review of staffing
levels in SNFs from 2018. The OIG recommended that CMS enhance efforts to ensure nursing homes meet daily staffing requirements and explore
ways to provide consumers with additional information on nursing homes’ daily staffing levels and variability. The OIG indicated
that while the review was initiated before the COVID-19 pandemic emerged, the pandemic reinforces the importance of sufficient staffing
for nursing homes, as inadequate staffing can make it more difficult for nursing homes to respond to infectious disease outbreaks like
COVID-19. It is unknown what impact, if any, enhanced scrutiny of staffing levels by OIG and CMS will have on our operators.
Department
of Justice and Other Enforcement Actions. SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents
and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) has historically used the
False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard.
For example, California prosecutors announced in March 2021 an investigation into a skilled nursing provider that is affiliated with
one of our operators, alleging the chain manipulated the submission of staffing level data in order to improve its Five Star rating.
In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against
nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods
of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive
relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business,
results of operations and cash flows.
Medicare
and Medicaid Program Audits. Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries
and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our operators’ billing practices from time
to time. CMS contracts with Recovery Audit Contractors on a contingency basis to conduct post-payment reviews to detect and correct improper
payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program. Regional Recovery Audit Contractor
program auditors along with the OIG and DOJ are expected to continue their efforts to evaluate SNF Medicare claims for any excessive
therapy charges. CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments.
In addition, the state Medicaid agencies and other contractors have increased their review activities. To the extent any of our operators
are found out of compliance with any of these laws, regulations or programs, their financial position and results of operations can be
adversely impacted, which in turn could adversely impact us.
Fraud
and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider
referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex
laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.
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, such as services provided in a SNF; (iii) federal and state physician
self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated
health services (some of which are provided in SNFs) 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. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive
payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the
Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. 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, which have become more frequent in recent years.
Privacy:
We
and our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security
of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health
Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder
(collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual
notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting
enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights (“OCR”). Additionally,
in a final rule issued in January 2013, HHS modified the standard for determining whether a breach has occurred by creating a presumption
that any non-permitted acquisition, access, use or disclosure of protected health information is a breach unless the covered entity or
business associate can demonstrate through a risk assessment that there is a low probability that the information has been compromised.
Various
states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information
generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend
the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators
found in violation of HIPAA or any other privacy law or regulation may face significant monetary penalties. In addition, compliance with
an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational
harm to an operator’s business.
Licensing
and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws
and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive
standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’
facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from
time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain
healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain
healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.
Other
Laws and Regulations. Additional federal, state and local laws and regulations affect how we conduct our operations, including laws
and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of
their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; the
Americans with Disabilities Act (the “ADA”), which imposes certain requirements to make facilities accessible to persons
with disabilities, the costs for which we may be directly or indirectly responsible; the U.S. Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform
Law”), which amended requirements for staff training, discharge planning, infection prevention and control programs, and pharmacy
services, among others; staffing; quality of services, including care and food service; residents’ rights, including abuse and
neglect laws; and health standards, including those set by the federal Occupational Safety and Health Administration (in the U.S.). It
is anticipated that our operators will continue to face additional federal and state regulatory requirements related to the operation
of their facilities in response to the COVID-19 pandemic. These requirements may continue to evolve and develop over lengthy periods
of time.
General
and Professional Liability. Although arbitration agreements have been effective in limiting general and professional liabilities
for SNF and long-term care providers, there have been numerous lawsuits in recent years challenging the validity of arbitration agreements
in long-term care settings. On July 16, 2019, CMS issued a final rule lifting the prohibition on pre-dispute arbitration agreements offered
to residents at the time of admission provided that certain requirements are met. The rule prohibits providers from requiring residents
to sign binding arbitration agreements as a condition for receiving care and requires that the agreements specifically grant residents
the explicit right to rescind the agreement within thirty calendar days of signing. A number of professional liability and employment
related claims have been filed or are threatened to be filed against long-term care providers related to COVID-19. While such claims
may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation, an
adverse resolution of any of legal proceeding or investigations against our operators may involve injunctive relief and/or substantial
monetary penalties, either or both of which could have a material adverse effect on our operators’ reputation, business, results
of operations and cash flows.
Environmental,
Social and Governance (“ESG”)
We
prioritize environmental, social and governance initiatives that matter most to our business and shareholders. Our Nominating and Corporate
Governance Committee of our Board of Directors has been charged with primary oversight of our sustainability efforts.
As
a triple-net landlord at two of our facilities, our third-party operators maintain operational control and responsibility for our real
estate on a day-to-day basis. While our ability to mandate environmental changes to their operations is limited, our tenants are contractually
bound to preserve and maintain our properties in good working order and condition. In connection with this, they are required to meet
or exceed annual expenditure thresholds on capital improvements and enhancements of our properties, which in some cases may facilitate
improvements in the environmental performance of our properties and reduces energy usage, water usage, and direct and indirect greenhouse
gas emissions. The goal is to incentivize operators to invest in sustainable capital projects that provide a favorable return on investment
while reducing the environmental footprint of these operations. Our due diligence on real estate acquisitions generally includes environmental
assessments as part of our analysis to understand the environmental condition of the property, and to determine whether the property
meets certain environmental standards. Similarly, during the due diligence process, we seek to evaluate the risk of physical, natural
disaster or extreme weather patterns on the properties we are looking to acquire and to assess their compliance with building codes,
which often results in remediations that incorporate sustainable improvements into our properties.
We
are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of
the communities in which our employees live and work. See also “Human Capital Management” immediately below.
Human
Capital Management
Our
success is based on the focused passion and dedication of our people. We believe our employees’ commitment to our Company provides
better service to our tenants and stakeholders, supports an inclusive and collegial working environment and generates long-term value
for our shareholders and the communities which we serve. As of February 1, 2023, we had 655 employees including the executive officers
listed below, none of whom is subject to a collective bargaining agreement. Due to the size and nature of our business, our future performance
depends to a significant degree upon the continued contributions of our executive management team and other key employees. As such, the
ability to attract, develop and retain qualified personnel will continue to be important to the Company’s long-term success.
