ITEM 1. BUSINESS
Background
Global Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was organized for the purpose of investing in real estate related to the long-term care industry. Prior to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF). WPF was merged into the Company in 2019.
We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio will be comprised of investments in the following three healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing and (iii) bonds securing senior housing communities. We will make investments within our healthcare segments using the following five investment products: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA.
The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the following:
● 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.
Our Properties
Acquisition of West Paces Ferry Healthcare REIT, Inc. (WPF)
On September 30, 2013, Global acquired all of the outstanding common stock of WPF in consideration of $100. WPF owned a 65% membership interest in Dodge NH, LLC, which owns a skilled nursing facility located in Eastman, Georgia.
In 2014, we formed and organized Southern Tulsa, LLC as part of our purchase of the Southern Hills Retirement Center in Tulsa, Oklahoma. Southern Tulsa, LLC was formed as a wholly-owned subsidiary of WPF.
WPF was merged into Global in 2019 and its direct ownership interests are now directly owned by Global.
Acquisition of Middle Georgia Nursing Home
Effective July 1, 2012, Georgia Healthcare REIT, Inc., (“Georgia REIT”) a private company owned and controlled by a former affiliate, consummated its first acquisition: the Middle Georgia Nursing Home. Middle Georgia Nursing Home is located at 556 Chester Highway in Eastman, Georgia (“Middle Georgia” or the “Facility”). The Facility was acquired through Dodge NH, LLC, a limited liability company formed for the purpose of acquiring Middle Georgia that was initially wholly-owned by Georgia REIT. Dodge Investors, LLC was formed and organized as a financing entity to raise $1.1 million in funding to complete the financing required to complete the acquisition, as more fully described below.
The terms of the acquisition of Middle Georgia were as follows: The purchase price was $5.0 million, of which $4.2 million was paid with the proceeds of a commercial mortgage with Colony Bank, as senior lender, which accrued interest at 6.25% per annum; and the balance of $1.0 million was provided by Dodge Investors, LLC. Dodge Investors LLC funded Dodge NH, LLC with $1.1 million in consideration of 13% unsecured notes and a carried 35% membership interest in Dodge NH, LLC. Of the $1.1 million raised by Dodge Investors, LLC, $125,000 was invested by Georgia REIT from loan proceeds from the Company, representing a 4% membership interest of the total 35% membership interest held by Dodge Investors, LLC. The Dodge NH, LLC notes purchased by Dodge Investors, LLC accrued interest at the rate of 13% per annum, interest payable monthly, with the outstanding balance of principal and accrued and unpaid interest due July 1, 2014.
Effective March 15, 2013, Georgia REIT conveyed its entire 65% membership interest in Dodge NH to WPF. During 2014 and 2015, the Company acquired the remaining membership interests in Dodge Investors, LLC and holds a 100% membership interest as of December 31, 2017. The Company has also repaid the entire $1.1 million note to Dodge Investors, LLC.
Dodge NH, LLC had an operating lease agreement with Eastman Healthcare and Rehab, LLC, owned by a professional skilled nursing facility operator, having an initial term of five years expiring in June 2017, with an option to renew for an additional five-year period. On January 22, 2016, the lease operator that operates the facility filed a voluntary petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. In 2018, the lease operator emerged from bankruptcy with a new five year lease.
In 2019 the Company brought an action against the former lease operator for numerous violations of the operating lease, including violation of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019, the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court has been overseeing the operations at the facility. This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions, LLC. We are currently in the process of having approved by the Court an Operations Transfer Agreement from the Receiver to a newly formed subsidiary of the Company.
Acquisition of Warrenton Nursing Home
Effective December 31, 2013, the Company consummated the purchase of the 110 bed Warrenton Nursing Home (“Warrenton”) located in Warrenton, Georgia. Warrenton was purchased by ATL/WARR, LLC, a single purpose Georgia limited liability company (“Warr LLC”) previously owned 95% by a former affiliate and 5% by an unaffiliated investor. Concurrently, the former affiliate conveyed his 95% membership interest in Warr LLC to the Company for nominal consideration.
Warr LLC entered into a Purchase and Sale Agreement dated April 3, 2013 (the “PSA”) with Providence Health Care, Inc., as seller, covering the Warrenton facility. The purchase price of Warrenton was $3.5 million, of which $2.72 million was provided by a commercial senior bank loan, and approximately $984,500 was provided by the Company.
The facility is covered by a ten year operating lease that began July 2016.
Acquisition of Southern Hills Retirement Center
Effective February 7, 2014, the Company acquired the real property and improvements comprising a 100% interest in the Southern Hills Retirement Center located in Tulsa, Oklahoma (“Southern Hills”). To complete the acquisition, the Company formed and organized Southern Tulsa, LLC, a Georgia limited liability company, a new wholly-owned subsidiary of WPF.
The Southern Hills facility is comprised of a senior living campus of three buildings totaling 104,192 square feet sitting on a 4.36-acre parcel. The Center consists of an Assisted Living facility (“ALF”), an Independent Living facility (“ILF”) and a Skilled Nursing facility (“SNF”). The Center offers 106 nursing beds, 92 independent living units, and 24 assisted living beds. The ALF and ILF were split off to a new wholly-owned subsidiary, Southern Tulsa TLC, LLC, in 2014, to accommodate a new financing through an industrial revenue bond.
The purchase price for Southern Hills was $2.0 million, of which $1.5 million was provided by a senior mortgage with First Commercial Bank, with the balance of $500,000 provided by Global. Global also provided a guaranty of the loan from First Commercial Bank.
On March 1, 2014, the Tulsa County Industrial Authority issued $5.7 million of its First Mortgage Revenue Bonds and lent the net proceeds to the Company. The Company used the proceeds to pay off the $1.5 million bridge loan, to pay certain costs of the bond issuance, to renovate the 86 independent living units and 32-bed assisted living facility, and to establish a debt service reserve fund and other initial deposits as required by the bond indenture. The debt is secured by a first mortgage lien on the independent living units and assisted living facility (facilities), an assignment of the facilities leases, a first lien on all personal property located in the facilities, and a guaranty by the Company. The debt bears interest at rates ranging from 7.0% to 8.5% with principal and interest due monthly beginning in May 2014 through maturity on March 1, 2044. The loan agreement also contains financial covenants required to be maintained by the Company.
The SNF was refinanced with a commercial bank for $1,750,000. The SNF was under a five-year lease to Healthcare Management of Oklahoma for an initial rent of $35,000 per month commencing February 1, 2015. On May 10, 2016, the Company obtained a Court Order appointing a Receiver to control and operate the SNF. The former lease operator represented that it was unable to meet the financial commitments of the facility, including the payment of rent, payroll, and other operating requirements. The transition to the Receiver resulted in our engaging in a turnaround effort to restore viable operations at the SNF. Under the oversight of the Receiver, we have undertaken substantial renovations at the SNF at a cost of over $1,500,000. The Company purchased a $750,000 note from F&M Bank on August 6, 2019, as part of a Receivership certificate in our Southern Hills SNF, for $694,609 paid to F&M bank and $55,391 paid to the Receiver. The maturity date of the note is February 7, 2018, and carries an interest rate of 6.75% as of September 30, 2019 (prime rate +2%). The note is past its maturity date and is in default. This purchase was made to facilitate the termination of the Receivership and transfer of the HMO assets and operations to Southern Hills Rehab Center, LLC, a wholly-owned subsidiary of the Company. This transfer was approved by the Oklahoma Department of Health and went into effect December 1, 2019.
The ILF underwent a $2.5 million renovation project and opened in September 2019. The facility is being operated internally in conjunction with the nursing home.
The ALF renovations were substantially complete until a fire incident at the facility in November 2018. This incident resulted in a $210,000 insurance claim. All restorative work has been complete. To date we have expended in excess of $2.0 million in upgrades at the ALF and expect to begin operations once the ILF is operating and further stabilized.
In November 2017 we obtained a new line of credit for Southern Hills in the principal amount of $7.3 million. The line of credit matures June 18, 2023; and we expect it to convert into an amortizing loan thereafter. The line of credit was used to refinance the $1.75 million loan on the SNF and opportunistically repurchase some of the Industrial Revenue Bonds (“IRB’s”) on the ALF and ILF. The Company repurchased $1.62 million of the IRB’s for $1.17 million in cash through open market purchases and various tender offers at discounted prices. On November 1, 2018, the remaining IRB’s outstanding were called and retired utilizing the proceeds from the line of credit.
Acquisition of Archway Transitional Care (formerly Goodwill Nursing Home)
Effective May 19, 2014, the Company entered into a Membership Interest Purchase Agreement pursuant to which it acquired from Christopher and Connie Brogdon (i) units representing an undivided 45% Membership Interest in Goodwill Hunting, LLC, a Georgia limited liability company, and (ii) units representing an undivided 36.7% Membership Interest in GWH Investors, LLC, a Delaware limited liability company (collectively, the “Units”). GWH Investors, LLC owns a 40% membership interest in Goodwill Hunting, LLC. Together, the Company acquired, directly and indirectly, a 59.7% interest in Goodwill Hunting, LLC. The purchase price for the Units was $800,000. The facility is subject to an aggregate of $4,601,009 in senior debt and $1,344,000 in non-affiliated subordinated debt.
