Item
1. Consolidated Financial Statements (Unaudited)
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property and Equipment,
Net
|
|
$
|
36,072,518
|
|
|
$
|
39,741,706
|
|
Cash and Cash Equivalents
|
|
|
1,352,015
|
|
|
|
71,055
|
|
Restricted Cash
|
|
|
564,416
|
|
|
|
541,835
|
|
Note Receivable - Related Party, Net
of Discount
|
|
|
-
|
|
|
|
573,428
|
|
Prepaid Expenses,
and Other
|
|
|
307,400
|
|
|
|
222,031
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
38,296,349
|
|
|
$
|
41,150,055
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt, Net of Debt
Issuance Costs and Discount of $644,498 and $700,692, Respectively
|
|
$
|
32,148,491
|
|
|
$
|
35,815,772
|
|
Accounts Payable
and Accrued Liabilities
|
|
|
650,093
|
|
|
|
396,862
|
|
Dividends Payable
|
|
|
7,500
|
|
|
|
7,562
|
|
Warrant Liability
|
|
|
177,922
|
|
|
|
304,536
|
|
Lease
Security Deposits
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
33,014,006
|
|
|
|
36,554,732
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
Series A - No
Dividends, $2.00 Stated Value, Non-Voting; 2,000,000 Shares Authorized, 200,500 Shares Issued and Outstanding
|
|
|
401,000
|
|
|
|
401,000
|
|
|
|
|
|
|
|
|
|
|
Series D - 8% Cumulative,
Convertible, $1.00 Stated Value, Non-Voting; 1,000,000 Shares Authorized, 375,000 Shares Issued and Outstanding
|
|
|
375,000
|
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
Common Stock
- $0.05 Par Value; 50,000,000 Shares Authorized,
24,912,728 and 22,246,453 Shares Issued and Outstanding
at September
30, 2016 and December 31, 2015, Respectively
|
|
|
1,245,636
|
|
|
|
1,112,323
|
|
Additional Paid-In
Capital
|
|
|
9,900,290
|
|
|
|
8,978,914
|
|
Accumulated
Deficit
|
|
|
(5,159,088
|
)
|
|
|
(4,840,289
|
)
|
Total Global Healthcare
REIT, Inc. Stockholders’ Equity
|
|
|
6,762,838
|
|
|
|
6,026,948
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
Interests
|
|
|
(1,480,495
|
)
|
|
|
(1,431,625
|
)
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
5,282,343
|
|
|
|
4,595,323
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Equity
|
|
$
|
38,296,349
|
|
|
$
|
41,150,055
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
Revenue
|
|
$
|
850,520
|
|
|
$
|
978,648
|
|
|
$
|
2,310,584
|
|
|
$
|
3,264,321
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
734,891
|
|
|
|
654,202
|
|
|
|
1,616,476
|
|
|
|
1,296,328
|
|
Property Taxes,
Insurance, and Other Operating
|
|
|
43,255
|
|
|
|
2,276
|
|
|
|
202,635
|
|
|
|
120,618
|
|
Acquisition Costs
|
|
|
-
|
|
|
|
1,950
|
|
|
|
52,325
|
|
|
|
1,950
|
|
Gain on Sale of
Property and Equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(980,839
|
)
|
|
|
-
|
|
Depreciation
|
|
|
287,389
|
|
|
|
338,355
|
|
|
|
1,182,849
|
|
|
|
949,080
|
|
Total
Expenses
|
|
|
1,065,535
|
|
|
|
996,783
|
|
|
|
2,073,446
|
|
|
|
2,367,976
|
|
Income
(Loss) from Operations
|
|
|
(215,015
|
)
|
|
|
(18,135
|
)
|
|
|
237,138
|
|
|
|
896,345
|
|
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss on Warrant
Liability
|
|
|
31,110
|
|
|
|
-
|
|
|
|
(126,614
|
)
|
|
|
-
|
|
Gain on Extinguishment
of Debt
|
|
|
(1,163,458
|
)
|
|
|
-
|
|
|
|
(1,163,458
|
)
|
|
|
-
|
|
Interest Income
|
|
|
-
|
|
|
|
(19,660
|
)
|
|
|
(32,149
|
)
|
|
|
(82,824
|
)
|
Interest
Expense
|
|
|
603,511
|
|
|
|
735,843
|
|
|
|
1,971,025
|
|
|
|
2,074,854
|
|
Total
Other (Income) Expense
|
|
|
(528,837
|
)
|
|
|
716,183
|
|
|
|
648,804
|
|
|
|
1,992,030
|
|
Equity
in Income from Unconsolidated Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,688
|
|
Net Income (Loss)
|
|
|
313,822
|
|
|
|
(734,318
|
)
|
|
|
(411,666
|
)
|
|
|
(1,041,997
|
)
|
Net
(Income) Loss Attributable to
Noncontrolling Interests
|
|
|
42,005
|
|
|
|
11,963
|
|
|
|
115,367
|
|
|
|
(27,174
|
)
|
Net
Income (Loss) Attributable
to
Global Healthcare REIT, Inc.
|
|
|
355,827
|
|
|
|
(722,355
|
)
|
|
|
(296,299
|
)
|
|
|
(1,069,171
|
)
|
Series
D Preferred Dividends
|
|
|
(7,500
|
)
|
|
|
(7,561
|
)
|
|
|
(22,500
|
)
|
|
|
(22,438
|
)
|
Net
Income (Loss) Attributable to Common Stockholders
|
|
$
|
348,327
|
|
|
$
|
(729,916
|
)
|
|
$
|
(318,799
|
)
|
|
$
|
(1,091,609
|
)
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Share Attributable
to
Common Stockholders -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,802,472
|
|
|
|
22,259,569
|
|
|
|
22,791,649
|
|
|
|
22,062,308
|
|
Diluted
|
|
|
23,377,972
|
|
|
|
22,259,569
|
|
|
|
22,791,649
|
|
|
|
22,062,308
|
|
See
accompanying notes to unaudited consolidated financial statements
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
|
|
Series
A Preferred Stock
|
|
|
Series
D Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Global
Healthcare REIT, Inc.
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Stockholders’
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
200,500
|
|
|
$
|
401,000
|
|
|
|
375,000
|
|
|
$
|
375,000
|
|
|
|
22,246,453
|
|
|
$
|
1,112,323
|
|
|
$
|
8,978,914
|
|
|
$
|
(4,840,289
|
)
|
|
$
|
6,026,948
|
|
|
$
|
(1,431,625
|
)
|
|
$
|
4,595,323
|
|
Stock
Based Compensation - Restricted Stock Awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
977,275
|
|
|
|
48,863
|
|
|
|
450,023
|
|
|
|
-
|
|
|
|
498,886
|
|
|
|
-
|
|
|
|
498,886
|
|
Common
Stock Issued for Accounts Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
12,500
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
112,500
|
|
|
|
-
|
|
|
|
112,500
|
|
Common
Stock Issued for Debt Cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
|
|
1,750
|
|
|
|
22,050
|
|
|
|
-
|
|
|
|
23,800
|
|
|
|
-
|
|
|
|
23,800
|
|
Common
Stock Issued for Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350,000
|
|
|
|
67,500
|
|
|
|
418,500
|
|
|
|
-
|
|
|
|
486,000
|
|
|
|
-
|
|
|
|
486,000
|
|
Series
D Preferred Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,500
|
)
|
|
|
(22,500
|
)
|
|
|
-
|
|
|
|
(22,500
|
)
|
Common
Stock to Noncontrolling Interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,000
|
|
|
|
2,700
|
|
|
|
(69,197
|
)
|
|
|
-
|
|
|
|
(66,497
|
)
|
|
|
66,497
|
|
|
|
-
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(296,299
|
)
|
|
|
(296,299
|
)
|
|
|
(115,367
|
)
|
|
|
(411,666
|
)
|
Balance, September
30, 2016
|
|
|
200,500
|
|
|
$
|
401,000
|
|
|
|
375,000
|
|
|
$
|
375,000
|
|
|
|
24,912,728
|
|
|
$
|
1,245,636
|
|
|
$
|
9,900,290
|
|
|
$
|
(5,159,088
|
))
|
|
$
|
6,762,838
|
|
|
$
|
(1,480,495
|
)
|
|
$
|
5,282,343
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(411,666
|
)
|
|
$
|
(1,041,997
|
)
|
Adjustments to Reconcile
Net Loss to Net Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,182,849
|
|
|
|
949,080
|
|
Amortization and
Accretion
|
|
|
90,725
|
|
|
|
115,463
|
|
Bad Debt Expense
|
|
|
-
|
|
|
|
380,000
|
|
Increase in Straight
Line Rent Receivable
|
|
|
(63,665
|
)
|
|
|
(156,010
|
)
|
Stock Based Compensation
|
|
|
498,886
|
|
|
|
194,666
|
|
Equity in Income
from Unconsolidated Partnership
|
|
|
-
|
|
|
|
(53,688
|
)
|
Gain on Warrant
Liability
|
|
|
(126,614
|
)
|
|
|
-
|
|
Premium on Debt
|
|
|
120,250
|
|
|
|
-
|
|
Gain on Extinguishment
of Debt
|
|
|
(1,163,458
|
)
|
|
|
-
|
|
Forgiveness of Debt
|
|
|
(100,000
|
)
|
|
|
-
|
|
Loss on Settlement
of Accounts Payable
|
|
|
12,500
|
|
|
|
-
|
|
Gain on Sale of
Property and Equipment
|
|
|
(980,839
|
)
|
|
|
-
|
|
Changes in Operating
Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Rents Receivable
|
|
|
(131,255
|
)
|
|
|
-
|
|
Accounts Payable
and Accrued Liabilities
|
|
|
456,458
|
|
|
|
113,877
|
|
Lease Security Deposits
|
|
|
-
|
|
|
|
72,876
|
|
Other
|
|
|
109,551
|
|
|
|
(205,161
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided
by (Used in) Operating Activities
|
|
|
(506,278
|
)
|
|
|
369,106
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
Issuance of Note
Receivable
|
|
|
-
|
|
|
|
(350,000
|
)
|
Collections on Notes
Receivable - Related Parties
|
|
|
573,428
|
|
|
|
574,719
|
|
Net Advances from/to
Related Parties
|
|
|
-
|
|
|
|
(80,000
|
)
|
Change in Restricted
Cash
|
|
|
-
|
|
|
|
205,703
|
|
Earnest Money on
Deposit
|
|
|
-
|
|
|
|
450,000
|
|
Proceeds from Sale
of Property and Equipment
|
|
|
2,112,970
|
|
|
|
-
|
|
Capital
Expenditures for Property and Equipment
|
|
|
(13,660
|
)
|
|
|
(328,651
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided
by Investing Activities
|
|
|
2,672,738
|
|
|
|
471,771
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
Proceeds from Debt
|
|
|
-
|
|
|
|
2,303,815
|
|
Payments on Debt
|
|
|
(829,688
|
)
|