We
have a long-standing commitment to being an equal opportunity employer. The Company has expanded its recruitment practices to reach more
diverse candidates for employment and Board positions and has developed an internship program with a focus on increasing diversity in
the pipeline of eligible employees. The Company requires employees and Board members to certify its Code of Business Conduct & Ethics
periodically, and from time to time, conducts compliance training for all employees and Directors, including diversity and inclusion
training. As of February 1, 2023, at the executive level, one of the Company’s four executive officers was a woman, and on the senior
management team, 82% are women and 36% bring ethnic diversity to the team. We regularly conduct pay equity reviews as we seek
for women and men, on average, at various roles and levels of the Company, to be paid equitably for their roles and contributions to
our success.
We
are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of
the communities in which our employees live and work. Our full-time employees are provided a competitive benefits program, the opportunity
to participate in our employee stock purchase program, bonus and incentive pay opportunities, competitive paid time-off benefits and
paid parental leave, wellness programs, continuing education and development opportunities, and periodic engagement surveys. In addition,
we believe that giving back to our community is an extension of our mission to improve the lives of our stockholders, our employees,
and their families.
EMPLOYEES
As
of December 31, 2022, the Company and its subsidiaries had 671 employees. 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.
The
COVID-19 pandemic has subjected our business, operations, and financial condition to several risks, including, but not limited to, those
discussed below:
● |
Risks
Related to Revenue: The revenues from our operations and from our tenants are dependent on occupancy. All facilities must maintain
a minimum viable resident count to ensure costs do not exceed revenues. In addition to the impact of increases in mortality rates
on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from
visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and
screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our operating and triple-net properties
could further decrease. Such a decrease could affect the net operating income of our operating properties and the ability of our
triple-net operators to make contractual payments to us. |
|
|
● |
Risks
Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments,
the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy, or insolvency due to factors such
as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses
or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with
the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford
certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, in bankruptcy or subject to insolvency
proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease. In addition, if a lease is rejected
in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required
to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition
of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a
tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due
to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant because
of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor
liabilities. Publicity about the operator’s financial condition and insolvency proceedings, particularly considering ongoing
publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and
revenues. Should such events occur, our revenue and operating cash flow may be adversely affected. |
● |
Risks
Related to Operations: Across all of our properties, our operations and our tenants have incurred increased operational costs
as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well
additional health and safety measures adopted by us related to the COVID-19 pandemic, including increases in labor and property cleaning
expenses and expenditures related to our efforts to procure PPE and supplies. Such operational costs may increase in the future based
on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are
also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic.
As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and
additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations
may be adversely impacted if a significant number of our employees’ contract COVID-19. Although we continue to undertake extensive
efforts to ensure the safety of our properties, employees, and residents and to provide operator support in this regard, the impact
of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us.
As a result of the COVID- 19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover
certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants
of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and
costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement
of people. |
|
|
● |
Risks
Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19
pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing
and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have
a significant development portfolio and have not experienced significant delays or disruptions but may in the future. Such disruptions
to acquisition, disposition and development activity may negatively impact our long-term competitive position. |
|
|
● |
Risks
Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe
global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn
in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs
increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could
be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations
could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not
face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position, and
access to capital markets. |
The
events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or
control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash
flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and
financial results, it may also have the effect of heightening many of the other risks described in this Report.
ITEM
1B. |
UNRESOLVED STAFF COMMENTS |
Not
applicable.
As
of December 31, 2022, we owned thirteen (13) long-term care facilities including a campus of three buildings in Tulsa, OK. The following
table provides summary information regarding these facilities at December 31, 2022:
| |
| | |
| | |
| | |
Total Square Feet | | |
# of Beds | |
State | |
Properties | | |
Operations | | |
Leased Operations | | |
Operating Square
Feet | | |
Leased Square Feet | | |
Operating Beds | | |
Leased Beds | |
Arkansas | |
| 1 | | |
| - | | |
| 1 | | |
| - | | |
| 40,737 | | |
| - | | |
| 141 | |
Georgia | |
| 5 | | |
| 4 | | |
| 1 | | |
| 78,197 | | |
| 46,199 | | |
| 454 | | |
| 100 | |
Ohio | |
| 1 | | |
| 1 | | |
| - | | |
| 27,500 | | |
| - | | |
| 99 | | |
| - | |
Oklahoma | |
| 6 | | |
| 6 | | |
| - | | |
| 162,976 | | |
| - | | |
| 351 | | |
| - | |
Total | |
| 13 | | |
| 11 | | |
| 2 | | |
| 268,673 | | |
| 86,936 | | |
| 904 | | |
| 241 | |
ITEM
3. |
LEGAL
PROCEEDINGS |
The
Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey
v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In
April 2019, 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, we have
engaged legal counsel, but 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.
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, filed in April 2016.
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.
Oliphant
v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This
is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center
(the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH,
LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any
affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies
upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was
not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership
of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff
has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In
the matter of Austin.
On
December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which
is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility
of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then
committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership.
We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded
that the likelihood of a material adverse result is remote.
Lawson v. C.R.M of Warrenton, LLC d/b/a Warrenton
Health and Rehab; ATL/WARR, LLC; Selectis Warrenton, LLC, et.al., Superior Court of Warren County, State of Georgia, Civil Action No.
23CV0076.
This is a personal injury lawsuit filed on June 14, 2023 against various
defendants arising out of the death of a patient of the Warrenton Health and Rehab Facility located in Warren, Georgia (the “Facility”).
The Facility is owned by the Company’s wholly-owned subsidiary ATL/Warr, LLC. At all relevant times, the Facility was leased and
operated by a third party C.R.M. Warrenton, LLC under an operating lease. Neither the Company nor any affiliate of the Company had any
involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law
that a landlord has no liability for patient care. Subsequent to the patient care complained of the Company entered into an Operations
Transfer Agreement with the lease operator and assumed operating control of the Facility through a new subsidiary, Selectis Warrenton,
LLC. The Company believes its exposure in this matter is de minimus and has referred the litigation to its insurance company for management.