Goodwill Hunting, LLC owns the Archway Transitional Care, formerly named Goodwill Nursing Home, a 172 bed skilled nursing facility located in Macon, Georgia. It was leased to Goodwill Healthcare and Rehabilitation, LLC under an operating lease that expired in 2017. In January 2016, concurrently with the Chapter 11 Bankruptcy filing by the lease operator, the Goodwill Nursing Home was closed by Georgia regulators and all residents were removed. The Company has entered into a new ten year operating lease covering the facility which became effective in February, 2017 with the new operator having obtained all licenses, permits and other regulatory approval necessary to recertify and reopen the facility. After receiving regulatory approvals, the lease operator invested approximately $2.0 million in capital improvements in the property. The facility has been relicensed and began taking patients in December 2016 and is currently building census.
Effective December 3, 2014, the Company acquired a 96.56% membership interest in GWH Investors, LLC, which holds a 40% membership interest in Goodwill Hunting, LLC. The purchase price for the 96.56% interest in GWH Investors, LLC was 164,491 shares of common stock of the Company.
The subordinated debt in the amount of $1,280,000 matured on July 1, 2015. With accrued and unpaid interest, the outstanding balance of the subordinated debt at December 31, 2017 was $1,344,000. Investors in the subordinated debt were entitled to an additional 5% equity in Goodwill Hunting, LLC every six months if the debt is not paid by the Company when due. Effective December 31, 2015, the investors holding all of the outstanding interests in the subordinated debt executed an Agreement Among Lenders pursuant to which they agreed to exchange their undivided interests in the note held by GWH Investors, LLC for separate, individual notes, and (i) waived any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017, in consideration for which Goodwill Hunting, LLC agreed to pay each investor a one-time premium equal to 5% of the principal amount of the notes at such time as the notes are repaid.
In April 2017, the former GWH Investors, LLC executed an Allonge and Modification Agreement pursuant to which they agreed to (i) waive all accrued and unpaid interest (ii) waive further interest payments until January 2018 (iii) fix interest at 13% beginning January 2018, (iv) extend the maturity date to December 31, 2019 and (v) agreed to accept a 15% premium payment upon repayment of the notes.
As of December 31, 2017, the Company owns an 85% interest in Goodwill Hunting, LLC. That interest was 83.62% at December 31, 2015. The former investors in GWH Investors, LLC still hold subordinated debt in the net amount of $1,280,000 plus accrued interest.
Acquisition of Edwards Redeemer Health & Rehab
Effective September 16, 2014, the Company acquired from a former affiliate a 62.5% membership interest in Edwards Redeemer Property Holding, LLC, which owns the real property and improvements known as the Edwards Redeemer Health & Rehab, a 106 bed nursing home located on 3.05 acres in Oklahoma City, Oklahoma.
Edwards Redeemer Health & Rehab is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which expired in December 2017. On January 22, 2016, the lease operator that operates the facility filed a voluntary petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The lease operator emerged from bankruptcy in 2017 and executed a new five year lease. In 2019 the operator informed the Company that it intended to close the Edwards Redeemer facility due to unprofitable operations. In violation of the operating lease, the operator began moving patients from the facility and, as of October 18, 2019, all patients had been removed. In response to our Petition, on October 17, 2019, the District Court of Oklahoma County, State of Oklahoma issued a Temporary Order Appointing Receiver (the “Order”) pursuant to a Motion to Appoint Receiver filed by Edwards Redeemer Property Holdings, LLC (“Edwards Property”), a wholly-owned subsidiary of the Company, with respect as a skilled nursing facility. The Order was issued due to the violations by the operator of the business-preservation obligations contained in the lease between Edwards Property and the Operator. The Company will allow Edwards Redeemer to remain closed for the purpose of undertaking extensive renovations to the facility. The renovations are expected to take up to 12 months.
The purchase price for the 62.5% interest in the facility was $491,487, which was subject to an aggregate of $2,381,500 in debt. The purchase price was offset in its entirety as a credit against an advance receivable owed by a former affiliate to the Company.
Effective December 3, 2014, the Company acquired a 100% membership interest in Redeemer Investors, LLC which owned the remaining 37.5% membership interest in Edwards Redeemer Property Holdings, LLC. The purchase price for the 100% interest in Redeemer Investors, LLC was 269,245 shares of common stock of the Company. As a result of these transactions, the Company now holds a 100% interest in Edwards Redeemer Property Holdings, LLC.
The investors in Redeemer Investors, LLC were repaid in full on January 23, 2015.
Acquisition of Grand Prairie (formerly Golden Years Manor) Nursing Home
Effective September 16, 2014, the Company acquired from a former affiliate a 44.5% membership interest in GL Nursing, LLC, which owns the real property and improvements known as the Golden Years Manor Nursing Home located at 1010 Barnes Street in Lonoke, Arkansas. The facility has 141 licensed beds and comprises 40,737 square feet on 3.17 acres.
Golden Years Manor Nursing Home is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which will expire in May 2017. The lease currently generates $763,000 in gross annual rent.
The purchase price for the 44.5% interest in the facility was 192,767 shares of common stock in Global Healthcare REIT, Inc. The facility is subject to an aggregate of $4,671,537 in senior debt and $1,650,000 in subordinated debt.
Effective December 3, 2014, The Company acquired a 26.25% membership interest in GLN Investors, LLC, which owned a 30% interest in GL Nursing, LLC. The purchase price for the 26.25% interest in GLN Investors, LLC was 31,015 shares of common stock in Global Healthcare REIT, Inc.
During 2015, the Company acquired an additional 73.48% in GLN Investors, LLC, bringing its interest to 100%. The purchase price for the additional shares was 107,113 shares of common stock in Global Healthcare REIT, Inc.
In January 2016, the Company acquired an additional 24.5% interest in GLN Investors, LLC, bringing its interest in GLN Investors to 100%. The purchase price for the 24.5% interest was 54,000 shares of common stock of Global.
In August 2016, the Company completed an exchange offering in which it purchased from the former members of GLN Investors, LLC all of their interest in the $1,650,000 subordinated debt owed to GLN Investors, LLC by GL Nursing, LLC in consideration of 1.35 million shares of Global.
As a result of these transactions, at December 31, 2017, the Company held a 100% interest in GL Nursing, LLC. That interest was 75.5% at December 31, 2015.
In January 2016, affiliated entities of our lease operator filed a voluntary petition under Chapter 11 of the US Bankruptcy Code. At the same time, our lease operator agreed to terminate its lease to allow a new operator to take possession of the facility. At that time, operations at the facility had deteriorated and the operator was delinquent in the payment of bed taxes as well a rent. The successor operator was unable to restore profitable operations and in August 2016 informed us that it was going to terminate its lease, which would have resulted in a loss of the Certificate of Need (“CON”) required to operate as a skilled nursing facility. Effective August 29, 2016, we executed a new operating lease with another operator. The initial lease term is ten years with two five year renewal options. The lease term does not begin until the end of the straddle period described below. The lease operator has also been granted an option to purchase the property any time after five years for a purchase price of $6.4 million.
Under the terms of the new lease, we agreed to cover all operating losses incurred by the new operator during a “straddle period” during which the operator is not obligated to pay rent and has agreed to undertake substantial renovations and build the census which had been significantly depleted during the prior two operator regimes.
In 2017, we executed an amendment to the operating lease to clarify that the straddle period would end February 28, 2018. On or about that date, the operator informed us that it would not continue as a lease operator. In March 2018, a new lease operator assumed operations of the facility under an Operations Transfer Agreement. We do not receive any rental income from this property.
Acquisition of Providence of Sparta Nursing Home
Effective September 16, 2014, the Company acquired from a former affiliate a 65% membership interest in Providence HR, LLC, which owns the real property and improvements known as the Providence of Sparta Nursing Home. The facility has 71 licensed beds and is located on approximately 8 acres in Sparta, Georgia.
Providence of Sparta is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which expired in June 2016. A new lease with a new operator currently generates $510,223 in gross annual straight line rent for fiscal year 2017.
The purchase price for the 65% interest in the facility was 61,930 shares of common stock of Global Healthcare REIT, Inc. The facility is subject to an aggregate of $1,655,123 in senior debt and $1,050,000 in subordinated debt.
Effective December 3, 2014, the Company acquired a 44.4% membership interest in Providence HR Investors, LLC, which owns a 30% membership interest in Providence HR, LLC. The purchase price for the 44.4% interest in Providence HR Investors, LLC was 45,145 shares of common stock of the Company.
During 2015, the Company acquired an additional 48.09% of Providence HR Investors, LLC bringing its interest to 92.46%. The purchase price for the additional shares was 17,333 shares of common stock in Global Healthcare REIT, Inc. In October 2016, we purchased the remaining 7.54% in outstanding interests in Providence HR Investors, LLC in consideration of 5,365 shares of common stock of Global and $10.00.
The subordinated debt in the amount of $1,050,000 matured on August 1, 2015. Providence HR Investors, LLC were entitled to an additional 5% equity in Providence HR, LLC every six months if the debt is not paid when due.
As a result of these transactions, the Company now holds a 100% interest in Providence HR, LLC. The investors in Providence HR Investors, LLC still retain $1,050,000 in subordinated debt.
In March 2017, the former members of Providence HR Investors, LLC which hold the interest in the $1.05 million subordinated debt all agreed to execute a Forbearance Agreement in which they agreed to (i) extend the maturity date of the note to December 31, 2017, (ii) waive accrued default interest and (iii) waive the equity ratchet that was triggered by the note not being repaid on the original maturity date.
Effective October 30, 2017, we completed a HUD refinance of this facility which included the repayment in full of the Providence Investor HR notes.