|
|
(2,721,921
|
)
|
Change in Restricted
Cash
|
|
|
(22,581
|
)
|
|
|
153,671
|
|
Deferred Loan Costs
Paid
|
|
|
(10,731
|
)
|
|
|
(95,455
|
)
|
Exercise of Common Stock Warrants
|
|
|
-
|
|
|
|
14,573
|
|
Dividends Paid on
Common Stock
|
|
|
-
|
|
|
|
(440,780
|
)
|
Dividends Paid on
Preferred Stock
|
|
|
(22,500
|
)
|
|
|
(14,876
|
)
|
Distributions
to Noncontrolling Interests
|
|
|
-
|
|
|
|
(117,037
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used
in Financing Activities
|
|
|
(885,500
|
)
|
|
|
(918,010
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease)
in Cash and Cash Equivalents
|
|
|
1,280,960
|
|
|
|
(77,133
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
71,055
|
|
|
|
533,597
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
1,352,015
|
|
|
$
|
456,464
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest, Net of Capitalized Interest of $0 and $105,867 for the Nine Months Ended September 30, 2016
and 2015, Respectively
|
|
$
|
1,621,067
|
|
|
$
|
1,814,781
|
|
Cash
Paid for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited consolidated financial statements.
GLOBAL
HEALTHCARE REIT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of the Business
Global
Healthcare REIT, Inc. (the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT)
for the purpose of investing in real estate and other assets related to the healthcare industry. Prior to the Company changing
its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos,
Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale
of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as
a reverse acquisition whereby WPF was deemed to be the accounting acquirer.
The
Company intends to make a REIT election under sections 856 through 859 of the Internal Revenue Code of 1986, as amended. Such
election will be made by the Board of Directors at such time as the Board determines that we qualify as a REIT under applicable
provisions of the Internal Revenue Code.
The
Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers.
As of September 30, 2016, the Company owned eight healthcare properties which are leased to third-party operators under triple-net
operating terms.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities
Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments considered necessary to make the consolidated financial statements
not misleading have been included. Operating results for the nine months ended September 30, 2016 are not necessarily indicative
of the results that may be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2015 filed with the Securities and Exchange Commission.
Recently
Issued Accounting Pronouncements
In
April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The new standard requires
that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.
On January 1, 2016, the Company adopted ASU 2015-03 and retrospectively applied the guidance to its Debt, Net for all periods
presented. Unamortized deferred loan costs, which were previously included in Prepaid Expenses, Deferred Loan Costs and Other,
totaling $573,981 and $626,688 are included in Debt, Net as of September 30, 2016 and December 31, 2015, respectively.
2.
GOING CONCERN
The
accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For
the nine months ended September 30, 2016, the Company incurred a net loss of $411,666, reported net cash used in operations of
$506,278 and has an accumulated deficit of $5,159,088. These circumstances raise substantial doubt as to the Company’s ability
to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s
ability to generate sufficient revenues and cash flows to operate profitably and meet contractual obligations, or raise additional
capital through debt financing or through sales of common stock.
The
failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the
Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
3.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
Limestone,
LLC
Effective
March 5, 2014, the Company consummated a Membership Interest Purchase Agreement providing for the purchase from Connie Brogdon,
spouse of Christopher Brodgon, President and Director of the Company, for nominal consideration ($10), a 25% membership interest
in Limestone Assisted Living, LLC (“Limestone LLC”). The remaining 75% membership interest in Limestone LLC was owned
by Connie Brogdon (5%) and unaffiliated third parties (70%).
Limestone
LLC owned 100% of the Limestone Assisted Living Facility, a 42-bed, 22,189 square foot assisted living facility located in Gainesville,
Georgia. The Company extended a loan to Limestone LLC in the amount of $550,000. On March 25, 2015, the Limestone facility was
sold and the note receivable due the Company was repaid in full, including accrued interest of $54,845.
The
Company recorded this investment using the equity method since the Company had the ability to exercise significant influence,
but not control, over Limestone LLC. Under the equity method, the Company recorded the initial investment at cost and adjusted
the carrying amount to reflect the Company’s share of earnings and losses of Limestone LLC. For the nine months ended September
30, 2016 and 2015, the Company’s share of income was $0 and $53,688, respectively. As of September 30, 2016 and 2015, the
Company’s carrying amount under the equity method was $0.
4.
PROPERTY AND EQUIPMENT
The
gross carrying amount and accumulated depreciation of the Company’s property and equipment as of September 30, 2016 and
December 31, 2015 are as follows:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,577,500
|
|
|
$
|
1,611,000
|
|
Land Improvements
|
|
|
200,000
|
|
|
|
200,000
|
|
Buildings and Improvements
|
|
|
32,703,011
|
|
|
|
35,610,444
|
|
Furniture, Fixtures and Equipment
|
|
|
988,437
|
|
|
|
1,051,473
|
|
Construction
in Progress
|
|
|
3,633,122
|
|
|
|
3,300,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,102,070
|
|
|
|
41,773,217
|
|
Less Accumulated
Depreciation
|
|
|
(3,029,552
|
)
|
|
|
(2,031,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,072,518
|
|
|
$
|
39,741,706
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105,867
|
|
Depreciation Expense
|
|
|
287,389
|
|
|
|
338,355
|
|
|
|
1,182,849
|
|
|
|
949,080
|
|
Cash Paid for Capital Expenditures
|
|
|
-
|
|
|
|
6,823
|
|
|
|
13,660
|
|
|
|
328,651
|
|
Construction in Progress Financed with
Debt
|
|
|
129,606
|
|
|
|
-
|
|
|
|
319,163
|
|
|
|
-
|
|
Effective
June 20, 2016, the Company sold its Greene Point Healthcare Center located in Union Point, Georgia for $3,800,000 which resulted
in a gain on sale of $980,839. Cash proceeds from the sale were used to pay off the existing mortgage loan in the amount of $1,683,200.
The Company received $2,112,970 in cash from the sale of the facility. The operating lease related to the facility was terminated
effective June 30, 2016.
5.
NOTE RECEIVABLE - RELATED PARTY
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Note Receivable - Gemini Gaming, LLC
|
|
$
|
-
|
|
|
$
|
573,428
|
|
In
connection with the split-off of gaming assets by Global, the Company accepted a note receivable in the amount of $962,373 from
Gemini Gaming, LLC. The note bore interest at 4.0% and was payable in quarterly installments of $17,495 beginning on January 1,
2014 through maturity of the note on October 1, 2033. The note was secured by all rights, title, and interest in and to 100,000
shares of the membership interest in Gemini Gaming, LLC. In the event of default, the Company would not take possession of gaming
assets or equipment or operate the casino unless duly licensed by the State of Colorado Division of Gaming.
On
the acquisition date, the fair value of the note receivable was estimated by discounting the expected cash flows at a rate of
10.0%, a rate at which management believes a similar loan with similar terms and maturity would be made. As a result, the note
receivable was discounted by $362,225 to its fair value of $600,148. The discount was accreted into earnings using the interest
method over the term of the note. For the nine months ended September 30, 2016 and 2015, $0 and $16,691, respectively, has been
accreted into earnings.
During
the quarter ended March 31, 2016, the Company collected an aggregate of $573,428 in repayment of the note from Gemini Gaming,
LLC, which was the discounted book value of the note, which the Company accepted in full satisfaction of the total outstanding
liability under the note.
6.