ITEM
4. |
MINE
SAFETY DISCLOSURES |
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of the Business
Selectis
Health, Inc. (“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries
Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions
of the US. In 2019 the Company shifted from leasing long-term care facilities to third-party independent operators towards an owner-operator model.
Prior
to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. from September 30, 2013,
to May 2021. Prior to this, 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”). WPF was merged into the Company in 2019.
In
September 2021, the Company rebranded to Selectis Health, Inc., from Global Healthcare REIT, Inc. to better align with the
current and future business model, which is to own and operate its facilities.
We
acquire, develop, lease, and manage healthcare real estate; provide financing to healthcare providers; and provide
healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following three
healthcare segments: (i) senior housing (including independent and assisted living), (ii) post-acute/skilled nursing facilities, and (iii)
bonds securing senior housing communities. We will make investments within our healthcare segments using the following six
investment methods: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv)
investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in
senior housing operations utilizing the structure permitted by RIDEA and (vi) owning healthcare operations.
Basis
of Presentation
The
accompanying consolidated financial statements (the Financial Statements) have been prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The Company is the sole member of various consolidated limited liability companies established
to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions
and balances have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its consolidated
balance sheets and the amount of consolidated net income that is attributable to Selectis Health, Inc. and the noncontrolling interest
in its consolidated statements of operations.
The
consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority
voting interest.
Reclassifications
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. These reclassifications had no effect on the previously reported net loss.
Use
of Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP” or “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.
Management’s
Liquidity Plans
On
August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires
management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and
to provide related footnote disclosures in certain circumstances.
For
the year ended December 31, 2022 the Company had negative operating cash flows of $0.3 million
and a net working capital deficit of $1.9 million.
Management believes that the Company will be able to meet its obligations for the next twelve months from the date of these
financial statements. This is, in part due to refinancing debt to more favorable terms, the continued optimization of the
Company’s operations in its current facilities and anticipated increases in state Medicaid reimbursement rates. Based
on management’s projections, the Company is expected to generate positive cash flows from its continued operations.
The
focus on opportunities within our current portfolio and future properties to acquire and operate, the settlement, refinance, and continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing to additional working
capital should alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05.
However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively
impact our future operations.
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:
SCHEDULE OF RESTRICTED CASH AND CASH EQUIVALENTS
| |
2022 | | |
2021 | |
| |
| | |
| |
Funds held in escrow under the terms of notes for future capital
expenditures, repairs and maintenance | |
$ | 996,400 | | |
$ | 853,656 | |
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 Company went to an Insured Cash Sweep service (ICS) in 2021. ICS funds are eligible for multi-million-dollar
FDIC insurance that’s backed by the full faith and credit of the United States government. Daily cash is swept and deposited to
as many banks as needed that are FDIC insured. This insures no amounts exceed a $250,000 balance which is fully insured by the FDIC.
The funds can be tracked by its primary financial institution. New funds can be deposited and withdrawn from that single relationship.
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 determined to be asset acquisitions, the Company determines the total purchase price of each property
and allocates the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values.
Fair value estimates are based on information obtained from independent appraisals, other market data, and information obtained during
due diligence period. Acquisition-related costs such as due diligence, legal and accounting fees are included in the purchase price.
Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available.
The measurement period shall not exceed one year from the date of acquisition.
Upon
acquisition of business entities and real estate determined to be a business combination, the Company identifies and recognizes the net
tangible and identified intangible assets based on fair values, and net assets as goodwill or gain on bargain purchase. Fair value estimates
are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information
related to the marketing, leasing, and or operating at the specific property. Acquisition-related costs such as due diligence, legal
and accounting fees are expensed as incurred. Initial valuations are subject to change during the measurement period, but the period
ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
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:
SCHEDULE
OF PROPERTY PLANT AND EQUIPMENT, ESTIMATED USEFUL LIVES
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.
Deferred
Loan Costs and Debt Discounts
Deferred
loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest
method. Amortization expense for the years ended December 31, 2022 and 2021 totaled $315,983 and $157,291, respectively. Deferred loan
cost amortization is included as a component of interest expense in the consolidated statements of operations.
Goodwill
Goodwill
represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but
is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger
interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit,
or an expectation that the carrying amount may not be recoverable, among other factors.
The
Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely
than not that the fair value of the reporting unit is greater than it’s carrying amount, an impairment test is unnecessary. If
an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a
reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and the Company will proceed
with recording an impairment charge equal to the excess of the carrying value over the related fair value.
The
Company has recorded Goodwill in connection with business acquisitions during the year ended December 31, 2020 (see Note 9). During the
years ended December 31, 2022 and 2021, the Company recorded no impairment of Goodwill.
Revenue
Recognition
Rent
receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained
for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements.
The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line recognition of rents. Such
allowances are charged to net against rental incomes.
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. During the year ended December 31, 2021
the Company terminated leases resulting in a lease termination expense of $258,943.
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, 2022, and 2021, there were no deferred lease incentives
recorded.
The
Company recognizes revenue in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” including
subsequently issued updates. Under the accounting guidance our revenues are presented net of estimated allowances, and we no longer present
the contractual allowance as a separate line item on our balance sheet.
The
Company reviews its calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing
for the uncollectible portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer
groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly
with a greater emphasis given to current trends. This calculation is routinely analyzed by the Company based on actual allowances issued
by payers and the actual payments made to determine what adjustments, if any, are needed.
Our
revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the
patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations
for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on
charges incurred in relation to total expected charges. The contractual relationships with patients, in most cases, also involve a third-party
payer (Medicare, and Medicaid) and the transaction prices for the services provided are dependent upon the terms provided by the third party payer or payers. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic
and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge,
per identified service or per covered member.
Our
revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of
contractual allowances under managed care are based upon the payment terms specified in the related contractual agreements.
Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts
are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined. In relation to certain
government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process.
The
collection of outstanding receivables for Medicare, and Medicaid is our primary source of cash and is critical to our operating performance.