Meadowview Healthcare Center
Effective September 30, 2014, the Company purchased the Meadowview Healthcare Center located in Seville, Ohio (“Meadowview”) and owns 100% of this facility. The facility is licensed for 100 skilled nursing beds, is 27,500 square feet and located on five acres of land. Seville, Ohio is located approximately 25 miles west of Akron, Ohio and 40 miles south of Cleveland, Ohio in an area with attractive population growth in the 65 to 74-year age bracket. The total purchase price for Meadowview was $3.2 million, which was paid in cash using the proceeds of the Note Offering described below. Meadowview was acquired through High Street Nursing, LLC, a wholly-owned subsidiary of the Company formed for the sole purpose of completing the purchase.
Effective October 31, 2017, we completed a refinance of the mortgage notes with a $3.0 million term loan from ServisFirst Bank. We used the proceeds of the loan to repay the mortgage notes issued in 2014.
Meadowview was operated under a triple-net operating lease to skilled nursing home operator, which expired in October 2024. The lease was generating $396,000 in gross annual rent; however, the operator experienced adverse results in late 2017 and throughout 2018. Effective December 1, 2018, the Company completed the operations transfer to an affiliate of Infinity Health Interests, LLC (“Infinity”). The lease is structured with a lower base rent component than the prior operator but also includes occupancy-based escalators that will better align facility operations with future rental payments. As part of the transition, the Company committed a $250,000 Accounts Receivable Line of Credit (“ARLOC”) to Infinity in order to ensure that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables of the facility as well as a personal guarantee from the principal of Infinity. As of December 31, 2019 the Company lent $250,000 to Infinity under this agreement.
Glen Eagle Healthcare & Rehab
On April 4, 2017, we successfully bid at foreclosure sale to purchase a 101-bed skilled nursing facility located In Abbeville, Georgia. We formed a new wholly-owned subsidiary, Global Abbeville Property, LLC (“GAP”) for the purpose of bidding on the facility. Colony Bank, the senior lender on the facility, was the party undertaking the foreclosure in light of the default of the prior owner. The purchase transaction was consummated in May 2017.
The purchase price for the Abbeville facility was $2.1 million which was entirely financed by Colony Bank through a newly approved closed-end revolving credit facility in the maximum amount of $2.6 million. The additional $500,000 under the credit line was used for renovations on a dollar-for-dollar matching basis. The loan agreement was executed in May 2017, and the maturity date is April 25, 2021. It carries an interest rate of prime plus 0.5%, 4.75% minimum, 5.50% maximum, is cross collateralized with the Eastman note with the same lender, and backed by a corporate guarantee from the Company. The transaction has been treated as an asset acquisition financed by debt, with $20,000 land, $1,827,000 building, and $253,000 fixed assets allocated in relative fair value. The Company recognized $38,421 in loan costs, which was amortized over the life of the loan.
The facility was closed in March 2016 due to uncured deficiencies. On March 17, 2017, in anticipation of our purchase of the facility, the State of Georgia initially approved a 45 day extension followed by a one-year provisional Certificate of Need (“CON”) to allow us to complete renovations and reopen the property. The Company assessed that the acquisition of the Abbeville facility did not qualify as a business combination in accordance with the provisions of ASC 805. The Company accounted for the acquisition as an acquisition of asset.
We completed approximately $1.0 million in renovations at this facility and achieved recertification on October 12, 2018. As such, we have commenced full scale operations at the facility through a wholly-owned subsidiary of the Company.
Recent Financings
Senior Secured Note Offering
In October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, and Warrant for each $1.00 in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share. The Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants. The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600. The Offering also included the exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants which the Company had previously sold in the 2016 and 2017 Senior Note Offerings for Units in the Offering. No proceeds were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. As a result of the exchange, only $25,000 of 10% Senior Secured Notes due on December 31, 2018 remain outstanding, all other previously outstanding senior notes have been exchanged for new 11% Senior Secured Notes due in 2021. There was additional $160,000 of 11% Senior Secured Notes due in 2021 sold in February 2020.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported globally.
Starting in March, the COVID-19 pandemic and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers. These trends accelerated in April and May, and are expected to continue through at least September, impacting revenues and net operating income.
Our triple-net tenants experienced similar trends, which has put them under increased operational and financial pressure. Without financial support or other government assistance, certain of our triple-net tenants will likely experience worsening financial conditions through the third quarter, which would pressure their rent coverage ratios and may affect their ability to pay us contractual rent in full on a timely basis.
As of the date of this Report, two of our facilities have reported “presumptive positive” cases of COVID-19. The Centers for Disease Control & Prevention (“CDC”) will provide final confirmation of the cases. The Company is engaging in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health and safety of residents while respecting their rights. Employees at both locations are taking several precautions as they care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Additionally, as of the date of this Report, none of our other operators have reported any occurrences of COVID-19 in any of the buildings they are managing. Our operators have also reported to us that they currently have adequate supply levels, including appropriate quantities of Personal Protective Equipment (PPE) for staff. Additionally, as of the date of filing the Company has received no additional information.
The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers and managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers and managers regarding ways in which these programs could benefit them or us.
In May, we applied for and were approved for an aggregate of $1,610,169 in PPP loans issued by the SBA. As a result of newly adopted amendments to the PPP program, 60% of the PPP loan amount must be expended on payroll in the 24 week-period following the loan date. We believe that most if not all of the PPP loans will be eligible to be forgiven under the PPP guidelines. Any portion that is not forgiven must be repaid over two years.
The COVID-19 pandemic is rapidly evolving. The information in this Annual Report is based on data currently available to us and will likely change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition.
We expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business, tenants and operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows but it could be material.
Our Business
Healthcare Industry
Healthcare is the single largest industry in the U.S. based on Gross Domestic Product (“GDP”). According to the National Health Expenditures report by the Centers for Medicare and Medicaid Services (“CMS”): (i) national health expenditures are expected to grow 1.2 percentage points faster than GDP per year over the 2016 - 2025 period; (ii) the average compounded annual growth rate for national health expenditures, over the projection period of 2016 through 2027, is anticipated to be 5.6%; and (iii) health spending is projected to represent 19.9% of US GDP by 2025, up from 17.8% in 2015.
Senior citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 85-year and older segment of the population spends 92% more on healthcare than the 65 to 84-year-old segment and over 329% more than the population average.
Business Strategy
Our primary goal is to increase shareholder value through profitable growth. Our investment strategy to achieve this goal is based on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing.
Opportunistic Investing
We will make investment decisions that are expected to drive profitable growth and create shareholder value. We will attempt to position ourselves to create and take advantage of situations to meet our goals and investment criteria.
Portfolio Diversification
We believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant and investment product. Diversification reduces the likelihood that a single event would materially harm our business and allows us to take advantage of opportunities in different markets based on individual market dynamics. While pursuing our strategy of diversification, we will monitor, but will not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment product, geographic location, the number of properties which we may lease to a single operator or tenant, or mortgage loans we may make to a single borrower. With investments in multiple segments and investment products, we can focus on opportunities with the most attractive risk/reward profile for the portfolio as a whole. We may structure transactions as master leases, require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters of credit or security deposits, and take other measures to mitigate risk.
Financing
We will strive to manage our debt-to-equity levels and maintain multiple sources of liquidity, access to capital markets and secured debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets. Our debt obligations will be primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates on our operations.
We plan to finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may arrange for short-term borrowings from banks or other sources. We may also arrange for longer-term financing through offerings of equity and debt securities, placement of mortgage debt and capital from other institutional lenders and equity investors.
Competition
Investing in real estate serving the healthcare industry is highly competitive. We will face competition from REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends.
Income from our facilities is dependent on the ability of our operators and tenants to compete with other companies on a number of different levels, including: the quality of care provided, reputation, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. Private, federal and state payment programs as well as the effect of laws and regulations may also have a significant influence on the profitability of our tenants and operators.
Healthcare Segments
Senior housing. Senior housing facilities include assisted living facilities (“ALFs”), independent living facilities (“ILFs”) and continuing care retirement communities (“CCRCs”), which cater to different segments of the elderly population based upon their needs. Services provided by our operators or tenants in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid and Medicare. Senior housing property types are further described below.
Assisted Living Facilities. ALFs are licensed care facilities that provide personal care services, support and housing for those who need help with activities of daily living (“ADL”) yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations.
Independent Living Facilities. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with ADL, such as bathing, eating and dressing. However, residents have the option to contract for these services.
Continuing Care Retirement Communities. CCRCs provide housing and health-related services under long-term contracts. This alternative is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents to “age in place.” Some CCRCs require a substantial entry or buy-in fee and most also charge monthly maintenance fees in exchange for a living unit, meals and some health services. CCRCs typically require the individual to be in relatively good health and independent upon entry.
Post-acute/skilled nursing. Skilled Nursing Facilities (SNF) offer restorative, rehabilitative and custodial nursing care for people not requiring the more extensive and sophisticated treatment available at hospitals. Ancillary revenues and revenues from sub-acute care services are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales of pharmaceutical products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis.
Post-acute/skilled nursing services provided by our operators and tenants in these facilities will be primarily paid for either by private sources or through the Medicare and Medicaid programs.
Investment Products
Direct Ownership. We plan to primarily generate revenue by purchasing properties and operating the facilities internally. Most of revenue will be received from government agencies, hospice companies, managed care contracts and private pay receipts that will provide for a substantial recovery of operating expenses including but not limited to staffing, supplies, bed taxes, real estate taxes, repairs and maintenance, utilities and insurance. For existing properties with leases in place, our rents will be received from leases under triple net leases.