DEBT
The
following is a summary of the Company’s debt outstanding as of September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Convertible Notes Payable
|
|
$
|
3,200,000
|
|
|
$
|
3,200,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
14,465,303
|
|
|
|
14,461,421
|
|
Variable-Rate Mortgage Loans
|
|
|
6,279,936
|
|
|
|
8,050,043
|
|
Bonds Payable
|
|
|
5,640,000
|
|
|
|
5,700,000
|
|
Other Debt
|
|
|
3,207,750
|
|
|
|
5,105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,792,989
|
|
|
|
36,516,464
|
|
|
|
|
|
|
|
|
|
|
Unamortized Discount
and Debt Issuance Costs
|
|
|
(644,498
|
)
|
|
|
(700,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,148,491
|
|
|
$
|
36,815,772
|
|
Convertible
Notes Payable
6.5%
Notes Due 2017
On
September 26, 2014, the Company completed a private offering of its 6.5% Senior Secured Convertible Promissory Notes in the amount
of $3,200,000 which mature on September 25, 2017. The Notes can be called for redemption at the option of the Company at any time
(i) after September 15, 2015 but prior to September 15, 2016 at an early redemption price equal to 103% of the face amount of
the Notes, plus accrued and unpaid interest, or (ii) any time after September 15, 2016 but prior to September 15, 2017 at an early
redemption price equal to 102% of the face amount of the Notes, plus accrued and unpaid interest. Each Note is convertible at
the option of the holder into shares of common stock of the Company at a conversion price of $1.37 per share. The Notes will automatically
convert into common stock at the conversion price in the event (i) there exists a public market for the Company’s common
stock, (ii) the closing price of the common stock in the principal trading market has been $2.00 per share or higher for the preceding
ten (10) trading days, and (iii) either (A) there is an effective registration statement registering for resale under the Securities
Act of 1933, as amended, the conversion shares or (B) the conversion shares are eligible to be resold by non-affiliates of the
Company without restriction under Rule 144 of the Securities Act. At the time of issuance and based on the Company’s common
stock trading activity, the Company determined that no beneficial conversion feature was associated with the Notes. As of September
30, 2016, none of the Notes have been converted into common stock.
The
Notes are secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio.
Mortgage
Loans
Mortgage
loans are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage
loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:
|
|
|
|
|
Principal
Outstanding at
|
|
|
Stated Interest
|
|
|
Property
|
|
Face
Amount
|
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
Rate
|
|
Maturity
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle
Georgia
Nursing
Home
(1)
|
|
$
|
4,200,000
|
|
|
$
|
3,760,857
|
|
|
$
|
3,849,678
|
|
|
5.50% Fixed
|
|
October 4, 2018
|
Goodwill Nursing Home
(1)
(4)
|
|
|
4,976,316
|
|
|
|
4,520,816
|
|
|
|
4,577,047
|
|
|
5.50% Fixed
|
|
March 19, 2017
|
Warrenton Nursing Home
|
|
|
2,720,000
|
|
|
|
2,490,927
|
|
|
|
2,562,765
|
|
|
5.00% Fixed
|
|
December 20, 2018
|
Edwards Redeemer Health & Rehab
|
|
|
2,303,815
|
|
|
|
2,182,231
|
|
|
|
2,249,772
|
|
|
5.50% Fixed
|
|
January 16, 2020
|
Southern Hills Retirement Center
|
|
|
1,750,000
|
|
|
|
1,510,472
|
|
|
|
1,222,159
|
|
|
4.75% Fixed
|
|
November 10, 2017
|
Providence
of Sparta Nursing Home
|
|
|
1,725,000
|
|
|
|
1,661,930
|
|
|
|
1,686,506
|
|
|
Prime Plus 0.50%/6.00% Floor
|
|
September 26, 2017
(2)
|
Providence
of Greene Point Healthcare Center
|
|
|
1,725,000
|
|
|
|
-
|
|
|
|
1,692,000
|
|
|
Prime Plus 0.50%/6.00% Floor
|
|
Repaid on June 20, 2016
|
Golden
Years Manor Nursing Home
(3)
|
|
|
5,000,000
|
|
|
|
4,618,006
|
|
|
|
4,671,537
|
|
|
Prime Plus
1.50%/5.75% Floor
|
|
August 3, 2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,745,239
|
|
|
$
|
22,511,464
|
|
|
|
|
|
|
(1)
|
Mortgage
loans are non-recourse to the Company except for the Southern Hills line of credit owed to First United Bank.
|
|
|
|
|
(2)
|
Effective
September 26, 2016, the maturity date was extended from September 17, 2016 to September 26, 2017.
|
|
|
|
|
(3)
|
During
the quarter ended September 30, 2016, we executed a Modification to the mortgage note pursuant to which some accrued payments
were deferred and the lender agreed to permit interest only payments through March 2017. The mortgage loan collateralized
by the Golden Years Manor Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount
of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is
subject to financial covenants and customary affirmative and negative covenants. As of September 30, 2016, the Company was
not in compliance with certain of these non-financial covenants which is considered to be a technical Event of Default as
defined in the note agreement. Remedies available to the lender in the event of a continuing Event of Default, at its option,
include, but are necessarily limited to the following (1) lender may declare the principal and all accrued interest on the
note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking
possession of the collateral or seeking satisfaction from the guarantors. The Company has not been notified by the lender
regarding the exercise of any remedies available. Guarantors under the mortgage loan are Christopher Brogdon and GLN Investors,
LLC, in which the Company owns a 100% membership interest.
|
|
|
|
|
(4)
|
On
September 19, 2016, the maturity date of the loan related to our Goodwill Nursing Home property was extended to March 19,
2017. The terms of the renewal call for monthly interest only payments through maturity at which time all principal and unpaid
interest is due. Edwards Redeemer Health & Rehab was pledged as additional collateral on the loan. At September 30, 2016,
there was approximately $60,000 in accrued interest due on the loan. We are in discussions with the lender to roll this accrual
into a new note which will be amortized over future payments. No binding agreement evidencing this restructure has been signed
as of the date of this Report.
|
Bonds
Payable - Tulsa County Industrial Authority
On
March 1, 2014, Southern Tulsa, LLC (Southern Tulsa), a subsidiary of WPF that owns the Southern Hills Retirement Center, entered
into a loan agreement with the Tulsa County Industrial Authority (Authority) in the State of Oklahoma pursuant to which the Authority
lent to Southern Tulsa the proceeds from the sale of the Authority’s Series 2014 Bonds. The Series 2014 Bonds consist of
$5,075,000 in Series 2014A First Mortgage Revenue Bonds and $625,000 in Series 2014B Taxable First Mortgage Revenue Bonds. The
Series 2014 Bonds were issued pursuant to a March 1, 2014 Indenture of Trust between the Authority and the Bank of Oklahoma. $4,325,000
of the Series 2014A Bonds mature on March 1, 2044 and accrue interest at a fixed rate of 7.75% per annum. The remaining $750,000
of the Series 2014A Bonds mature on various dates through final maturity on March 1, 2029 and accrue interest at a fixed rate
of 7.0% per annum. The Series 2014B Bonds mature on March 1, 2023 and accrue interest at a fixed rate of 8.5% per annum. The debt
is secured by a first mortgage lien on the independent living units and assisted living facility (facilities), an assignment of
the facilities’ leases, a first lien on all personal property located in the facilities, and a guarantee by the Company.
Deferred loan costs incurred of $478,950 and an original issue discount of $78,140 related to the loan are amortized to interest
expense over the life of the loan. Amortization expense related to deferred loan costs and the original issue discount totaled
$5,465 and $653 for the three months ended September 30, 2016 and 2015, respectively, and $22,340 and $22,095 for the nine months
ended September 30, 2016 and 2015, respectively. The loan agreement includes certain financial covenants required to be maintained
by the Company, which were not in compliance as of September 30, 2016. No notice has been received from the lender regarding the
exercise of any remedies available. As part of the loan terms, a $60,000 principal reduction was paid on the bonds during March
2016. As of September 30, 2016, restricted cash of $564,416 is related to these bonds.
Other
Debt
Other
debt at September 30, 2016 and December 31, 2015 includes unsecured notes payable issued to facilitate the acquisition of the
nursing home properties.
|
|
|
|
|
Principal
Outstanding at
|
|
|
Stated Interest
|
|
|
Property
|
|
Face
Amount
|
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
Rate
|
|
Maturity
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill Nursing Home
|
|
$
|
2,180,000
|
|
|
$
|
1,344,000
|
|
|
$
|
1,280,000
|
|
|
17.0%
Fixed
(4)
|
|
June
30, 2017
(1)
|
Providence of Sparta Nursing Home
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
|
10.0% Fixed
|
|
August 1, 2016
(2)
|
Providence of Greene Point
Healthcare
Center
|
|
|
1,150,000
|
|
|
|
813,750
|
|
|
|
1,125,000
|
|
|
10.0% Fixed
|
|
June 30, 2017
(3)
|
Golden Years
Manor Nursing Home
|
|
|
1,650,000
|
|
|
|
-
|
|
|
|
1,650,000
|
|
|
11.0% Fixed
|
|
April
1, 2016
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,207,750
|
|
|
$
|
5,105,000
|
|
|
|
|
|
|
(1)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, all of the holders
of the Goodwill subordinated note executed an Agreement Among Lenders pursuant to which they (i) waived all equity ratchets
and (ii) extended the maturity date of their notes to June 30, 2017. In exchange, Goodwill Hunting LLC agreed to pay the investors
a one-time premium equal to 5% of the principal amount of each individual note (approximately $64,000) as such time as the
note is repaid. For the nine months ended September 30, 2016, premium of $64,000 has been recognized into earnings. The tenant,
New Beginnings, of the Goodwill nursing facility filed for bankruptcy in January 2016. The facility is currently vacant and
not generating any revenue and is unable to pay interest on the subordinated debt. The Company has been accruing the unpaid
interest but is in default under the note.