The primary collection risks relate to Medicaid pending patient accounts. Accounts are written off when all reasonable internal and external
collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of
historical write-offs and expected net collections, business and economic conditions, trends in federal, state and private employer health
care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections
at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source
of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling
twelve-months accounts receivable collection and write-off data. We believe our quarterly updates to the estimated contractual allowance
amounts at each of our facilities provide reasonable estimates of our revenues and valuations of our accounts receivable.
In
accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that
are a direct reduction to net operating revenues. For the year ended December 31, 2022, the uncollectable amounts recognized as a
reduction to net operating revenues totaled $510,939. As of December 31, 2022 and 2021, the Company’s allowance for doubtful
accounts was $1,803,762
and $1,901,203,
respectively. During the years ended December 31, 2022 and 2021, the Company’s provision for bad debts totaled $1,364,354
and $897,538,
respectively. During the years ended December 31, 2022 and 2021 the Company recognized $3,272,026
and $1,514,728,
respectively, in healthcare grant revenue.
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.
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 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.
The
Company has no financial assets or financial liabilities that are required to be measured at fair value on a recurring basis as of December
31, 2022, and 2021.
The
carrying values of cash and cash equivalents, accounts payable, accrued liabilities and other short-term debt, approximate their fair
value because of the short-term nature of these financial instruments. The carrying value of long-term debt approximates fair value since
the related rates of interest approximate current market rates.
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.
Income
Taxes
As
previously disclosed in the “Organization and Description of the Business” section of this Note, the Company’s focus
has partially shifted from leasing nursing home assets to independent operators toward owning and operating its real estate assets itself.
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
earnings per share are based on the weighted-average number of shares of common stock outstanding. FASB ASC Topic 260, “Earnings
per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.
Diluted
earnings per share are based on the assumption that all dilutive options and warrants were converted or exercised by applying the treasury
stock method and that all convertible preferred stock were converted into common shares by applying the if-converted method. Under the
treasury stock method, options and warrants are assumed to be exercised at the beginning of the period or at the time of issuance, if
later, and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted
method, the preferred dividends applicable to convertible preferred stock are added back to the numerator. The convertible preferred
stock is assumed to have been converted at the beginning of the period or at time of issuance, if later, and the resulting common shares
are included in the denominator.
We
calculate basic earnings per share by dividing net income attributable to common stockholders (the “numerator”) by the weighted
average number of common shares outstanding (the “denominator”) during the reporting period. Diluted earnings per share is
calculated similarly but reflects the potential impact of outstanding options, warrants and other commitments to issue common stock,
including shares issuable upon the conversion of convertible preferred stock outstanding, except where the impact would be anti-dilutive.
The
following table sets forth the computation of basic and diluted earnings per share:
SCHEDULE OF BASIC AND DILUTED EARNINGS PER SHARE
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Numerator for basic earnings per share: | |
| | | |
| | |
Net Loss Attributable to Selectis Health, Inc. | |
$ | (2,395,813 | ) | |
$ | (2,251,980 | ) |
Series D Preferred Dividends | |
| (30,000 | ) | |
| (30,000 | ) |
Net Loss Attributable to Common Stockholders - Basic | |
$ | (2,425,813 | ) | |
$ | (2,281,980 | ) |
| |
| | | |
| | |
Numerator for diluted earnings per share: | |
| | | |
| | |
Net Loss Attributable to Common Stockholders | |
| (2,395,813 | ) | |
| (2,251,980 | ) |
Series D Preferred Dividends | |
| (30,000 | ) | |
| (30,000 | ) |
Net Loss Attributable to Common Stockholders - Diluted | |
| (2,425,813 | ) | |
| (2,281,980 | ) |
| |
| | | |
| | |
Denominator for basic earnings per share: | |
| | | |
| | |
Weighted Average Common Shares Outstanding | |
| 3,054,126 | | |
| 2,768,285 | |
| |
| | | |
| | |
Denominator for diluted earnings per share: | |
| | | |
| | |
Weighted Average Common Shares Outstanding - Basic | |
| 3,054,126 | | |
| 2,768,285 | |
Effect of dilutive securities: | |
| - | | |
| | |
Issuance of stock options | |
| - | | |
| - | |
Exercise of warrants | |
| - | | |
| - | |
Weighted Average Common Shares Outstanding - Diluted | |
| 3,054,126 | | |
| 2,768,285 | |
| |
| | | |
| | |
Net Loss per Share Attributable to Common Stockholders: | |
| | | |
| | |
Basic | |
$ | (0.79 | ) | |
$ | (0.82 | ) |
Diluted | |
$ | (0.79 | ) | |
$ | (0.82 | ) |
Options
to purchase 60,000 shares of common stock were outstanding during the years ended December 31, 2022 and 2021 but were not included
in the computation of diluted earnings per share because they are anti-dilutive due to the options’ exercise price being greater
than the average market price of the common shares.
Recently
Issued Accounting Pronouncements
In September 2016, the FASB issued ASU 2016-13, Measurement
of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking
approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments,
including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for
the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance
and related codification improvements will be material to its financial position, results of operations and cash flows.
The
FASB and other entities issued new or modifications to, or interpretations of, existing accounting guidance
during 2022. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does
not believe that any other new or modified principles will have a material impact on the Company’s reported financial position
or operations in the near term.
2.
INVESTMENTS IN DEBT SECURITIES
At
December 31, 2021, 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:
SCHEDULE OF INVESTMENTS IN MARKETABLE SECURITIES
| |
2022 | | |
2021 | |
| |
| | |
| |
States and Municipalities | |
$ | - | | |
$ | 24,387 | |
Contractual
maturity of held-to-maturity securities at December 31, 2021 was $24,387,
all due in one year or less, and total value of securities at their respective maturity dates is $24,387.
The securities had technical defaults, but the Company still considered the investments to be recoverable. 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.
3.