Our ability to grow income from our properties depends, in part, on our ability to (i) increase revenue and other earned income by increasing occupancy levels and improving rates, (ii) manage bad debt and (iii) control operating expenses. For properties under lease, most of our leases will include contractual annual base rent escalation clauses that are either predetermined fixed increases and/or are a function of an inflation index.
Debt investments. Our mezzanine loans will generally be secured by a pledge of ownership interests of an entity or entities, which directly or indirectly own properties, and are subordinate to more senior debt, including mortgages and more senior mezzanine loans. Our interest in mortgages and construction financing will typically be issued by healthcare providers and will generally be secured by healthcare real estate.
Developments and redevelopments. We will generally commit to development projects that are at least 50% pre-leased or when we believe that market conditions will support speculative construction. We will work closely with our local real estate service providers, including brokerage, property management, project management and construction management companies to assist us in evaluating development proposals and completing developments. Our development and redevelopment investments will likely be in the life science and medical office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition cost or existing basis) to achieve property stabilization or to change the primary use of the properties.
Investment management. We may co-invest in real estate properties with institutional investors through joint ventures structured as partnerships or limited liability companies. We may target institutional investors with long-term investment horizons who seek to benefit from our expertise in healthcare real estate. Predominantly, we plan to retain noncontrolling interests in the joint ventures ranging from 20% to 30% and serve as the managing member. These ventures generally allow us to earn acquisition and asset management fees, and have the potential for promoted interests or incentive distributions based on performance of the joint venture.
Operating properties (“RIDEA”). We may enter into contracts with healthcare operators to manage communities that are placed in a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”). Under the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points, where repositioning with a new operator that is aligned with health care providers can bring scale, operating efficiencies, and/or ancillary services to drive growth.
Government Regulations, Licensing and Enforcement
Overview
Our tenants and operations will typically be subject to extensive and complex federal, state and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide-ranging and can subject our tenants and our operations to civil, criminal and administrative sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties will be subject to oversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement enforcement activity and regulatory non-compliance by our tenants and operations can all have a significant effect on the financial condition of the property, which in turn may adversely impact us.
We will seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our tenants and operations by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operations base to limit our exposure to any single entity, and seeking tenants and operations that are not largely dependent on Medicaid reimbursement for their revenues. In addition, we ensure in each instance that our operators have obtained all necessary licenses and permits before beginning operations, and require that those operators covenant that they will comply with all applicable laws and regulations in connection with the facility operations.
The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Fraud and Abuse Enforcement
There are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our operations and tenants are subject to these laws, and some of them may in the future become the subject of governmental enforcement actions if they fail to comply with applicable laws.
Reimbursement
Sources of revenue for many of our tenants and operations will include, among other sources, governmental healthcare programs, such as the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as many states face significant budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operations.
Healthcare Licensure and Certificate of Need
Certain healthcare facilities in our portfolio will be subject to extensive federal, state and local licensure, certification and inspection laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials and operate equipment. Many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion and closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact some of our tenants’ and our ability to expand or operative effectively.
Americans with Disabilities Act (the “ADA”)
Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations” as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one, and we continue to assess our properties and make modifications as appropriate in this respect.
Environmental Matters
A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s or secured lender’s liability therefore could exceed or impair the value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenues.
Taxation
Federal Income Tax Considerations
The following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt entities, financial institutions or broker-dealers, persons holding shares of common stock as part of a hedging, integrated conversion, or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United States).
This summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant to you in light of your particular investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of purchasing, owning and disposing of our securities as set forth in this summary. Before you purchase our securities, you should consult your own tax advisor regarding the particular U.S. federal, state, local, foreign and other tax consequences of acquiring, owning and selling our securities.
On March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders who meet certain requirements and are individuals, estates or certain trusts to pay an additional 3.8% tax on, among other things, dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of shares of our stock.
Health Care Regulatory Climate
The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 30, 2019, CMS issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, CMS projects aggregate payments to skilled nursing facilities will increase by $851 million, or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the new Patient-Driven Payment Model case mix classification system that became effective on October 1, 2019, changes to the group therapy definition in the skilled nursing facility setting, and various skilled nursing facility Value-Based Purchasing and quality reporting program policies. On April 10, 2020, CMS issued a proposed rule to update skilled nursing facility rates and policies for fiscal year 2021, which starts October 1, 2020. CMS estimates that payments to skilled nursing facilities would increase by $784 million, or 2.3%, for fiscal year 2021 compared to fiscal year 2020. CMS also proposes to revise the geographic wage index and apply a cap on wage index decreases used in setting skilled nursing facility rates. The proposal would also make changes to the patient classifications under the Patient Driven Payment Model and certain minor policy changes to the Value-Based Purchasing program. CMS is expected to release the final rule by August 1, 2020.
Since the announcement of the COVID-19 pandemic and beginning as of March 13, 2020, CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including skilled nursing facilities, respond to the COVID-19 pandemic. These include, waiving the skilled nursing facility’s 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow skilled nursing facilities and certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments they received from October-December 2019; this expansion was suspended April 26, 2020 in light of other CARES Act funding relief. In addition, CMS has also enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities.
On March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), sweeping legislation intended to bolster the nation’s response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspends the 2% across-the-board “sequestration” reduction during the period May 1, 2020 through December 31, 2020, and extends the current Medicare sequester requirement through fiscal year 2030. In addition, the law provides $100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. On April 10, 2020, CMS announced the distribution of $30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers must agree to certain terms and conditions in receiving these grants. In addition, the Department of Health and Human Services (“HHS”) has authorized $20 billion of additional funding for providers that have already received funds from the initial distribution of $30 billion. Unlike the first round of funds, which came automatically, providers have to apply for these additional funds and submit the required supporting documentation, using the online portal provided by HHS. Providers must attest to and agree to specific terms and conditions for the use of such funds. HHS will make the additional distributions with the goal of allocating the whole $50 billion proportionally across all providers based on those providers’ proportional share of 2018 net Medicare fee-for-service revenue. CMS is expected to distribute additional funding to Medicaid and potentially other providers, but the details are not yet known.
On July 18, 2019, CMS published a final rule that eliminates the prohibition on pre-dispute binding arbitration agreements between long-term care facilities and their residents. The rule also strengthens the transparency of arbitration agreements and makes other changes to arbitration requirements for long-term care facilities. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.
Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services. Congress continues to consider further legislative action in response to the COVID-19 pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company.
Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.
EMPLOYEES
As of December 31, 2019, the Company and its subsidiaries had 166 employees. The Company also engages the services of consultants from time to time, some of which may be provided by affiliates of the Company at no cost.
ITEM 1A.
ITEM 1A. RISK FACTORS
The COVID-19 pandemic has subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:
● Risks Related to Revenue: Our revenues and our operators’ revenues are dependent, in part, on occupancy. In addition to the impact of increases in mortality rates on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our operating and triple-net properties could further decrease. Such a decrease could affect the net operating income of our operating properties and the ability of our triple-net operators to make contractual payments to us.
● Risks Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy or insolvency due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant due to the effects of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about the operator’s financial condition and insolvency proceedings, particularly in light of ongoing publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should such events occur, our revenue and operating cash flow may be adversely affected.
● Risks Related to Operations: Across all of our properties, we and our operators have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or tenants contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties, employees and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement of people.
● Risks Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have a significant development portfolio and have not experience significant delays or disruptions, but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position.
● Risks Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets.
The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many of the other risks described in this Report.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2019, we owned nine senior living facilities. The following table provides summary information regarding these facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we may become subject to legal proceedings, claims, or disputes. We are or were a party to the following pending legal proceedings.
Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Southern Tulsa, LLC v. Healthcare Management of Oklahoma, LLC, District Court of Tulsa County, State of Oklahoma, Case No. CJ - 2016- 01781.
This matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former operator at that facility. The Court ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters have been dismissed. The Company entered into an agreement with the Receiver to assign operations and assets to a subsidiary of the Company and discharge the Receiver. The transition and discharge were effective in December 2019.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. Other claims against the former operator are pending.
Dodge NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.
This action was brought by us against the former lease operator for numerous violations of the operating lease, including violation of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019, the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility. This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions, LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer Agreement with the Company, which Motion was granted.
Village of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.
This is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients) at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not Guilty. We are the landlord and don’t believe we have any liability in this matter. The issue has subsequently been dismissed without prejudice.
Cadence Healthcare Solutions, LLC.
We received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”) claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this claim and intend to defend vigorously.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The outstanding shares of Common Stock are traded over-the-counter and quoted on the OTC.Pink under the symbol “GBCS”. On April 25, 2011, the quotation was moved from the OTCBB to the OTC.Pink due to the lack of a market maker. The reported high and low bid and ask prices for the common stock are shown below for the period from January 2018 through December 31, 2019.
The closing price of the Company’s common stock as of July 1, 2020 was $0.20, as reported on the OTC.Pink. The OTCBB and OTC.Pink prices are bid and ask prices which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commissions to the broker-dealer. The prices do not reflect prices in actual transactions. As of July 1, 2020, there were approximately 850 record owners of the Company’s common stock.
The OTC.Pink is a quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities. An OTC equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange. The OTC.Pink is not an issuer listing service, market or exchange. Although the OTC.Pink does not have any listing requirements, per se, to be eligible for quotation on the OTC.Pink, issuers must remain current in their filings with the SEC or applicable regulatory authority.