|
|
|
|
|
(2)
|
The
subordinated note on Sparta matured on August 1, 2016. Investors in the Sparta note are entitled to an additional 5% equity
in Providence HR, LLC every six months if the note is not paid when due. The Company is negotiating with these investors to
purchase their residual equity interests in exchange for shares of common stock. There can be no assurance that these negotiations
will be successful.
|
|
(3)
|
The
subordinated note on Greene Point matured on October 1, 2015. Investors in the Greene Point note were entitled to an additional
5% equity in Wash/Greene, LLC, the entity that owns the facility, every six months if the note is not paid when due. Effective
December 31, 2015, all of the holders of the Wash/Greene subordinated note executed an Agreement Among Lenders pursuant to
which they (i) waived all equity ratchets and (ii) extended the maturity date of their notes to June 30, 2017. In exchange,
Wash/Greene LLC agreed to pay the investors a one-time premium equal to 5% of the principal amount of each individual note
(approximately $56,000) as such time as the note is repaid. For the nine months ended September 30, 2016, premium of $56,250
has been recognized into earnings. On June 20, 2016, the Greene Pointe facility was sold for cash proceeds of $3.8 million.
On the closing date, the Company paid off the mortgage loan related to this property. Subordinated notes in the amount of
$813,750 remain outstanding as of September 30, 2016. Subsequent to September 30, 2016, these subordinated notes were paid
in full.
|
|
|
|
|
(4)
|
As
of September 30, 2016, the income from the Goodwill facility was insufficient to cover debt service for the subordinated debt
for the facility. The debt is accruing interest at the default rate but not currently being paid. We are in discussions with
the lender to restructure the accrued interest into a new note to be amortized through future payments.
|
|
|
|
|
(5)
|
Effective
September 23, 2016, the Company exchanged 1,350,000 shares of common stock, at $0.36 per share, for an unsecured note payable
with a principal balance of $1,550,000 and unpaid interest of $99,458. The transaction was accounted for as a debt extinguishment
with a gain on extinguishment of debt in the amount of $1,163,458 recorded in the consolidated statement of operations for
the three months ended September 30, 2016. During the three month period ended September 30, 2016, principal in the amount
of $100,000 was forgiven resulting in a loss on forgiveness of debt which has been recognized in the consolidated statements
of operations.
|
Future
maturities of all of the notes and bonds payable listed above for the next five years and thereafter are as follows:
2016
|
|
$
|
12,192,756
|
|
2017
|
|
|
12,476,358
|
|
2018
|
|
|
6,103,051
|
|
2019
|
|
|
82,265
|
|
2020
|
|
|
1,938,559
|
|
2021 and Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
32,792,989
|
|
During
the nine month period ended September 30, 2016, $4,162,888 of debt was eliminated, of which $829,688 was paid with cash,
$1,683,200 was paid through the sale of property, $100,000 through forgiveness of debt and $1,550,000 through exchange for shares
of the Company’s common stock. For the nine month period ended September 30, 2016, $90,725 was recorded as amortization
of discount and debt issuance costs.
7.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences
as may be determined by the Board of Directors.
Series
A Convertible Redeemable Preferred Stock
The
Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred
stock has a senior liquidation preference value of $2.00 per share, has no voting or redemption rights and does not accrue dividends.
As
of September 30, 2016 and December 31, 2015, 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 eight percent (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 fifteenth 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 September 30, 2016 and December 31, 2015, the Company had 375,000 shares of Series D preferred stock outstanding.
Dividends
of $7,500 were declared for the three months ended September 30, 2016. All quarterly dividends previously declared have been paid.
For the nine months ended September 30, 2016, dividends of $22,500 have been declared and paid.
Restricted
Stock Awards
The
following table summarizes the restricted stock activity during the nine months ended September 30, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Outstanding Non-Vested Restricted
Stock , Beginning
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
977,275
|
|
|
|
251,549
|
|
Vested
|
|
|
(977,275
|
)
|
|
|
(201,549
|
)
|
Cancelled
/ Forfeited
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding
Non-Vested Restricted Stock, Ending
|
|
|
-
|
|
|
|
-
|
|
In
connection with these director restricted stock grants, the Company recognized stock-based compensation of $348,886 and $36,334
for the three months ended September 30, 2016 and 2015, respectively, and $498,886 and $194,666 for the nine months ended September
30, 2016 and 2015, respectively. During the three months ended September 30, 2016, the Company issued 250,000 shares of restricted
stock with a fair value of $112,500 to a director in satisfaction of $100,000 in accrued and unpaid legal fees, therefore a $12,500
loss is recognized.
Common
Stock Warrants
As
of September 30, 2016 and December 31, 2015, the Company had 1,221,736 and 2,921,736, respectively, of outstanding warrants to
purchase common stock at a weighted average exercise price of $0.77 and $0.76, respectively. During the three month period ended
September 30, 2016, 1,700,000 warrants with an exercise price of $0.75 expired.
Common
Stock
During
the quarter ending March 31, 2016, 54,000 shares of common stock were issued for equity positions to holders on non-controlling
interests in one of the Company’s subsidiary entities. In addition, 35,000 shares of common stock with a fair value of $23,800
were issued as payment to the placement agent that solicited investors who agreed to restructure their subordinated debt. There
were no issuances of common stock during the quarter ending September 30, 2016.
As
described in Note 6, on September 23, 2016, the Company issued 1,350,000 shares of common stock, priced at $0.36 per share, in
exchange for an unsecured note payable in the principal amount of $1,550,000 and unpaid interest of $99,459.
9.
RELATED PARTIES
Clifford
Neuman, a director of the Company, is a manager and member of Gemini Gaming, LLC. As described in Note 5, the Company had a note
receivable from Gemini Gaming, LLC. Mr. Neuman also serves as sole manager of the Company’s affiliated subsidiaries. Mr.
Neuman provides office space for the Company free of charge.
The
Company transitioned the bookkeeping and property management for the Company to Colliers International. Andy Sink, a director
and the interim Chief Operating Officer, is a partner of Colliers International.
Creative
Cyberweb developed and maintains the Company’s website, and is affiliated with CFO Zvi Rhine’s family.
10.
FACILITY LEASES
The
following table summarizes our leasing arrangements related to the Company’s healthcare facilities:
Facility
|
|
Monthly
Lease
Income
(1)
|
|
|
Lease
Expiration
|
|
|
Renewal
Option, if any
|
|
|
|
|
|
|
|
|
|
Middle
Georgia
(5)
|
|
$
|
49,000
|
|
|
|
June
30, 2017
|
|
|
Term may be extended for
one additional five year term.
|
Warrenton
|
|
|
55,724
|
|
|
|
June
30, 2026
|
|
|
Term may be extended for one additional
ten year term.
|
Goodwill
(5),(7)
|
|
|
-
|
|
|
|
December
31, 2017
|
|
|
Term may be extended for one additional
five year term.
|
Edwards Redeemer
(5)
|
|
|
45,900
|
|
|
|
December
31, 2017
|
|
|
Term may be extended for one additional
five year term.
|
Providence
|
|
|
42,519
|
|
|
|
June
30, 2026
|
|
|
Term may be extended for one additional
ten year term.
|
Meadowview
|
|
|
33,695
|
|
|
|
October
31, 2024
|
|
|
Term may be extended for one additional
five year term.
|
Golden Years
(5)
(6)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
Southern Hills SNF
(2)
|
|
|
37,000
|
|
|
|
May
31, 2019
|
|
|
Term may be extended for one additional
five year term.
|
Southern Hills ALF
(3)
|
|
|
22,000
|
|
|
|
March
31, 2019
|
|
|
None
|
Southern Hills ILF
(4)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
(1)
|
Monthly
lease income reflects rent income on a straight-line basis, where applicable, over the term of each lease. Properties related
to the New Beginnings properties (Middle Georgia/Dodge, Goodwill and Edwards Redeemer) are reflected on a cash basis until
the tenant is out of bankruptcy and stable.)
|
|
|
(2)
|
Lease
agreement dated May 21, 2014 with lease payments commencing February 1, 2015. On May 10, 2016, the Company obtained a Court
Order appointing a Receiver to control and operate the Southern Hills SNF. The former lease operator represented that it was
unable to meet the financial commitments of the facility, including the payment of rent, payroll and other operating requirements.