PROPERTY AND EQUIPMENT, NET
The
gross carrying amount and accumulated depreciation of the Company’s property and equipment as of December 31, 2022 and 2021 are
as follows:
SCHEDULE
OF PROPERTY PLANT AND EQUIPMENT
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Land | |
$ | 1,778,250 | | |
$ | 1,778,250 | |
Land Improvements | |
| 329,055 | | |
| 329,055 | |
Buildings and Improvements | |
| 44,659,921 | | |
| 44,574,401 | |
Furniture, Fixtures and Equipment | |
| 2,459,138 | | |
| 2,322,297 | |
Property and Equipment, gross | |
| 49,226,364 | | |
| 49,004,003 | |
| |
| | | |
| | |
Less: Accumulated Depreciation | |
| (12,212,251 | ) | |
| (10,419,411 | ) |
Less: Impairment | |
| (1,560,000 | ) | |
| (1,560,000 | ) |
| |
| | | |
| | |
Property and Equipment,
Net | |
$ | 35,454,113 | | |
$ | 37,024,592 | |
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Depreciation Expense (excluding Intangible Assets) | |
$ | 1,792,840 | | |
$ | 1,733,349 | |
| |
| | | |
| | |
Cash Paid for Capital Expenditures | |
$ | 222,361 | | |
$ | 519,575 | |
4.
DEBT AND DEBT – RELATED PARTIES
The
following is a summary of the Company’s debt and debt – related parties outstanding as of December 31, 2022 and 2021:
SCHEDULE
OF DEBT AND DEBT - RELATED PARTIES
| |
2022 | | |
2021 | |
| |
| | |
| |
Senior Secured Promissory Notes | |
$ | 1,025,000 | | |
$ | 1,305,000 | |
Senior Secured Promissory Notes - Related Parties | |
| 750,000 | | |
| 750,000 | |
Fixed-Rate Mortgage Loans | |
| 30,568,677 | | |
| 31,407,503 | |
Variable-Rate Mortgage Loans | |
| 4,879,462 | | |
| 5,063,841 | |
Other Debt, Subordinated Secured | |
| 741,000 | | |
| 741,000 | |
Other Debt, Subordinated Secured - Related Parties | |
| 150,000 | | |
| 150,000 | |
Other Debt, Subordinated Secured - Seller Financing | |
| 56,051 | | |
| 93,251 | |
Financed Insurance Premiums | |
| 235,125 | | |
| - | |
Debt and Debt – Related Parties, Gross | |
| 38,405,315 | | |
| 39,510,595 | |
Unamortized Discount and Debt Issuance Costs | |
| (810,997 | ) | |
| (1,243,071 | ) |
Debt and Debt – Related Parties, Net of Discount | |
$ | 37,594,318 | | |
$ | 38,267,524 | |
| |
| | | |
| | |
As presented in the Consolidated Balance Sheets: | |
| | | |
| | |
| |
| | | |
| | |
Current Maturities of Long Term Debt, Net | |
$ | 2,296,830 | | |
$ | 6,312,562 | |
Short Term Debt – Related Parties, Net | |
| 900,000 | | |
| 150,000 | |
Long-Term Debt, Net | |
| 34,397,488 | | |
| 31,054,962 | |
Long-Term Debt - Related Parties, Net | |
| - | | |
| 750,000 | |
The
weighted average interest rate and term of our fixed rate debt are 3.87 % and 12.83 years, respectively, as of December 31, 2022. The
weighted average interest rate and term of our variable rate debt are 3.53% and 15.25 years, respectively, as of December 31, 2021.
Corporate
Senior and Senior Secured Promissory Notes
As
of December 31, 2022, and December 31, 2021, the senior secured notes are subject to annual interest ranging from 10% to 11% with an
original maturity date of October 31, 2021. These notes were extended to June 30, 2023 and as consideration the Company modified the
outstanding warrants to extend the life an additional 1.67 years. As a result of the warrant modification, the Company recorded the incremental
increase in fair value of $844,425 as a debt discount which will be amortized over the new life of the loans.
In
2017, $600,000 in notes were sold and issued, of which $425,000 were to related parties. On 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. For every $10.00 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 $7.50 per share. The warrants have a cashless exercise
provision and were valued using the Black-Scholes pricing model. The maturity date of the 120,000 warrants issued along with the notes
was extended to December 31, 2018, 225,000 warrants of which occurred in 2018. As of December 31, 2019, the Company had not renewed or
repaid $125,000 in 10% notes with a maturity date of December 31, 2018, and those notes were technically in default. Effective January
28, 2020, the Company exchanged $100,000 in outstanding senior secured 10% Notes and Warrants that had matured on December 31, 2018 for
11% Senior Secured Promissory Notes and issued 10,000 cashless exercise warrants for purchase of company stock at $5.00, expiring October
31, 2021. As of December 31, 2020, the Company had not renewed or repaid $25,000 in 10% notes with a maturity date of December 31, 2018.
While this is technically in default, the Company continues to make interest payments to the noteholder.
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 were due in October 2020. For every $10.00 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 $7.50 per share. The warrants have a cashless exercise provision. On September
30, 2020, the Company repaid $150,000 of 10% Senior Unsecured Notes that matured October 31, 2020. Effective October 31, 2020, the Company
exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that had matured on October 31, 2020 for 11% Senior Secured
Promissory Notes and issued 15,000 cashless exercise warrants for purchase of the Company’s common stock at $5.00 per share, expiring
October 31, 2021.
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, (October 31, 2021) and one Warrant for each $10.00
in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $5.00 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 11,100 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 by virtue of the exchange, $875,000 were to related parties.
On
January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering of 11%
Senior Secured Notes. The total amount of the Offering has been increased to $2,500,000 and the offering period will continue until terminated
by the Board of Directors. Effective February 5, 2020 and March 3, 2020, the Company completed the sale of $60,000 and $100,000, respectively,
of Units in the Offering. The sale of $100,000 Units on March 3, 2020 was to a related party. In connection with the sale of the Units
on February 5, 2020 and March 3, 2020, the Company issued 6,000 and 10,000, respectively, cashless exercise warrants for purchase of
company stock at $0.50, expiring October 31, 2021. Effective October 31, 2020 the Company completed the exchange of $150,000 of Units
in the Offering for matured Senior Unsecured notes. In connection with the exchange of the Units effective October 31, 2020, the Company
issued 15,000 cashless exercise warrants for purchase of company stock at $5.00, expiring October 31, 2021. No fees or commissions were
paid on the sale of the Units. The proceeds were used for general working capital.