The Company’s Board of Directors may declare and pay dividends on outstanding shares of common stock out of funds legally available therefore in its sole discretion. For the years ended December 31, 2019 and 2018, the Company paid no dividends on common stock but did pay the 8% dividends on our outstanding shares of Series D Preferred Stock. Future dividends on our common stock will be authorized at the discretion of our board of directors and will depend on our actual cash flow, financial condition, capital requirements, and other factors as our board of directors may deem relevant.
Recent Sales of Unregistered Securities
None, except as previously reported on Forms 8-K.
EQUITY COMPENSATION PLAN INFORMATION
We have not adopted any formal equity compensation plans.
(1) The Company entered into an Employment Agreement with Zvi Rhine on April 1, 2018 with an effective date of January 1, 2018. Under the terms of the Agreement, Mr. Rhine was granted options exercisable to purchase 600,000 shares of common stock at an exercise price of $0.36 per share. Of the options, 150,000 vested immediately, 150,000 vested April 1, 2019, 150,000 vested October 1, 2019 and 150,000 vested April 1, 2020. Mr. Rhine was also granted a restricted stock award of 150,000 shares of common stock on April 1, 2018, vesting one-half each on January 1, 2019 and January 1, 2020. On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Mr. Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a restricted stock award of 272,727 shares of Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Going Concern
The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For the year ended December 31, 2019, the Company incurred a net loss of $868,031 and has an accumulated deficit of $11,962,220. 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.
Impact of COVID-19 Pandemic
The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future, including but not limited to, the following:
● Our operating revenues and our triple-net operators’ revenues are dependent on occupancy. Declines in occupancy are expected due to heightened move-in criteria and screening, as well as increased mortality rates among seniors. In addition, increased expenses are expected to continue until the pandemic subsides. Such factors may impact our triple-net operator’s ability to pay rent and contractual obligations. Furthermore, various local and state stay at home orders and the temporary closure of certain medical practices as a result may impact our medical office building tenants’ ability to pay rent. These factors may cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables.
● Assessing properties for potential impairment involves subjectivity in determining if impairment indicators are present and in estimating the future undiscounted cash flows or estimated fair value of the asset. Key assumptions are made in this assessment and drive conclusions include the estimation of future rental revenues, operating expenses, capitalization rates and the ability and intent to hold the respective asset. All of these assumptions are significantly affected by our expectations of future market or economic conditions and can be highly impacted by the uncertainty of the COVID-19 pandemic, leading us to recognize increased impairment charges.
● The determination of the allowance for credit losses is based on our evaluation of collectability of our loans receivable and includes review of factors such as delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and the value of the underlying collateral. Reduced economic activity severely impacts our borrowers’ businesses, financial conditions and liquidity and may hinder their ability to make contractual payments to us, leading to an increase in loans deemed to have deteriorated credit which could result in an increase in the provision for loan losses.
RESULTS OF OPERATIONS
Rental revenue for the year ended December 31, 2019 totaled $3,267,644, compared to $3,507,366 for the year ended December 31, 2018, a decrease of $239,954. The Company also had Healthcare revenue of $3,662,344 for the year end December 31, 2019, an increase of $3,546,319, compared to $116,025 for the year ended December 31, 2018, primarily related to the Abbeville facility which commenced operations in late 2018. Factors that contributed to the decrease in rental revenue included the appointment of a receivership at Eastman as well as the closure of Edwards Redeemer. Also, the Southern Tulsa facility is operated directly by the Company as of December 1, 2019, increasing Healthcare revenues but decreasing rental revenues.
General and administrative expenses were $1,298,593 for the year ended December 31, 2019 compared to $1,178,120 for the year ended December 31, 2018, an increase of $120,473. Significant factors include an increase in healthcare salaries and wages, as well as legal, accounting, and license fees, offset by decreases in non-healthcare salaries and wages, director compensation, and other miscellaneous gains. The Company stringently reviews its costs regularly but believes its cost structure has been optimized for its current portfolio. For the years ended December 31, 2019 and 2018, general and administrative expenses included $280,087 and $402,392, respectively, of stock-based compensation related to restricted stock and common stock awards granted.
Property taxes, insurance, and other operating expenses totaled $2,760,227 and $790,954 for the years ended December 31, 2019 and 2018, 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 are also responsible for all working capital related to our Abbeville facility and the Southern Hills ALF, ILF and SNF.
Depreciation expense totaled $1,351,810 for the year ended December 31, 2019 compared to $1,258,345 for the year ended December 31, 2018, an increase of $93,465.
Warrants to purchase our common stock with nonstandard anti-dilution provisions, regardless of the probability or likelihood that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their estimated fair value at each reporting period. For the years ended December 31, 2019 and 2018, we recognized a change in fair value of the warrant liability of $2,785 and $92,586, respectively.
For the year ended December 31, 2019, we recorded no extinguishment of debt. For the year ended December 31, 2018 we recognized a net loss of $276,140 on the extinguishment of debt.
For the year ended December 31, 2019, the Company recorded no settlement of debts, accounts payable and other liabilities, compared to $383,514 during 2018.
Interest income of $56,012 and $29,983 was recognized for the years ended December 31, 2019 and 2018, respectively, from outstanding investment securities.
Interest expense totaled $2,136,701 for the year ended December 31, 2019 compared to $2,137,887 for the year ended December 31, 2017, a decrease of $1,186.
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 debt and equity securities to meet cash demands generated by our acquisition activities.
At December 31, 2019, the Company had cash and cash equivalents of $641,215 and restricted cash of $351,298. Our restricted cash is to be expended on debt service, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home. 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 secured obligations that mature during 2020, as our projected cash flow from operations will be insufficient to retire the debt.
Cash provided by operating activities was $868,921 for the year ended December 31, 2019 compared to cash provided by operating activities of $108,188 for the year ended December 31, 2018. Cash flows provided by operations in 2019 were positively impacted by the increase in healthcare revenues, offset somewhat by the increase in Accounts Receivable.
Cash used in investing activities was $2,407,914 and $595,176 for the years ended December 31, 2019 and 2018, respectively. During 2019, we spent $1,668,867 in capital expenditures, disbursed $143,666 on notes receivable. The Company realized net cash proceeds from investments in debt securities during 2019 of $138,788. Net cash paid in 2019 for the acquisition of SHR operating assets was $734,169. During 2018, we spent $763,258 in capital expenditures and disbursed $106,334 on a note receivable issued for $250,000. The Company realized net cash proceeds from investment in debt securities during 2018 of $274,416.
Cash provided by financing activities was $1,224,299 for the year ended December 31, 2019 compared to cash provided by financing activities of $822,047 for the year ended December 31, 2018. During 2019, we made payments on debt of $538,534 and received proceeds from issuance of debt of $1,801,718. During 2018, we made payments on debt of $465,704 and received proceeds from issuance of debt of $2,053,384.
As of December 31, 2019 and 2018, our debt balances consisted of the following:
The weighted average interest rate and term of our fixed rate debt are 6.02% and 6.4 years, respectively, as of December 31, 2019. The weighted average interest rate and term of our variable rate debt are 6.25% and 17.6 years, respectively, as of December 31, 2019.
Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as lines of credit here are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:
(1) Mortgage loans are non-recourse to the Company except for (i) the senior loan held by ServisFirst Bank on Meadowview (Ohio), (ii) the loans held by Colony Bank on Eastman and Glen Eagle, and (iii) the Southern Hills line of credit and Goodwill loan owed to Southern Bank (formerly First Commercial Bank).
(2) On October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with Southern Bank (formerly First Commercial Bank) pursuant to a Promissory Note in the principal amount of $7,229,052 (the “Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on its skilled nursing facility in Tulsa for $1,546,801, funded open market and tender offer purchases of its Industrial Revenue Bonds covering the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of December 31, 2019, a total of $7,230,582 was drawn under the Line of Credit, and as of December 31, 2018, a total of $7,119,743 was drawn under the Line of Credit.
The interest rate on the Line of Credit increased from 5.25% to 5.75% effective April 28, 2019 and subsequently was changed to 4.75%. Monthly payments of interest began on November 30, 2017 and continue until the Promissory Note is paid in full on the Maturity Date. The Maturity Date was been extended multiple times in three month increments initially from April 30, 2018 to May 5, 2020, and subsequently to June 18, 2023 with a principal amount of $7,227,074. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for its Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location. With the retirement of the Tulsa Industrial Authority Bonds effective November 1, 2018, Southern Bank (formerly First Commercial Bank) moved into a senior position on the ALF and ILF properties.
(3) The loan at Eastman was renewed on November 26, 2018 with the maturity extended to October 26, 2021.
(4) The maturity date for the loan at Goodwill Nursing was extended to April 12, 2025 in June 2020.
(5) The original loan was extended on January 19, 2019 to January 20, 2020 and the Company capitalized $8,885 in loan costs paid. The loan was subsequently refinanced in June 2019. The Company has incurred $156,671 in unamortized loan costs to refinance this debt with another lender. The refinance was treated as debt extinguishment, with a new maturity date of July 1, 2049 and an interest rate of 3.73%. For the year ended December 31, 2019, amortization expense related to loan costs of the prior loan totaled $8,885 and amortization expense related to loan costs for the new loan, which began in July 2019, totaled $2,176.
(6) The maturity date for the loan at Edwards Redeemer was extended to June 29, 2021 in June 2020.