The Company plans to engage a new lease operator for the facility. See Note (8).
|
|
|
(3)
|
Lease
agreement dated March 19, 2014. Lease payments were to have commenced on April 1, 2015; however the ALF facility is not yet
open and rent payments have not been made. The tenant for the ALF is the same tenant as the tenant for the Southern Hills
SNF, discussed in Note 2. The Company plans to seek a new tenant for this entity to assume operations at the completion of
construction. See Note (8).
|
|
|
(4)
|
The
Southern Hills ILF requires renovation and is not subject to an operating lease. See Note (8).
|
|
|
(5)
|
On
January 22, 2016, a lease operator that operates Middle Georgia, Edwards Redeemer, Golden Years (until January 1, 2016) and
Goodwill filed a voluntary petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Under the Chapter 11 Bankruptcy,
the lease operator can either assume or reject the leases of Middle Georgia, Edwards Redeemer and Goodwill. As of the date
of this Report, the lease operator has not made any binding elections, but has verbally represented that he intends to assume
the leases of Middle Georgia and Edwards Redeemer under existing lease terms and reject the lease covering Goodwill. If the
lease operator assumes a lease, he is required to bring the leases current as a condition to such assumption.
|
|
|
(6)
|
Effective
January 1, 2016, the Golden Years facility was leased to another operator for a period of ten years at a monthly base rent
of $30,000 which was subject to increases based on census levels. Under the terms of the lease, the Company agreed to fund
certain capital expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice that it was terminating
the lease effective August 31, 2016. The Company entered into a Lease Termination Agreement under which it paid the tenant
$145,000 and is obligated to make future payments. Effective August 30, 2016, the Company entered into a new lease agreement
with another nursing home operator for its Golden Years facility. The lease term commences at the end of a straddle period
which is defined as the period the nursing home operator takes occupancy of and commences operations of the facility and ends
the later of (i) such time the Company has recovered 100% of all advances made to the operator to cover initial operating
losses incurred or (ii) twelve months from the occupancy date. During the straddle period, the Company has agreed to make
working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the facility.
If at the end of the straddle period, the operator has not reimbursed the full amount of advances to the Company, the Company
or operator have the right to terminate the lease agreement. No amounts have been advanced to the operator by the Company
as of September 30, 2016. If the lease term commences, the Company will receive monthly base rents beginning at $35,000 which
is subject to increases based on census levels.
|
|
|
(7)
|
In
January 2016, concurrently with the Chapter 11 Bankruptcy filing by the lease operator, the Goodwill facility was closed by
Georgia regulators and all residents were removed. The Goodwill facility is not generating any revenue as of the date of this
report. In a transaction related to the sale of the Greene Point facility, an affiliate of the buyer of Greene Point has executed
a ten year operating lease covering Goodwill. The lease will not become effective until and unless the State of Georgia approves
the issuance of all licenses, permits and other regulatory approvals necessary to recertify and reopen the facility. The former
lease has been terminated. After receiving regulatory approvals, the lease operator invested approximately $2.0m
in capital improvements in the property. The facility is scheduled to reopen as early as December 2016 pending a
successful survey. If the facility is not reopened by January 2017 (one year from that date it was closed), the Certificate
of Need for the facility will be terminated, and the property will no longer be eligible to be operated as a licensed nursing
home.
|
|
|
(8)
|
On
August 3, 2016, the Company entered into a non-binding letter of intent with a new tenant for all three Southern Hills facilities.
New leases will not be executed until renovations at the ALF and ILF have been completed.
|
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, the Company may become liable for such operating expenses. We have been required to cover those
expenses at Goodwill since the facility was closed by regulators in January 2016. The Company has also committed to extending
a line of credit to the Receiver for the Southern Hills SNF for working capital in the maximum amount of $250,000, of which $150,000
has already been advanced. The line of credit will represent a senior obligation of the Receivership estate.
Future
cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows
(excludes Middle Georgia, Edwards Redeemer, Goodwill, Golden Years, Southern Tulsa SNF, Southern Tulsa ALF and Southern Tulsa
ILF):
2016
|
|
$
|
348,000
|
|
2017
|
|
|
1,446,000
|
|
2018
|
|
|
1,511,040
|
|
2019
|
|
|
1,545,342
|
|
2020
|
|
|
1,576,254
|
|
2021
and Thereafter
|
|
|
8,571,204
|
|
|
|
|
|
|
|
|
$
|
14,997,840
|
|
The
Company is in active negotiations with potential lease operators to assume the operations of the properties whose operator is
in bankruptcy (Middle Georgia, Edwards Redeemer and Goodwill) as well as a new operator for the Southern Hills’ facilities.
11.
FAIR VALUE MEASUREMENTS
Our
consolidated balance sheets include the following financial instruments: cash and cash equivalents, advances to related parties,
notes receivable, restricted cash, accounts payable, debt and lease security deposits. We consider the carrying values of our
short-term financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because
of the short period of time between origination of the financial assets and liabilities and their expected settlement, or because
of their proximity to acquisition date fair values. The carrying value of debt approximates fair value based on borrowing rates
currently available for debt of similar terms and maturities.
Upon
acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price
base 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 rate assumptions from a
third party appraisal or other market sources.
Assets
and liabilities measured at fair value on a recurring basis as of September 30, 2016 are summarized below:
|
|
|
|
|
Fair
Value Measurement
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
177,922
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
177,922
|
|
Assets
and liabilities measured at fair value on a recurring basis as of December 31, 2015 are summarized below:
|
|
|
|
|
Fair
Value Measurement
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
$
|
304,536
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
304,536
|
|
The
warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other
(Income) Expense on the Company’s Consolidated Statement of Operations until the warrants are exercised, expire, or other
facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability
is determined each reporting period by utilizing the Black-Scholes option pricing model.
The
table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the warrant liability
for the nine months ended September 30, 2016:
Beginning Balance, January 1, 2016
|
|
$
|
304,536
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
(126,614
|
)
|
Exercise of Warrants
|
|
|
-
|
|
|
|
|
|
|
Ending Balance, September 30, 2016
|
|
$
|
177,922
|
|
The
significant assumptions used in the Black-Scholes option pricing model as of September 30, 2016 and December 31, 2015 include
the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Volatility
|
|
|
94.8%
- 142.3%
|
|
|
|
95.3%
- 152.8%
|
|
Risk-free Interest Rate
|
|
|
0.29%
- 0.88%
|
|
|
|
0.65%
- 1.31%
|
|
Exercise Price
|
|
|
$0.50
- $1.37
|
|
|
|
$0.50
- $1.37
|
|
Fair Value of Common Stock
|
|
|
$0.40
|
|
|
|
$0.68
|
|
Expected Life
|
|
|
.36
– 3.0 years
|
|
|
|
1.1
– 3.7 years
|
|
12.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental
cash flow information for the nine months ended September 30 follows:
|
|
2016
|
|
|
2015
|
|
Acquisition of Membership
Interests
in Exchange for Common Stock
|
|
$
|
66,497
|
|
|
$
|
-
|
|
Common Stock Issued for Debt Cost
|
|
|
23,800
|
|
|
|
-
|
|
Common Stock Issued for Debt and Accrued
Interest
|
|
|
486,000
|
|
|
|
-
|
|
Common Stock issued for Settlement Accounts
Payable
|
|
|
112,500
|
|
|
|
-
|
|
Dividends Declared on Preferred Stock
|
|
|
22,500
|
|
|
|
7,500
|
|
Dividends Declared on Common Stock
|
|
|
-
|
|
|
|
218,317
|
|
Payment of Mortgage Debt through Sale
of Property
|
|
|
1,683,200
|
|
|
|
-
|
|
Construction in Progress Financed with
Debt
|
|
|
319,163
|
|
|
|
-
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The
following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be
read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains
forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected
operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified
by the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. All forward-looking statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2015 as filed with the SEC.
Our
actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings
with the SEC. These factors include without limitation:
|
●
|
macroeconomic
conditions, such as a prolonged period of weak economic growth, and volatility in capital markets;
|
|
|
|
|
●
|
changes
in national and local economic conditions in the real estate and healthcare markets specifically;
|
|
|
|
|
●
|
legislative
and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation
enacted in 2010;
|
|
|
|
|
●
|
the
availability of debt and equity capital;
|
|
|
|
|
●
|
changes
in interest rates;
|
|
|
|
|
●
|
competition
in the real estate industry; and,
|
|
|
|
|
●
|
the
supply and demand for operating properties in our market areas.
|
Overview
Global
Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was organized for the purpose of
investing in real estate related to the long-term care industry.
We
plan to elect to be treated as a real estate investment trust (REIT) in the future; however, we did not make that election for
the 2015 fiscal year.
The
Company invests primarily in real estate serving the healthcare industry in the United States. We acquire, develop, lease, manage
and dispose of healthcare real estate. Our portfolio will be comprised of investments in the following five healthcare segments:
(i) senior housing, (ii) life science, (iii) medical office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments
within our healthcare segments using the following five investment products: (i) properties under lease, (ii) mortgage debt investments,
(iii) developments and redevelopments, (iv) investment management and (v) RIDEA, which represents investments in senior housing
operations utilizing the structure permitted by the Housing and Economic Recovery Act of 2008.
The
delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to
maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to
the following:
|
●
|
Compelling
demographics driving the demand for healthcare services;
|
|
|
|
|
●
|
Specialized
nature of healthcare real estate investing; and
|
|
|
|
|
●
|
Ongoing
consolidation of a fragmented healthcare real estate sector.
|
Acquisitions
We
did not acquire any properties during the nine month periods ended September 30, 2016 and 2015.