Mortgage
Loans and Lines of Credit Secured by Real Estate
Mortgage
loans and other debts such as lines of credit are collateralized by all assets of each nursing home property and an assignment of its
rents. Collateral for certain mortgage loans includes the personal guarantee of a former but no longer related
party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following:
SCHEDULE OF MORTGAGE LOAN DEBT
| |
| | |
| | |
Total Principal Outstanding as of | |
State | |
Number of Properties | | |
Total Face Amount | | |
December 31, 2022 | | |
December 31, 2021 | |
Arkansas(1) | |
| 1 | | |
$ | 5,000,000 | | |
$ | 3,910,767 | | |
$ | 4,058,338 | |
Georgia(2) | |
| 5 | | |
$ | 17,765,992 | | |
$ | 16,019,874 | | |
$ | 16,581,283 | |
Ohio | |
| 1 | | |
$ | 3,000,000 | | |
$ | 2,649,400 | | |
$ | 2,728,599 | |
Oklahoma(3) | |
| 6 | | |
$ | 13,181,325 | | |
$ | 12,868,098 | | |
$ | 11,823,385 | |
| |
| 13 | | |
$ | 38,947,317 | | |
$ | 35,448,139 | | |
$ | 35,191,605 | |
(1) |
The
mortgage loan collateralized by this property 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. Guarantors under the mortgage
loan include Christopher Brogdon. Mr. Brogdon has assumed operations of the facility and is making payments of principal and
interest on the loan on our behalf in lieu of paying rent on the facility to us, until a formal lease can be put in place. During
the years ended December 31, 2022 and 2021, the Company recognized other income of $143,219 and $521,400, respectively
for repayments on the loan. |
|
|
(2) |
The
Company refinanced two of its mortgages that would have matured in June and October of 2021 amounting to $2,961,167 and $3,289,595,
to extend their maturity dates to May 2024 for both. |
|
|
(3) |
The
Company refinanced all three mortgages in July 2021, that would have matured in June and July of 2021 amounting to $2,065,969 and
$750,000, $500,000, to extend their maturity dates to June 2027 for all three. Additionally, the Company has refinanced the primary
mortgage at the Southern Hills Campus, for 35 years at 2.38%. |
Subordinated,
Corporate, and Other Debt
Other
debt due at December 31, 2022 and 2021 includes unsecured notes payable issued to entities controlled by the Company used to facilitate
the acquisition of the nursing home properties.
SCHEDULE
OF OTHER DEBT
| |
| | |
Total Principal Outstanding as of | | |
| |
| |
Property | |
Face
Amount | | |
December 31, 2022 | | |
December 31, 2021 | | |
Stated Interest Rate | |
Maturity
Date | |
Goodwill Nursing Home | |
$ | 2,030,000 | | |
$ | 741,000 | | |
$ | 741,000 | | |
13% Fixed | |
| 1-Apr-24 | |
Goodwill Nursing Home – Related Party | |
$ | 150,000 | | |
| 150,000 | | |
| 150,000 | | |
13% Fixed | |
| 30-Nov-25 | |
Higher
Call Nursing Center (1) | |
| 150,000 | | |
| 56,051 | | |
| 93,251 | | |
8% Fixed | |
| 1-Apr-24 | |
| |
$ | 2,330,000 | | |
$ | 947,051 | | |
$ | 984,251 | | |
| |
| | |
(1) |
In
connection with the acquisition of Higher Call, the Company executed a promissory note in favor of the Seller, Higher Call Nursing
Center, Inc., in the principal amount of $150,000 which accrues interest at the rate of 8% per annum and is payable in equal monthly
installments, principal and interest. This note is secured by a corporate guaranty of Global. |
Our
corporate debt at December 31, 2022 and December 31, 2021 includes unsecured notes and notes secured by all assets of the Company not
serving as collateral for other notes.
SCHEDULE OF UNSECURED NOTES AND NOTES SECURED BY ALL ASSETS
| |
| | |
Total Principal Outstanding as of | | |
| |
| |
Series | |
Face
Amount | | |
December 31, 2022 | | |
December 31, 2021 | | |
Stated Interest Rate | |
Maturity
Date | |
10% Senior Secured Promissory Notes | |
$ | 1,255,000 | | |
$ | 1,025,000 | | |
$ | 1,230,000 | | |
10% Fixed | |
| 30-Jun-23 | |
10% Senior Secured Promissory Notes – Related Party | |
$ | 750,000 | | |
| 750,000 | | |
| 750,000 | | |
10% Fixed | |
| 30-Jun-23 | |
| |
$ | 2,005,000 | | |
$ | 1,775,000 | | |
$ | 1,980,000 | | |
| |
| | |
For
the year ended December 31, 2021, the Company received proceeds from the issuance of debt of $9,134,102. Cash payments on debt totaled
$1,865,458 and $8,118,772 for the years ended December 31, 2022 and 2021, respectively. Amortization expense for deferred loan costs and
debt discounts totaled $315,983 and $157,291 for the years ended December 31, 2022 and 2021, respectively.
Paycheck
Protection Program Loans
On
June 16, 2021, the Company through its subsidiaries received confirmation that the loan of $675,598 pursuant to the Paycheck Protection
Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was forgiven
by the SBA.
Future
maturities and principal payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:
SCHEDULE
OF FUTURE MATURITIES OF NOTES PAYABLE
Year Ending December 31 | |
| |
2023 | |
$ | 3,252,210 | |
2024 | |
| 9,833,913 | |
2025 | |
| 5,994,541 | |
2026 | |
| 723,215 | |
2027 and Thereafter | |
| 18,601,436 | |
| |
| | |
Total | |
$ | 38,405,315 | |
5.
OTHER CURRENT LIABILITIES
During
the year ended December 31, 2021, the Company received an overpayment from Medicare of $931,446 for which the liability was paid in
full as of December 31, 2022.
6.
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, 2022, and 2021, 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 twelve 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, 2022, and 2021, the Company had 375,000 shares of Series D Preferred Stock outstanding.
For
years ended December 31, 2022, and 2021, the Company declared $30,000 and $30,000 in preferred dividends, respectively. During the years ended December 31, 2022,
and 2021, the Company paid $30,000 and $30,000, respectively, for Series D preferred stock dividends. Dividends declared of $7,500 were
accrued as of December 31, 2021, were paid in 2022. Declared dividends of $7,500 were accrued as of December 31, 2022 and were paid in
2023.