(7) Amortization expense related to loan costs of this loan totaled $874 for the year ended December 31, 2019. Amortizing payments began in January 2019. In June 2018 the Company converted the original note to a fixed note which qualified as debt extinguishment, unamortized debt discount on the original note was expensed as a loss on extinguishment of $27,794. In April 2018, the Company capitalized $22,800 in fees and interest and added it to principal. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of December 31, 2019, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender. In October 2018 the Lender extended the Company a line of credit with a limit of $200,365 to provide working capital to scale operations at the facility. As of December 31, 2018 the Company had drawn $120,440 on the line. The line of credit was expanded in February 2019 to $400,000 with a maturity date of September 30, 2019. Prior to September 30, 2019, the Company had drawn $400,000 on the line which was subsequently merged into the amortizing note due May 25, 2021.
(8) The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during 2017. Amortization expense related to loan costs totaled $4,984 for the year ended December 31, 2019.
(9) Amortization expense related to loan costs of this loan totaled $9,303 for the year ended December 31, 2019. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of December 31, 2019, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender.
(10) The mortgage loan collateralized by the GL Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is subject to financial covenants and customary affirmative and negative covenants. As of December 31, 2019, the Company was not in compliance with certain of these financial and non-financial covenants which is considered to be a technical Event of Default as defined in the note agreement. The Company is also delinquent in installment payments due under the mortgage. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are not necessarily limited to the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction from the guarantors. The Company has been notified by the lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility and is dealing with the lender.
Other mortgage loans contain financial and non-financial covenants, including reporting obligations, with which the Company has not complied in some instances in a timely manner.
Subordinated, Corporate, and Other Debt
Our subordinated debt due at December 31, 2019 and 2018 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.
(1) The subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13% beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the principal balance of the notes. The note matured December 31,2019 and as of filing date has not been repaid, and is therefore in default. Of the total principal outstanding as of December 31, 2019 of $1,536,000, $150,000 is owed to related parties.
Our corporate debt at December 31, 2019 and 2018 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
(1) On January 28, 2020, the Company exchanged $100,000 of 10% Senior Secured Promissory Notes with a maturity date of December 31, 2018 for $100,000 of 11% Senior Secured Promissory Notes with a maturity date of October 31, 2021.
Other mortgage loans contain financial and non-financial covenants, including reporting obligations, with which the Company has complied in some instances in an untimely manner.
Contractual Obligations
As of December 31, 2019, we had the following contractual debt obligations:
We have $13.6 million of debt maturing and expect principal reduction payments of approximately $2.1 million in the year ending December 31, 2020. There is also $10.6 million in debt in technical default maturing after December 31, 2020 but shown due immediately. The total of debt maturing, expected principal reduction payments, and debt in technical default is $26.3 million for the year ending December 31,2020, which compares to $19.6 million of debt that was maturing, expected to pay down or was in default at the beginning of the year ended December 31, 2019. While we anticipate being able to refinance all the loans at reasonable market terms upon maturity, inability to do so may impact our financial position and results of operations. We have already refinanced $6.4 million in mortgage loans maturing in 2020 as the associated properties met loan to value requirements currently being employed in commercial lending markets. We have $300,000 in note obligations maturing in 2020. See the consolidated financial statements included elsewhere in the Form 10-K for additional debt details.
Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand and revenues generated from operations are in excess of operating expenses and debt service requirements. 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. Except for renovations at Grand Prairie and Southern Hills Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.
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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.
SUMMARY OF 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 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 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. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a 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 or projected cash flows of properties using standard industry valuation techniques.
Notes Receivable and Notes Receivable - Related Parties
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 agreements. Once a note has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the fair value, as determined by the 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.
Subsequent Events
On January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the offering period of its 2018 Offering of 11% Senior Secured Notes (the “Offering”). The total amount of the Offering has been increased to $2,500,000 and the offering period will continue until terminated by the Board of Directors.
Effective January 28, 2020 the Company exchanged $100,000 of 10% Senior Secured Promissory Notes with a maturity date of December 31, 2018 for $100,000 of 11% Senior Secured Promissory Notes with a maturity date of October 31, 2021. The exchange of note was accompanied by the issuance of 100,000 warrants for the purchase of company stock at $0.50, expiring October 31, 2021.
In January 2020, the Board of Directors approved an amendment to the Director Compensation Plan to provide that the annual $30,000 fee to non-employee directors would be paid proportionately at the end of each fiscal quarter 50% in cash and 50% in stock with the stock valued at the end of each quarter.
The Company completed the sale of an aggregate of $160,000 of its 11% Senior Secured Notes (“Note”), $60,000 effective February 5, 2020 and $100,000 effective March 3, 2020. The purchase price for the Notes is equal to the principal amount of the Notes. The Notes accrue interest at the rate of 11% per annum, payable monthly, and mature in October 2021. No fees or commissions were paid on the sale of the Notes. The notes were accompanied by the issuance of an aggregate of 160,000 warrants for the purchase of Company stock at $0.50, expiring October 31, 2021.The proceeds will be used for general working capital.
On February 11, 2020, former Director John Downs returned 26,515 shares granted but not vested prior to his resignation from the Board of Directors. The shares had been granted under the Company’s compensation plan.
Effective March 2, 2020, the Company, through its wholly-owned subsidiary, Global Quapaw, LLC (“Quapaw”), completed the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center (“Higher Call”) located in Quapaw, Oklahoma for the purchase price of $1,300,000. Quapaw has entered into an Operating Lease Agreement with Global Higher Call Nursing, LLC, a wholly-owned subsidiary of the Company, as lessee, to be the Operator of the facility. The acquisition represents the consummation of an Asset Purchase Agreement dated October 21, 2019 between Higher Call Nursing Center, Inc., as Seller, and Quapaw, as Buyer.
In connection with the acquisition of Higher Call, the Company entered into two credit facilities, summarized as follows:
The Company entered into a senior loan agreement with Security Bank in the principal amount of $1.0 million (the “Senior Loan”). The Senior Loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of $7,907. The Senior Loan matures in 2040. The Senior Loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents (“Mortgage”) covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets.
The Company also executed a promissory note in favor of the Seller, Higher Call Nursing Center, Inc., in the principal amount of $150,000 (the “Seller Note”). The Seller Note accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest, and matures in April 2024. The Seller Note is secured by a Corporate Guaranty of Global.
The Company is in the process of gathering relevant information needed to complete the initial accounting of the acquisition. As a result, the initial accounting for the acquisition is incomplete and, therefore, the Company is unable to disclose the information required by ASC 805, “Business Combinations”.
On April 20, 2020, the Company through its subsidiaries received a loan of $574,975 pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 20, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.
On May 4, 2020, the Company through its subsidiaries received loans of $324,442 and $710,752 pursuant to the Paycheck Protection Program (the “PPP Loans”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Both PPP Loans mature on May 4, 2022 (the “Maturity Date”), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.
On July 2nd, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. The OTA will be effective as of the date that Global Eastman, LLC secures an operating license from the state. Pursuant to the terms of the OTA, Global Eastman will assume all receivables and select critical liabilities associated with the prior operator.
As of June 30th, 2020, the Company purchased from former GWH Investors, LLC $402,000 of interest in the note issued to its partly-owned subsidiary Goodwill Hunting, LLC for an equal amount of cash. The notes matured on December 31, 2019 and were in default. The Company will recognize a gain from elimination of the premium owed to the note holders. The notes cannot be retired until all interests are repaid.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. Exhibits, Financial Statement Schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this Report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, relating to the Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
Our management, including our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were not effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this evaluation, management concluded that that our internal control over financial reporting was not effective as of December 31, 2019. Our CEO and CFO concluded we have a material weakness due to lack of segregation of duties and a limited corporate governance structure. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our system of internal control. Therefore, while there are some compensating controls in place, it is difficult to ensure effective segregation of accounting and financial reporting duties. Management reported material weaknesses resulting from the following significant deficiencies:
● Lack of segregation of duties in certain accounting and financial reporting processes including the initiation, processing, recording and approval of disbursements;
● Lack of a formal review process that includes multiple levels of review.
While we strive to segregate duties as much as practicable, there is an insufficient volume of transactions at this point in time to justify additional full-time staff. We believe that this is typical in many new ventures. We may not be able to fully remediate the material weakness until we hire more staff. We will continue to monitor and assess the costs and benefits of additional staffing.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the SEC rules that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The name, position with the Company, age of each Director and executive officer of the Company is as follows:
Name
Age
Position
Director/Officer Since
Lance Baller
Director, CEO
Clifford L. Neuman
Director
Zvi Rhine
Director, President, CFO
Adam Desmond
Director
Lance Baller serves as a director and sole or principal shareholder of several privately owned businesses, including Baller Enterprises, Inc. from 1993 to the present (personal holding company), High Speed Mines, LLC and High Speed Aggregate, LLC (gold, sand, rock and gravel mining), RM Investments, LLC (fast food real estate), HSA Bedrock, LLC (landscape material supply) and Baller Family Foundation, Inc. (personal family foundation). He is also the co-founder, former CEO and President of Iofina plc, a technology leader in the production of iodine and iodine derivatives, where he continues to serve as Chairman. He is the former managing partner of Shortline Equity Partners, Inc. (2004 to 2010), a mid-market merger and acquisitions consulting and investment company. Mr. Baller is also the former Managing Partner of Elevation Capital Management, LLC (2005 to 2010) and is the former alternative investment hedge fund manager of the Elevation Fund. He is also a former Vice-President of Corporate Development and Communications (2003 to 2004) of Integrated Biopharma, Inc. and prior to that a vice-president of the investment banking firms UBS and Morgan Stanley. He was also a director of Equal Earth, Inc. (2013 to 2014). He has served on numerous boards of directors of both private and public companies, including Index Asset Management, Inc., where he has served on the Board of Trustees since 2014.