Dispositions
Effective
June 20, 2016, we sold our Providence of Greene Point Healthcare Center for cash proceeds of $3.8 million.
Properties
As
of September 30, 2016, we owned eight long-term care facilities. The following table provides summary information regarding these
facilities at September 30, 2016:
Property
Name
|
|
Location
|
|
Percentage
Equity Ownership
|
|
|
Date
Acquired
|
|
Gross
Square Feet
|
|
|
Purchase
Price
|
|
|
Outstanding
Debt at
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle GA Nursing Home (a/k/a
Crescent Ridge)
|
|
Eastman, GA
|
|
|
100
|
%
|
|
3/15/2013
|
|
|
28,808
|
|
|
$
|
5,000,000
|
|
|
$
|
3,760,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrenton Health and Rehabilitation
|
|
Warrenton, GA
|
|
|
100
|
%
|
|
12/31/2013
|
|
|
26,894
|
|
|
|
3,500,000
|
|
|
|
2,490,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Hills Retirement Center
|
|
Tulsa, OK
|
|
|
100
|
%
|
|
2/07/2014
|
|
|
104,192
|
|
|
|
2,000,000
|
|
|
|
7,150,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill Nursing Home
|
|
Macon, GA
|
|
|
83.62
|
%(2)
|
|
5/19/2014
|
|
|
46,314
|
|
|
|
7,185,000
|
|
|
|
5,864,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwards Redeemer Health & Rehab
|
|
Oklahoma City, OK
|
|
|
100
|
%
|
|
9/16/2014
|
|
|
31,939
|
|
|
|
3,142,233
|
|
|
|
2,182,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Providence of Sparta Nursing Home
|
|
Sparta, GA
|
|
|
97.36
|
%(3)
|
|
9/16/2014
|
|
|
19,441
|
|
|
|
2,836,930
|
|
|
|
2,711,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meadowview Healthcare Center
|
|
Seville, OH
|
|
|
100
|
%
|
|
9/30/2014
|
|
|
27,500
|
|
|
|
3,000,000
|
|
|
|
3,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Years Manor Nursing Home
|
|
Lonoke, AR
|
|
|
100
|
%
|
|
9/16/2014
|
|
|
40,737
|
|
|
|
6,742,767
|
|
|
|
4,618,006
|
|
Property
Name
|
|
Annual
Lease
Revenue
|
|
|
Operating
Lease
Expiration
|
|
|
|
|
|
|
|
|
Middle
Georgia Nursing
Home
(a/k/a Crescent Ridge)
(4)
|
|
$
|
570,000
|
|
|
|
6/30/2017
|
|
Warrenton Health and Rehabilitation
|
|
|
668,690
|
|
|
|
6/30/2026
|
|
Southern Hills Retirement
Center
(1)
|
|
|
427,000
|
|
|
|
5/31/2019
|
|
Goodwill Nursing
Home
(2) (4)(5)
|
|
|
-
|
|
|
|
12/31/2017
|
|
Edwards Redeemer
Health & Rehab
(4)
|
|
|
540,000
|
|
|
|
12/31/2017
|
|
Providence of Sparta
Nursing Home
(3)
|
|
|
510,223
|
|
|
|
6/30/2026
|
|
Meadowview Healthcare Center
|
|
|
361,000
|
|
|
|
10/31/2024
|
|
Golden Years Manor
Nursing Home
(4)
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Southern
Hills Retirement Center consists of a skilled nursing facility (SNF), assisted living facility (ALF) and independent living
facility (ILF) under separate lease agreements. Lease revenues for the SNF began in February 1, 2015. On May 10, 2016, the
Company obtained a Court Order appointing a Receiver to control and operate the Southern Hills SNF. The former lease operator
represented that it was unable to meet the financial commitments of the facility, including the payment of rent, payroll and
other operating requirements. During the nine month period ended September 30, 2016, actual payment of rent has been sporadic.
The Company plans to engage a new lease operator for the facility. Lease revenues for the ALF were to have begun April 1,
2015; however, additional renovations are required to open the facility. Lease revenues for the ILF are expected to commence
when needed renovations to the facility are completed. On the date acquired, the ALF and ILF were vacant and in need of renovation.
The Company obtained financing through the issuance of bonds and a mortgage loan to fund the renovation costs and to fund
the acquisition of the facilities.
|
|
|
|
|
(2)
|
The
subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity
in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding
the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets
and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed
to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time
as the note is repaid.
|
|
|
|
|
(3)
|
The
subordinated notes on Sparta and Greene Pointe matured on August 1, 2015. Investors in the Sparta and Greene Point notes are
entitled to an additional 5% equity in Providence HR, LLC and Wash/Greene, LLC, respectively, every six months if the note
is not paid when due. The Company’s percentage ownership in Sparta gives effect to this equity ratchet; however effective
December 31, 2015, the investors holding the subordinated debt in Greene Pointe executed an Agreement Among Lenders pursuant
to which they (i) agreed to waive any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated
debt to June 30, 2017. In exchange, Wash/Greene LLC agreed to pay the investors an additional one-time premium equal to 5%
of the principal amount of the individual note at such time as the note is repaid.
|
|
|
|
|
(4)
|
On
January 22, 2016, the lease operator that operates Middle Georgia Nursing Home, Edwards Redeemer Health & Rehab, Goodwill
Nursing Home and formerly Golden Years Manor Nursing Home filed a voluntary petition in bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. We cannot predict the effect of this bankruptcy filing on future lease terms. The Golden Years Manor
Nursing Home has been re-leased to an unaffiliated third party operator effective January 1, 2016 at an initial lease rate
of $360,000 per year, subject to future census adjustments. In July 2016, the Golden Years operator served notice that it
was terminating the lease effective August 31, 2016, claiming that GL Nursing, LLC, our subsidiary, failed to fulfill its
obligations under the lease. Effective August 30, 2016, the Company entered into a new lease agreement with another nursing
home operator for its Golden Years facility. The lease term commences at the end of a straddle period which is defined as
the period the nursing home operator takes occupancy of and commences operations of the facility and ends the later of (i)
such time the Company has recovered 100% of all advances made to the operator to cover initial operating losses incurred or
(ii) twelve months from the occupancy date. During the straddle period, the Company has agreed to make working capital advances
to enable the operator to cover cash flow deficits resulting from initial operations of the facility. If at the end of the
straddle period, the operator has not reimbursed the full amount of advances to the Company, the Company or operator have
the right to terminate the lease agreement. No amounts have been advanced to the operator by the Company as of September 30,
2016. If the lease term commences, the Company will receive monthly base rents beginning at $35,000 which is subject to increases
based on census levels.
|
|
|
|
|
(5)
|
Goodwill
was closed by regulators in January 2016 and is currently not generating any revenue. The Goodwill facility is not generating
any revenue as of the date of this report. In a transaction related to the sale of the Greene Point facility, an affiliate
of the buyer of Greene Point has executed a ten year operating lease covering Goodwill. The lease will not become effective
until and unless the State of Georgia approves the issuance of all licenses, permits and other regulatory approvals necessary
to recertify and reopen the facility. The lease is also conditional on the termination of the current lease covering the property
which is held by the former operator which filed a voluntary Chapter 11 bankruptcy petition in January 2016. The lease operator
has agreed to invest not less than $1.0 million in capital improvements in the property pending receipt of regulatory approvals.
|
Results
of Operations
The
following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should
be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q.
Results
of Operations - Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Rental
revenues for the three month periods ended September 30, 2016 and 2015 totaled $850,520 and $978,648, respectively, a decrease
of $128,128. On January 22, 2016, the lease operator that leased our Middle Georgia, Edwards Redeemer, Golden Years and Goodwill
properties filed a voluntary petition in bankruptcy under Chapter 11 of the U.S Bankruptcy Code, and at the same time the regulators
closed the Goodwill facility. At the time of the bankruptcy petition, we were owed pre-petition rent of over $600,000 which likely
will not be recovered. The bankrupt lease operator also owed unpaid property taxes on each of the controlled properties totaling
approximately $300,000 which constitute a lien on our interests and must be paid. We continue to have to service the senior secured
loan at Goodwill even though the property is closed and generates no revenues. We have not recognized any rental revenues related
to the Golden Years property, and under the terms of the new lease with a new operator, we’ll continue to not receive any
rental revenues until the costs of refurbishment and operating losses incurred by the new operator have been reimbursed, which
we expect may occur during the second quarter of 2017. We have restructured our senior loan related to Golden Years which permitted
us to defer certain payments in 2016 and pay interest only until April 1, 2017. Rental revenues from our Southern Hills SNF has
been sporadic under the Receivership on that property; and we have additional refurbishment costs for that facility. We recognized
no rental revenues related to our assisted and independent living facilities in Tulsa, Oklahoma which were to have begun April
1, 2015; however, additional renovations are required to open the facilities at an estimated cost of approximately $3.0 million.
We have been unable to service our unsecured debt at Lonoke and Goodwill and cannot predict when those properties will generate
sufficient revenues to resume those payments. We expect to recognize rental revenues on the assisted living facility during 2016.