Common
Stock
The
Company’s Board of Directors has authorized 50,000,000 shares of $0.05 par value, Common Stock. As of December 31, 2022, and 2021,
the Company has 3,054,587 and 2,998,361 shares of common stock outstanding, respectively.
Additionally,
on September 22, 2021, the Company received approval from FINRA and other regulators to execute a ten-for-one reverse stock split. Accordingly,
all share and per-share amounts relating to the common stock, stock options and warrants for all periods presented in the accompanying
consolidated financial statements have been retroactively adjusted, where applicable, to reflect the reverse stock split.
During
the year ended December 31, 2021, the Company issued 3,000 shares of common stock in exchange for services which were valued at $18,750.
During
the year ended December 31, 2021, the Company sold 150,000 shares of Common Stock at a purchase price of $5.00 per share for net proceeds
of $713,625. The offering was conducted through a registered broker-dealer acting as a Placement Agent. The Placement Agent was
paid a cash commission of 5% of the gross proceeds of the offering proceeds, which was reduced to 2.5% commission on the proceeds of
investments by directors and officers of the Company and a three-year warrant exercisable to purchase 10% of the number of shares of
common stock sold to non-officer or director investors in the offering at an exercise price of $5.00 per share. No warrants have yet
been issued to the placement agent as of December 31, 2022.
There
were no repurchases performed in the 2022 year.
Common
Stock Warrants
As
of December 31, 2022, and December 31, 2021, the Company had 206,000 and 206,000,
respectively, of outstanding warrants to purchase common stock at a weighted average exercise price of $5.00 and
$5.00,
respectively, and weighted average remaining term of 0.5 years
and 1.67 years,
respectively. The aggregate intrinsic value of common stock warrants outstanding as of December 31, 2022, and December 31, 2021 was
$0 and $355,877,
respectively. During the twelve months ended December 31, 2021, 64,813 warrants
were exercised in a cashless transaction in exchange for 19,524 shares
of common stock.
SCHEDULE
OF COMMON STOCK WARRANTS ACTIVITY
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Number of | | |
Weighted Average | | |
Number of | | |
Weighted Average | |
| |
Warrants | | |
Exercise Price | | |
Warrants | | |
Exercise Price | |
| |
| | |
| | |
| | |
| |
Beginning Balance | |
| 206,000 | | |
$ | 5.00 | | |
| 270,813 | | |
$ | 5.00 | |
Issued | |
| - | | |
| - | | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| (64,813 | ) | |
| - | |
Expired | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Ending Balance | |
| 206,000 | | |
$ | 5.00 | | |
| 206,000 | | |
$ | 5.00 | |
Common
Stock Options
As
of December 31, 2022, the Company had no outstanding options to purchase common stock.
7.
FACILITY LEASES
The
following table summarizes our leasing arrangements related to the Company’s healthcare facilities at December 31, 2022:
SCHEDULE
OF LEASING ARRANGEMENTS
| |
Monthly | | |
Lease | |
|
Facility | |
Lease
Income (1) | | |
Expiration | |
Renewal Option if Any |
| |
| | | |
| |
|
Goodwill Hunting LLC(1) | |
$ | 48,924 | | |
February 1, 2027 | |
Term may be extended for one additional five-year term |
(1) |
The
lease became effective on February 1, 2017, and the facility began generating rental revenue thereafter. |
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 at Glen Eagle as well as the Southern Hills SNF, ALF and ILF, Meadowview, Higher Call, Edwards, Fairland, Sparta,
and Warrenton properties.
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:
SCHEDULE OF FUTURE CASH PAYMENTS FOR RENT RECEIVED DURING INITIAL TERM OF LEASE
As of December 31, | |
| |
2023 | |
$ | 635,026 | |
2024 | |
| 643,401 | |
2025 | |
| 651,954 | |
2026 | |
| 660,665 | |
2027 and Thereafter | |
| 55,116 | |
| |
| | |
Total | |
$ | 2,646,162 | |
8.
INCOME TAXES
The
following is the breakdown of the Company’s income tax expenses:
SCHEDULE OF INCOME TAX EXPENSES
Income Tax Expenses: | |
2022 | | |
2021 | |
Current Federal | |
$ | - | | |
$ | - | |
Current State | |
| - | | |
| - | |
Current Income Tax Expenses | |
| - | | |
| - | |
Deferred Federal | |
| - | | |
| - | |
Deferred State | |
| - | | |
| - | |
Deferred Income Tax Expenses | |
| - | | |
| - | |
Total Income Tax Expenses | |
| - | | |
| - | |
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 files federal, Alabama, Arkansas, Colorado, Georgia,
and Oklahoma income tax returns. The Company is current with all its federal and state tax filings. The Company is open to examination for tax years 2015 through 2022 due
to the carry forward of net operating losses, although the Company is not currently under examination
in any jurisdiction.
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, 2022 and 2021:
SCHEDULE
OF EFFECTIVE INCOME TAX RATE RECONCILIATION
| |
2022 | | |
2021 | |
Statutory Federal Income Tax Rate | |
| 21 | % | |
| 21 | % |
Prior Year True-Ups | |
| (89 | )% | |
| - | |
Amortization of Warrant Discount | |
| (4 | )% | |
| - | |
Other | |
| 4 | % | |
| - | |
Effect of Valuation Allowance on Deferred Tax Assets | |
| 68 | % | |
| (21 | )% |
Effective tax rate | |
| - | % | |
| - | % |
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, 2022 and 2021 are as follows:
SCHEDULE
OF DEFERRED TAX ASSETS
| |
2022 | | |
2021 | |
Deferred Tax Assets: | |
| | | |
| | |
Net Operating Loss Carryforwards | |
$ | 2,296,982 | | |
$ | 2,523,460 | |
Impairment Loss on Long Term Assets | |
| 393,026 | | |
| 327,600 | |
Goodwill Impairment | |
| - | | |
| 595,154 | |
Stock Based Compensation | |
| - | | |
| 31,387 | |
Acquisition Costs | |
| - | | |
| 124,304 | |
Other | |
| - | | |
| 625,496 | |
Deferred Tax Assets | |
| 2,690,008 | | |
| 4,227,401 | |
Deferred Tax Liabilities: | |
| | | |
| | |
Bargain Purchase Gain | |
| - | | |
| (1,020,000 | ) |
Property and Equipment | |
| (1,502,934 | ) | |
| (380,902 | ) |
Other | |
| (8,807 | ) | |
| - | |
Deferred Tax Liabilities | |
| (1,511,741 | ) | |
| (1,400,902 | ) |
Valuation Allowance | |
| (1,178,267 | ) | |
| (2,826,499 | ) |
Net Deferred Tax Asset | |
$ | - | | |
$ | - | |
The
valuation allowance at December 31, 2022 and 2021 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. Estimated
taxable loss for the year ended December 31, 2022 approximated $1.9
million. 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, and has recorded a valuation allowance of $1,178,267 and $ 2,826,499 at December 31, 2022 and December 31, 2021.