Clifford L. Neuman has been engaged as a principal in his own law firms for over 46 years, emphasizing corporate and securities law in the representation of companies in matters of corporate finance, mergers, acquisitions, reorganizations and public and private offerings. Mr. Neuman has served on the boards of directors of numerous public, private and non-profit companies and has been actively involved in the process of capital formation on behalf of his clients for many years. He is also the President of Gemini Gaming, Inc., which owns and operates a gaming casino in Blackhawk, Colorado. He currently serves as a Director and CEO of Mindfulness Peace Project, f/k/a Ratna Foundation, a non-profit charitable foundation, and a member of the Governing Council of Shambhala Mountain Center, a non-profit retreat center in Red Feather Lakes, Colorado. Mr. Neuman received his Juris Doctorate degree from the University of Pennsylvania (1973) and his Bachelor of Arts degree, magna cum laude from Trinity College, Hartford, Connecticut (1970), where he was elected to Phi Beta Kappa.
Zvi Rhine has nearly 20 years of experience in the securities industry. He is the principal and managing member of Sabra Capital Partners which he founded in 2012, a multi-strategy hedge fund that focuses on event-driven, value and special situations investments primarily in North America. Prior to founding Sabra Capital Partners, he worked at Hilco Real Estate concentrating on asset-backed investments and sale-leaseback transactions. From 2005 to 2008, he was a Director of Boone Capital, an event-driven hedge fund concentrating on small to mid-cap companies. Mr. Rhine has also worked in various investment capacities for Banc of America Securities and US Bancorp Piper Jaffray. He is a graduate of the University of Illinois where he was the recipient of the Bronze Tablet for being in the top 1% of his graduating class.
Adam Desmond is the founder and CEO of Needle Rock Capital, an investment banking firm located in Carbondale, Colorado. Prior to founding Needle Rock Capital, Mr. Desmond founded ASG Securities in 1998 that focused exclusively on small/mid-cap banks and thrift markets. In 2004 ASG Securities became FIG Partners LLC which expanded the business from a sales and trading platform to a full-service investment banking firm. Mr. Desmond assembled a team of principals at Fig Partners that raised over $2.5 billion in equity since 2007 and completed more than 95 whole bank transactions throughout the United States, with offices in Chicago, Los Angeles, San Francisco, Dallas, New Jersey and Charlotte, employing over 60 people. Mr. Desmond began his career at the Chicago Mercantile Exchange in the financial quadrant and went on to Raymond James and Associates where he helped develop a high yield fixed income department. Mr. Desmond enjoys supporting and servicing many charitable organizations, including helping fund the building of a school in the Philippines through St. Mary’s Catholic Church in Aspen, Colorado. Mr. Desmond is a graduate of the University of Wisconsin - Madison with a Bachelor of Arts in International Economics and Political Science.
Family Relationships
None.
Board Meeting and Compensation
During the fiscal year ended December 31, 2019, meetings of the Board of Directors were held telephonically, and business of the board was also conducted by written unanimous consent. There were eight (8) meetings of the Board during 2019. A quorum was present at all Board meetings. Directors are entitled to reimbursement of their expenses associated with attendance at such meeting or otherwise incurred in connection with the discharge of their duties as a Director.
During fiscal 2019, the entire Board of Directors assumed all responsibilities of the Audit, Compensation and Nominating Committees. The board had no formal standing committees, but plans to create those committees when it determines that those committees would be beneficial. No member of the Audit, Compensation or Nominating Committees will receive any additional compensation for his service as a member of that Committee.
During fiscal 2014, the Board adopted the Director Compensation Plan (the “Plan”), which was amended in January 2018, pursuant to which each Director of the Company, whether or not independent, and whether or not such Director holds any other position with the Company, including any position as an executive officer, shall be entitled to an annual grant of restricted common stock in compensation for services during the year of grant, determined as follows:
1. The grant to each Director shall consist of restricted shares of common stock of the Company having a Market Value equal to $30,000. For the purposes of the Plan, “Market Value” shall mean the closing price of the Company’s common stock on its principal trading market on a date determined by the Board of Directors.
2. All shares granted to Directors under the Plan shall vest ratably at the rate of 1/12th per month for each month of service during the year.
3. Should the Company determine that it is obligated to withhold payroll taxes from the Award, the undersigned Director will consent to the Company reducing the Award to the extent necessary to satisfy such obligation. Should the Company not withhold payroll taxes, each Director receiving a grant under the Plan shall be responsible for any and all federal, state or local taxes assessed as a result of such grant and shall indemnify, defend and hold harmless the Company for any liability therefore.
The fourth grant date was January 23, 2018, and consisted of 93,750 shares of common stock to each of the six Directors, for a total of 562,500 shares issued under the Plan for 2018. The fifth grant date was March 1, 2019 and consisted of 90,909 shares of common stock valued at $0.33 per share issued to each of Baller, Desmond and Neuman. Mr. Rhine is compensated through his Employment Agreement and did not participate in the Director Compensation Plan.
In January 2020, the Board amended the Plan to provide the following:
1. Each non-employee director shall receive annual fees of $30,000. The fee was further amended to be fully payable 100% in cash.
2. The share portion of the fee will be issuable quarterly and shall be priced at the closing price of the common stock on the last day of each quarter.
The following table summarizes director compensation paid for the year ended December 31, 2019:
DIRECTOR COMPENSATION TABLE
Director Independence
Our common stock is listed on the OTCPink inter-dealer quotation systems, which does not have director independence requirements. Nevertheless, for purposes of determining director independence, we have applied the definition set forth in NASDAQ Rule 4200(a)(15). Mr. Adam Desmond would be considered “independent” under the NASDAQ rule.
Audit Committee
The Board as a whole serves as the audit committee.
For this purpose, an audit committee member is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family or other material personal ties to management.
The committee is responsible for accounting and internal control matters. The audit committee:
- reviews with management and the independent auditors policies and procedures with respect to internal controls;
- reviews significant accounting matters;
- approves any significant changes in accounting principles of financial reporting practices;
- reviews independent auditor services; and
- recommends to the board of directors the independent registered public accounting firm to audit our consolidated financial statements.
In addition to its regular activities, the committee is available to meet with the independent registered public accounting firm or controller whenever a special situation arises.
The Audit Committee of the Board of Directors will adopt a written charter, which, when adopted, will be filed with the Commission.
Compensation Advisory Committee
The composition of the compensation advisory committee has not been determined.
The compensation advisory committee did not meet during fiscal 2019. The compensation advisory committee will, when appointed:
- recommend to the board of directors the compensation and cash bonus opportunities based on the achievement of objectives set by the compensation advisory committee with respect to our chairman of the board and president, our chief executive officer and the other executive officers;
- administer our compensation plans for the same executives;
- determine equity compensation for all employees;
- review and approve the cash compensation and bonus objectives for the executive officers; and
- review various matters relating to employee compensation and benefits.
Nomination Process
The Board of Directors has not appointed a standing nomination committee and does not intend to do so during the upcoming year. The process of determining director nominees has been addressed by the board as a whole, which consists of five members. The board has not adopted a charter to govern the director nomination process.
The board of directors has not adopted a policy with regard to the consideration of any director candidates recommended by security holders, since to date the board has not received from any security holder a director nominee recommendation. The board of directors will consider candidates recommended by security holders in the future. Security holders wishing to recommended a director nominee for consideration should contact Mr. Lance Baller, Interim President, at the Company’s principal executive offices located in Greenwood Village, Colorado and provide to Mr. Baller, in writing, the recommended director nominee’s professional resume covering all activities during the past five years, the information required by Item 401 of Regulation S-K, and a statement of the reasons why the security holder is making the recommendation. Such recommendation must be received by the Company before December 31, 2020.
The board of directors believes that any director nominee must possess significant experience in business and/or financial matters as well as a particular interest in the Company’s activities.
Shareholder Communications
Any shareholder of the Company wishing to communicate to the board of directors may do so by sending written communication to the board of directors to the attention of Mr. Lance Baller, Interim President, at the principal executive offices of the Company. The board of directors will consider any such written communication at its next regularly scheduled meeting.
Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company’s independent, outside disinterested directors.
Code of Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees during the fiscal year ended June 30, 2004. We will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics. Such request should be made in writing and addressed to Investor Relations, Global Healthcare REIT, Inc., at the Company’s principal executive offices located in Niwot, Colorado. Further, our Code of Business Conduct and Ethics was filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 and can be reviewed on the website maintained by the SEC at www.SEC.gov.
There are no material proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent (5%) of any class of voting securities of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
During the last ten (10) years no director or officer of the Company has:
(1) had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(3) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company’s independent, outside disinterested directors.
Indemnification and Limitation on Liability of Directors
The Company’s Articles of Incorporation provide that the Company shall indemnify, to the fullest extent permitted by Utah law, any director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding, by reason of the former or present official of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
The Company’s Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Utah Business Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles. The officers of the Company will dedicate sufficient time to fulfill their fiduciary obligations to the Company’s affairs. The Company has no retirement, pension or profit sharing plans for its officers and Directors.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company’s Directors, its Executive (and certain other) Officers, and any persons holding more than ten percent (10%) of the Company’s common stock are required to report their ownership of the Company’s common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to report in this Report any failure to file by these dates. All of these filing requirements were satisfied by our Officers, Directors, and ten-percent holders except for Mr. Neuman failed to file one (1) report covering one (1) transaction in a timely fashion and Mr. Rhine failed to file one (1) report covering three (3) transactions in a timely fashion. In making these statements, the Company has relied on the written representation of its Directors and Officers or copies of the reports that they have filed with the Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Components of Compensation.