Rental revenues for our independent living facility in Tulsa, Oklahoma will be recognized after construction activities and renovations
have been completed, forecast to occur in 2016. Revenues from Goodwill ceased in January 2016 and it is unlikely that we will
realize any rental revenues from that property for the remainder of 2016. For the three months ended September 30, 2015, we recognized
rental revenues on all properties with the exception of Goodwill and our assisted living facility and independent living facilities
located in Tulsa, Oklahoma. We have also not received any rental income from the Southern Hills skilled nursing facility since
the appointment of our Receiver in May 2016.
General
and administrative expenses were $734,891 and $654,202 for the three month periods ended September 30, 2016 and 2015, respectively,
an increase of $80,689. This classification primarily consisted of salaries and legal, accounting and other professional fees
to comply with regulatory reporting requirements. The increase is attributed to the recognition of stock based compensation of
$337,500 during the three months ended September 30, 2016 compared to $36,334 during the three months ended September 30,
2015.
Property
taxes, insurance, and other operating expenses totaled $43,255 and $2,276 for the three month periods ended September 30, 2016
and 2015, respectively. Lessees are responsible for the payment of insurance, taxes and other charges while under the lease. Should
the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We have been
required to cover these expenses at our Goodwill since the facility was closed by regulators in January 2016. We are also responsible
for property taxes and insurance related to the ALF and ILF at our Southern Hills Retirement Center.
Acquisition
costs were $0 and $1,950 for the three months ended September 30, 2016 and 2015, respectively.
Depreciation
expense decreased $50,966 from $338,355 for the three months ended September 30, 2015 to $287,389 for three months ended September
30, 2016. We have not recorded depreciation expense on our assisted living facility and independent living facility located at
our Southern Hills Retirement Center which will commence once renovations have been completed and the properties are placed in
service. We did not recognize depreciation expense on our Providence of Greene Point Healthcare Center during the three months
ended September 30, 2016 due to the sale of that facility in June 2016. Depreciation expense recognized on our Providence of Greene
Point Healthcare Center for the three months ended September 30, 2015 totaled $42,446.
During
the three months ended September 30, 2016, we recognized a loss on warrant liability of $31,110. Warrants to purchase our common
stock contain nonstandard antidilution provisions which require them to be classified as liabilities and recorded at their estimated
fair value at each reporting period. Changes in the fair value of these warrants during the reporting period are recorded as a
gain or loss in our consolidated statement of operations.
We
recognized a gain on extinguishment of debt in the amount of $1,163,458 during the three months ended September 30, 2016. During
the period, we issued 1,350,000 shares of common stock, priced at $0.36 per share, for an unsecured note payable with a principal
balance of $1,550,000 and unpaid interest of $99,459.
Interest
income for the three months ended September 30, 2016 was $0 compared to $19,660 for the same period in 2015. During the first
quarter of 2016, we collected a note receivable from a related party in full satisfaction of the note; and, as of September 30,
2016, there were no notes receivable outstanding. During the quarter ended September 30, 2015, interest income was recognized
on notes receivable with average balances approximating $1.1 million.
Interest
expense decreased $132,332 from $735,843 for the three months ended September 30, 2015 to $603,511 for the three months ended
September 30, 2016. The decrease is attributable to reductions in the principal amount of debt from 2015 to 2016.
Results
of Operations - Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Rental
revenues for the nine month periods ended September 30, 2016 and 2015 totaled $2,310,584 and $3,264,321, respectively, a decrease
of $953,737. On January 22, 2016, the lease operator that leased our Middle Georgia, Edwards Redeemer, Golden Years and Goodwill
properties filed a voluntary petition in bankruptcy under Chapter 11 of the U.S Bankruptcy Code, and at the same time the regulators
closed the Goodwill facility. At the time of the bankruptcy petition, we were owed pre-petition rent of over $600,000 which likely
will not be recovered. The bankrupt lease operator also owned unpaid property taxes on each of the controlled properties totaling
approximately $300,000 which constitute a lien on our interests and must be paid. We continue to have to service the senior secured
loan at Goodwill even though the property is closed and generates no revenues. We have not recognized any rental revenues related
to the Golden Years property, and under the terms of the new lease with a new operator, we’ll continue to not receive any
rental revenues until the costs of refurbishment and operating losses incurred by the new operator have been reimbursed, which
we expect may occur during the second quarter of 2017. We have restructured our senior loan related to Golden Years which permitted
us to defer certain payments in 2016 and pay interest only until April 1, 2017. Rental revenues from our Southern Hills SNF has
been sporadic under the Receivership on that property; and we have additional refurbishment costs for that facility. We recognized
no rental revenues related to our assisted and independent living facilities in Tulsa, Oklahoma which were to have begun April
1, 2015; however, additional renovations are required to open the facilities. We have been unable to service our unsecured debt
at Lonoke and Goodwill and cannot predict when those properties will generate sufficient revenues to resume those payments. We
expect to recognize rental revenues on the assisted living facility during 2016. Rental revenues for our independent living facility
in Tulsa, Oklahoma will be recognized after construction activities and renovations have been completed, forecast to occur in
2016. Revenues from Goodwill ceased in January 2016 and it is unlikely that we will realize any rental revenues from that property
for the remainder of 2016. For the nine months ended September 30, 2015, we recognized rental revenues on all properties with
the exception of Goodwill and our assisted living facility and independent living facilities located in Tulsa, Oklahoma.
General
and administrative expenses were $1,616,476 and $1,296,328 for the nine month periods ended September 30, 2016 and 2015, respectively,
an increase of $320,148. This classification primarily consisted of salaries and legal, accounting and other professional fees
to comply with regulatory reporting requirements. For the nine months ended September 30, 2016 and 2015, general and administrative
expenses includes $498,886 and $194,666 of share based compensation related to restricted stock and common stock awards. We also
recognized higher legal costs during the nine months ended September 30, 2016 due to the bankruptcy of a lease operator.
Property
taxes, insurance, and other operating expenses totaled $202,635 and $120,618 for the nine month periods ended September 30, 2016
and 2015, respectively. Lessees are responsible for the payment of insurance, taxes and other charges while under the lease. Should
the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We have been
required to cover these expenses at our Goodwill since the facility was closed by regulators in January 2016. We are also responsible
for property taxes and insurance related to the ALF and ILF at our Southern Hills Retirement Center.
Acquisition
costs were $52,325 and $1,950 for the nine months ended September 30, 2016 and 2015, respectively. For the nine months ended September
30, 2016, we incurred acquisition costs in the form of a partial forfeiture of an earnest money deposit related to the potential
purchase of a skilled nursing facility. The acquisition failed to close.
We
recognized a gain on disposal of property and equipment of $980,839 during the nine months ended September 30, 2016 related to
the sale of our Providence of Greene Point Healthcare Center for cash proceeds of $3.8 million.
Depreciation
expense increased $233,769 from $949,080 for the nine months ended September 30, 2015 to $1,182,849 for nine months ended September
30, 2016. We have not recorded depreciation expense on our assisted living facility and independent living facility located at
our Southern Hills Retirement Center which will commence once renovations have been completed and the properties are placed in
service.
During
the nine months ended September 30, 2016, we recognized a gain on warrant liability of $126,614. Warrants to purchase our common
stock contain nonstandard antidilution provisions which require them to be classified as liabilities and recorded at their estimated
fair value at each reporting period. Changes in the fair value of these warrants during the reporting period are recorded as a
gain or loss in our consolidated statement of operations.
We
recognized a gain on extinguishment of debt in the amount of $1,163,458 during the three months ended September 30, 2016. During
the period, we issued 1,350,000 shares of common stock, priced at $0.36 per share, for an unsecured note payable with a principal
balance of $1,550,000 and unpaid interest of $99,459.
Interest
income decreased $50,675 from $82,824 for the nine months ended September 30, 2015 to $32,149 recognized for the nine months ended
September 30, 2016 as a result of decreased average balances outstanding related to our note receivable from a related party.
Interest
expense decreased $103,829 from $2,074,854 for the nine months ended September 30, 2015 to $1,971,025 for the nine months ended
September 30, 2016. The decrease is attributable to reductions in the principal amount of debt from 2015 to 2016. For the nine
months ended September 30, 2015, we capitalized interest costs on construction in progress of $105,867 related to renovations
at our Southern Hills Retirement Center. We did not capitalize any interest during the nine months ended September 30, 2016.
Liquidity
and Capital Resources
Throughout
its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of properties
and debt and equity securities to meet cash demands.
At
September 30, 2016, the Company had cash and cash equivalents of $1.4 million on hand. In June 2016, we sold our Greene Point
facility for gross cash proceeds of $3.8 million. A portion of the proceeds were used to pay off an existing mortgage related
to the facility in the amount of $1.7 million and related subordinated debt of $367,500. Our liquidity is expected to increase
from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with the acquisition
of properties. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements,
excluding balloon payments at maturity, are expected to be achieved from rental revenues received and existing cash on hand. We
plan to renew senior debts that mature during 2016, as our projected cash flow from operations will be insufficient to retire
the debt. Our restricted cash approximated $0.6 million as of September 30, 2016 which is to be expended on debt service associated
with our Southern Hills Retirement Center.