As
of December 31, 2022 and 2021, the Company has $11,045,978 and $9,172,956 in federal net operating losses, among which, if not used,
$3,979,044 and $3,979,044 would begin to expire starting 2035, respectively. The remaining $7,066,934 and $5,193,912 net operating losses are subject
to the 80% taxable income limitation. As of December 31, 2022 and 2021, the Company has $10,467,971 and $8,596,403 state net operating
losses.
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. In September 2013, the Company had a split-off, in
which the business activities changed from gaming casinos into real estate related to long-term care. The Company determined that the
pre-2013 net operating losses of $4,047,175 were subject to the limitation set forth under Internal Revenue Code Section 382 and thus
wrote off such net operating losses in 2022. No determination has been made regarding whether another ownership change had occurred during
2014 and 2022.
We
have evaluated whether there were material uncertain tax positions requiring recognition in our financial statements. During the
period from 2016 to 2022, the Company had deducted bad debt allowances for tax purposes. As of December 31, 2022, the Company
deducted $1,803,762
of bad debt allowance, generating $454,439
of an uncertain tax liability. Due to the company’s net operating losses, this uncertain tax position would not have material
impact on the financial statements. The company policy is to treatment tax-related interest and penalties as income tax expense. The
company is considering filing for an accounting method change which would eliminate the unrecognized tax position within the
next twelve months.
The
following table summarizes the activity related to the Company’s gross unrecognized tax liabilities:
SCHEDULE
OF UNRECOGNIZED TAX LIABILITIES
| |
2022 | | |
2021 | |
Unrecognized tax liabilities, beginning of the year | |
$ | - | | |
$ | - | |
Increase (decrease) related to prior year tax positions | |
| 478,988 | | |
| - | |
Increase (decrease) related to current year tax positions | |
| (24,549 | ) | |
| - | |
Unrecognized tax liabilities, end of the year | |
$ | 454,439 | | |
$ | - | |
9.
GOODWILL
Goodwill
is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. During the years ended December 31, 2022 and 2021,
the Company recorded no impairment of Goodwill.
Following
is a summary of goodwill for the years ended December 31, 2022 and 2021:
SCHEDULE
OF ACTIVITIES IN GOODWILL
Balance, December 31, 2020 | |
$ | 1,076,908 | |
Goodwill acquired in 2020 | |
| - | |
Balance, December 31, 2021 | |
| 1,076,908 | |
Goodwill acquired in 2022 | |
| - | |
Balance, December 31, 2022 | |
$ | 1,076,908 | |
10.
LEGAL PROCEEDINGS
The
Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey
v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In
April 2019, 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, we have
engaged legal counsel, but 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.
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, filed in April 2016.
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.
Oliphant
v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This
is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center
(the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH,
LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any
affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies
upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was
not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership
of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff
has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In
the matter of Austin.
On
December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which
is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility
of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then
committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership.
We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded
that the likelihood of a material adverse result is remote.
Lawson v. C.R.M of Warrenton, LLC d/b/a Warrenton
Health and Rehab; ATL/WARR, LLC; Selectis Warrenton, LLC, et.al., Superior Court of Warren County, State of Georgia, Civil Action No.
23CV0076.
This is a personal injury lawsuit filed on June 14, 2023 against various
defendants arising out of the death of a patient of the Warrenton Health and Rehab Facility located in Warren, Georgia (the “Facility”).
The Facility is owned by the Company’s wholly-owned subsidiary ATL/Warr, LLC. At all relevant times, the Facility was leased and
operated by a third party C.R.M. Warrenton, LLC under an operating lease. Neither the Company nor any affiliate of the Company had any
involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law
that a landlord has no liability for patient care. Subsequent to the patient care complained of the Company entered into an Operations
Transfer Agreement with the lease operator and assumed operating control of the Facility through a new subsidiary, Selectis Warrenton,
LLC. The Company believes its exposure in this matter is de minimus and has referred the litigation to its insurance company for management.
11.
SUBSEQUENT EVENTS
The Company has evaluated all events or transactions
that occurred after December 31, 2022 up through June 29, 2023, which is the date that the financial statements were available to be issued.
There were no subsequent events which required adjustment or disclosure in the financial statements except the event described below.
The
CARES Act provides an employee retention credit (“CARES Employee Retention Credit”), which
is a refundable tax credit against certain employment taxes of up to $5,000
per employee for eligible employers. The tax
credit is equal to 50%
of qualified wages paid to employees during a
quarter, capped at $10,000
of qualified wages per employee through December
31, 2020. Additional relief provisions were passed by the United States government, which extend and slightly expand the qualified wage
caps on these credits through December 31, 2021. Based on these additional provisions, the tax credit is now equal to 70%
of qualified wages paid to employees during a
quarter, and the limit on qualified wages per employee has been increased to $10,000
of qualified wages per quarter. The Company qualified
for the tax credit under the CARES Act for qualified wages for the years ended December 31, 2020 and 2021. In February 2023, the Company
submitted filings for CARES Employee Retention Credits totaling $6,350,532
and expects to receive the credits within twelve
months of filing submission.