We
have an agreement for the Goodwill facility
that should start generating revenues in January 2017 after the new operator has completed renovations and obtained necessary
licenses and permits. We also have an agreement from the senior lender to extend and modify the Goodwill senior loan to
require interest only payments for six months. An agreement is also in place at Golden Years in which the Company makes advances
to the operator to cover operating deficits until operations at the facility sufficiently recover. The operator has initiated
over $400,000 in property improvements, which will be complete by year-end. Our advances will reimbursed by any operating surpluses
prior to commencement of the lease. Any remaining unreimbursed advances after twelve months will not be recovered and either party
has the option to reject the lease prior to commencement. We expect all advances to be repaid and the lease to commence in April
2017.
Cash
used in operating activities was $506,278 for the nine months ended September 30, 2016 compared to cash provided by operating
activities of $369,106 for the nine months ended September 30, 2015. Cash flows provided by operations was primarily impacted
by the decrease in rental revenues received during the first quarter of 2016 as a result of the bankruptcy filing of a lease operator
and the closure of one facility.
Cash
provided by investing activities was $2,672,738 for the nine month period ended September 30, 2016 compared to cash provided by
investing activities of $471,771 for the nine month period ended September 30, 2015. For the nine months ended September 30, 2016,
we collected the total carrying value of a note receivable with a related party in the amount of $573,428 and received proceeds
of $2,112,970 from the sale of our Greene Point facility. For the nine months ended September 30, 2015, we issued a note receivable
of $350,000 to a nursing home operator, collected $574,719 from notes receivable to related parties, received back a $450,000
earnest money on deposit related to a potential acquisition and incurred capital expenditures of $328,651 related to our Southern
Hills Retirement Center.
Cash
used in financing activities was $885,500 and $918,010 for the nine months ended September 30, 2016 and 2015, respectively. During
the nine months ended September 30, 2015, we issued $2.3 million in debt and made payments on debt of $2.7 million. During the
nine months ended September 30, 2016, we did not issue any new debt and made payments on debt of $0.8 million.
As
of September 30, 2016 and December 31, 2015, our debt balances consisted of the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Convertible Notes Payable
|
|
$
|
3,200,000
|
|
|
$
|
3,200,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
14,465,303
|
|
|
|
14,461,421
|
|
Variable-Rate Mortgage Loans
|
|
|
6,279,936
|
|
|
|
8,050,043
|
|
Bonds Payable
|
|
|
5,640,000
|
|
|
|
5,700,000
|
|
Other Debt
|
|
|
3,207,750
|
|
|
|
5,105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,792,989
|
|
|
|
36,516,464
|
|
Unamortized Discount
and Debt Issuance Costs
|
|
|
(644,498
|
)
|
|
|
(700,692
|
)
|
|
|
$
|
32,148,491
|
|
|
$
|
35,815,772
|
|
The
weighted average interest rate and term of our fixed rate debt are 6.94% and 6.0 years, respectively, as of September 30, 2016.
The weighted average interest rate and term of our variable rate debt are 5.82% and 15.3 years, respectively, as of September
30, 2016.
We
have $6.8 million of debt maturing during the remaining three months of 2016. We expect to refinance this debt as the associated
properties meet loan to value requirements currently being employed in commercial lending markets. During 2016, we paid off a
$1.7 mortgage note using proceeds from the sale of our Greene Pointe facility, exchanged $1.6 million of subordinated debt for
our common stock, and paid off $367,500 of subordinated debt related to our Greene Point facility. In January 2015, the Company
paid off a note payable in the amount of $880,000 and refinanced an existing fixed-rate mortgage loan related to the Edwards Redeemer
Health & Rehab facility.
The
mortgage loan collateralized by the Golden Years Manor Nursing Home is 80% guaranteed by the USDA and is subject to financial
covenants and customary affirmative and negative covenants. As of September 30, 2016, the Company was not in compliance with certain
of these non-financial covenants which is considered to be a technical Event of Default as defined in the note agreement. Remedies
available to the lender in the event of a continuing Event of Default, at its option, include, but are necessarily limited to
the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise
additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction
from the guarantors. The Company has not been notified by the lender regarding the exercise of any remedies available. Guarantors
under the mortgage loan are Christopher Brogdon and GLN Investors, LLC, of which the Company owns a 100% membership interest.
There is approximately $60,000 in accrued interest due under this mortgage loan at September 30, 2016; and we are in negotiations
with the lender to restructure that amount in a new note to be amortized over future payments.
Contractual
Obligations
As
of September 30, 2016, we had the following contractual obligations:
|
|
Total
|
|
|
Less
Than
1 Year
|
|
|
1
- 3 Years
|
|
|
3
- 5 Years
|
|
|
More
Than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and Bonds Payable
- Principal
|
|
$
|
29,592,989
|
|
|
$
|
21,469,114
|
|
|
$
|
6,103,051
|
|
|
$
|
2,020,824
|
|
|
$
|
-
|
|
Notes and Bonds Payable - Interest
|
|
|
13,458,082
|
|
|
|
1,796,302
|
|
|
|
1,954,236
|
|
|
|
1,482,181
|
|
|
|
8,225,363
|
|
Convertible Notes Payable - Principal
|
|
|
3,200,000
|
|
|
|
3,200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes
Payable - Interest
|
|
|
260,000
|
|
|
|
208,000
|
|
|
|
52,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
46,511,071
|
|
|
$
|
26,673,416
|
|
|
$
|
8,109,287
|
|
|
$
|
3,503,005
|
|
|
$
|
8,225,363
|
|
Revenues
from operations are not sufficient to meet all the working capital needs of the Company for the foreseeable future. Cash on hand
of $1.4 million as of September 30, 2016 has increased during the year through the repayment of our note receivable with Gemini
Gaming of $573,428 and net cash proceeds from the sale of our Greene Point facility during the first six months of 2016 offset
by reductions in debt. Existing cash on hand combined with revenues generated from operations were not sufficient to cover all
of our operating expenses and debt service requirements during the first nine months of 2016. The closure of Goodwill, the bankruptcy
of our operator at Eastman, Edwards Redeemer and Goodwill, the renegotiation of the operating lease for Lonoke, and the Receivership
at Southern Tulsa SNF, have impaired our cash flow for the near term. Debt maturities are expected to be refinanced at reasonable
terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue
bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. We have ongoing capital
improvement and recurring capital expenditure commitments at most of our properties, which range from minor capital expenditure
needs at Edwards Redeemer and Eastman to significant commitments at Lonoke and the Southern Hills. We will likely need to consider
further equity and debt financings to meet our short term capital requirements, for which there currently exist no commitments
or agreements.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that we consider material.
Critical
Accounting Policies
Set
forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated
financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position
and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies
require that application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual
results could differ as a result of such judgment and assumptions.
Property
Acquisitions
We
allocate the purchase price of acquired properties to net tangible and identified intangible assets and any liabilities based
on relative fair values. 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 and leasing at the specific property. Acquisition-related
costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the purchase price
or fair value of an acquired property.
Impairment
of Long Lived Assets
When
circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This
review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the
property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market
and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment
exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that
the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from
independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties
using standard industry valuation techniques.
Notes
Receivable
The
Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made
in accordance with the contractual terms of the note receivable agreement. Once a note has been determined to be impaired, it
is measured to establish the amount of the impairment, if any, based on the fair value of the note determined by using present
value of expected future cash flows discounted at the note’s effective interest rate. If the fair value of the impaired
note receivable is less than the recorded investment in the note, a valuation allowance is recognized.
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective
for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective
or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial
statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard
on our ongoing financial reporting.
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): 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 and to provide related footnote disclosures in certain circumstances.
Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard, disclosures
are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within
one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has not yet determined
the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
In
April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The new standard requires
that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.
On January 1, 2016, the Company adopted ASU 2015-03 and retrospectively applied the guidance to its Debt, Net for all periods
presented. Unamortized deferred loan costs, which were previously included in Prepaid Expenses, Deferred Loan Costs and Other,
totaling $582,284 and $626,688 are included in Debt, Net as of September 30, 2016 and December 31, 2015, respectively.
In
September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments
”
. Under this guidance, an acquirer is required to recognize adjustments to provisional amounts that are
identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments
in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes
in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated
as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately
on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by
line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized
as of the acquisition date. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim
periods beginning after December 15, 2015. The Company adopted ASU No. 2015-16 on January 1, 2016, and the adoption did not have
a material impact on the consolidated financial statement s and related disclosures.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU 2016-02 requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease
expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is
also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless
of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating
leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes previous leasing standards
.
ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted.
The Company is currently assessing the potential impact that the adoption of ASU 2016-02 will have on its consolidated financial
statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting”
.
ASU 2016-09 is intended to improve the accounting for share-based payments and affects all organizations
that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are
simplified with ASU 2016-09, including income tax consequences, classification of awards as equity or liabilities and classification
on the statement of cash flows. ASU 2016-09 is effective for the Company for reporting periods beginning after December 15, 2016,
with early adoption permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-09 will have
on its consolidated financial statements.
SUBSEQUENT
EVENTS
On
October 1, 2016, subordinated debt with an outstanding principal balance of $813,750 related to our Providence of Greene Pointe
Healthcare Center was paid off.