The CEO receives exclusively stock based compensation at the discretion of the Board, and on September 6, 2018, a stock-based compensation grant was made to Lance Baller in consideration of his services as CEO for the six months ended June 30, 2018. The grant consisted of 250,000 shares of common stock valued at $0.33 per share, total value $82,500. The Company did not provide additional compensation in the form of annual incentive bonus, long term incentives, retirement benefits, or perquisites.
In May 2018, the Company approved a compensation agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year (which accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000 shares of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000 of the Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company accrued $165,000 in salaries, $25,000 in bonuses, and recognized $139,892 in stock and option-based compensation. For the year ended December 31, 2019 the Company has accrued $165,000 in salaries and recognized $160,087 in stock and option-based compensation for Mr. Rhine. On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Mr. Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a bonus for 2018 services in the amount of $90,000 payable in shares of restricted common stock. The shares were valued at $0.33 per share (the closing price of the Company’s stock on April 2, 2019), resulting in 272,727 shares of Common Stock. The Amendment also defines a Bonus Plan for Mr. Rhine for future periods which provides for additional incentive compensation if certain performance milestones are achieved.
The following table and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer (“CEO”), and the Company’s four (4) most highly compensated executive officers other than the CEO, for all services rendered in all capacities to the Company and its subsidiaries for each of the Company’s last three (3) completed fiscal years; provided, however, that no disclosure has been made for any executive officer, other than the CEO, whose total annual salary and bonus does not exceed $100,000.
SUMMARY COMPENSATION TABLE
(1) Does not include stock based compensation for services as Directors.
Company Stock Incentive Plans
In 1993, the Board of Directors and the Shareholders of the Company adopted the Global Casinos, Inc., Stock Incentive Plan (the “Incentive Plan”). An aggregate of 100,000 shares of the Company’s Common Stock were reserved for issuance under the Incentive Plan. As of December 31, 2019, no options were outstanding under the Plan and all options to purchase shares of Common Stock have expired. The Plan has terminated in accordance with its terms, and as a result no shares are available for future option grants.
Equity Awards at Year End
Except for the awards and option grants to Mr. Rhine under his Employment Agreement, there were no other unexercised options, unvested stock awards or equity incentive plan awards for any named executive officer outstanding as of the end of the most recently completed fiscal year.
Stock Based Compensation
On September 6, 2018, a stock-based compensation grant was made to Lance Baller in consideration of his services as CEO for the six months ended June 30, 2018. The grant consisted of 250,000 shares of common stock valued at $0.33 per share, total value $82,500.
In May 2018, the Company approved a compensation agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year (which accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000 shares of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000 of the Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company accrued $165,000 in salaries, $25,000 in bonuses, and recognized $139,892 in stock and option-based -based compensation. For the year ended December 31, 2019 the Company has accrued $165,000 in salaries and recognized $160,087 in stock and option-based compensation for Mr. Rhine. On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Mr. Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a bonus for 2018 services in the amount of $90,000 payable in shares of restricted common stock. The shares were valued at $0.33 per share (the closing price of the Company’s stock on April 2, 2019), resulting in 272,727 shares of Common Stock. The Amendment also defines a Bonus Plan for Mr. Rhine for future periods which provides for additional incentive compensation if certain performance milestones are achieved.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of July 1, 2020 the stock ownership of (i) each person known by the Company to be the beneficial owner of five (5%) percent or more of the Company’s Common Stock, (ii) all Directors individually, (iii) all Officers individually, and (iv) all Directors and Officers as a group. Each person has sole voting and investment power with respect to the shares shown, except as noted. In presenting the information contained in this Item 12, the Company has relied upon publicly available reports of beneficial ownership filed by persons required to do so pursuant to Section 13 of the Exchange Act.
(1)
Shares not outstanding but beneficially owned by virtue of the individuals’ right to acquire them as of the date of this annual report or within sixty days of such date, are treated as outstanding when determining the percent of the class owned by such individual.
(2) Includes 862,974 shares owned individually; and 128,788 shares owned of record Mindfulness Peace Project (formerly Ratna Foundation), of which Mr. Neuman is a Director, as to which Mr. Neuman disclaims beneficial ownership for purposes of Section 16 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
(3) Includes 1,614,654 shares owned individually, 266,156 shares owned by High Speed Aggregate, Inc. of which Mr. Baller is an owner and control person, but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act, 629,335 shares owned by Ultimate Investments Corp., Inc. of which Mr. Baller is an owner and control person, but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act.
(4) Includes 1,752,575 shares owned individually which includes warrants exercisable to purchase 50,000 shares and options exercisable to purchase 600,000 shares.
(5) Based on 27,414,525 shares issued and outstanding on July 1, 2020.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon loans from affiliates to meet immediate cash demands. There can be no assurance that these affiliates or other related parties will continue to provide funds to the Company in the future, as there is no legal obligation to provide such loans.
Related Party Transactions
During 2018, among the $225,000 senior secured notes that were extended to December 31, 2018, $125,000 were to related parties and among the $1.075 million senior secured notes that were extended to October 31, 2021, $875,000 were to related parties.
In the fourth quarter of 2016 and the first quarter of 2017, the Company undertook a private offering (“Offering”) of Units, each Unit consisting of a 10% Senior Secured Note and one warrant for every dollar in principal amount of Note purchased. In the Offering, Ultimate Investments, Ltd and the Baller Family Foundation, Inc., each entity controlled by Mr, Baller, invested $300,000 and $200,000 respectively. Zvi Rhine invested $50,000, while his brother David Rhine invested $50,000 and his father Gary Rhine invested $25,000. In addition, Adam Desmond invested $100,000 in the Offering and his father Robert Desmond invested $150,000.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table details the aggregate fees billed to the Company by MaloneBailey, LLP, its current registered independent public accounting firm, for the years ended December 31, 2018 and 2019:
The caption “Audit Fees” includes professional services rendered for the audit of the annual consolidated financial statements and the review of the quarterly interim consolidated financial statements.
It is the policy of the Board of Directors, acting as the audit committee, to pre-approve all services to be performed by the independent registered public accounting firm.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report:
(a) Financial Statement Schedules
See the Index to Consolidated Financial Statements at page of this report.
The following financial statement schedule is included herein at page of this report:
Schedule III - Real Estate Assets and Accumulated Depreciation
(b) Exhibits
Exhibit No.
Title
(1) 1.0
Articles of Amendment to the Articles of Incorporation dated June 22, 1994
(1) 3.1
Amended and Restated Articles of Incorporation
(35) 3.1
Amended and Restated Articles of Incorporation
(1) 3.2
Bylaws
(1) 3.3
Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock
(5) 3.4
Certificate of Designations, Preferences, and Rights of Series B Convertible Preferred Stock
(5) 3.5
Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock
(5) 3.6
Agreement Respecting Rights of Holders of Series C Convertible Preferred Stock
(17) 3.7
Certificate of Designations, Preferences, and Rights of Series E Convertible Preferred Stock
(18) 3.8
Form of Registration Rights Agreement
(1) 4.1
Specimen Certificate of Common Stock
(1) 4.2
Specimen Class A Common Stock Purchase Warrant
(1) 4.3
Specimen Class B Common Stock Purchase Warrant
(1) 4.4
Specimen Class C Common Stock Purchase Warrant
(1) 4.5
Warrant Agreement
(19) 4.6
Form of Series 2010 5% Convertible Debenture
(20) 4.7
Form of Common Stock and Warrant Purchase Agreement
(1) 5.0
Opinion of Neuman & Drennen, LLC regarding the legality of the securities being registered
(1) 10.1
Selling Agent Agreement
(1) 10.2
The Casino-Global Venture I Joint Venture Agreement
(1) 10.3
Assignment of Casino-Global Joint Venture Agreement dated January 31, 1994
(1) 10.4
Nonresidential Lease Agreement between Russian-Turkish Joint Venture Partnership with Hotel Lazurnaya and Global Casino Group, Inc. dated September 22, 1993
(1) 10.5
Contract by and between Aztec-Talas-Four Star, Inc. and Global Casinos Group, Inc. dated April 12, 1993, and Addendum to Agreement by and between Aztec-Talas-Four Star, Inc., Global Casinos Group, Inc. and Restaurant “Naryn” dated June 29, 1993.
(1) 10.6
Agreement and Plan of Reorganization among Silver State Casinos, Inc., Colorado Gaming Properties, Inc. and Morgro Chemical Company, dated September 8, 1993, incorporated by reference from the Company’s Current Report on Form 8-K, dated September 20,
(1) 10.7
Agreement and Plan of Reorganization among Casinos USA., Lincoln Corporation, Woodbine Corporation and Morgro Chemical Company, dated October 15, 1993, incorporated by reference from the Company’s Current Report on Form 8-K, dated November 19, 1993
(1) 10.8
Stock Pooling and Voting Agreement, incorporated by reference from the Company’s Current Report on Form 8-K, dated November 19, 1993
(1) 10.9
Employment Agreement, dated September 28, 1993, between Morgro Chemical Company and Nathan Katz, incorporated by reference from the Company’s Current Report on Form 8-K, dated November 19, 1993
(1) 10.10
Employment Agreement, dated October 15, 1993, between Morgro Chemical Company and William P. Martindale, incorporated by reference from the Company’s Current Report on Form 8-K, dated November 19, 1993
(1) 10.11
Asset Acquisition Agreement by and among Global Casinos, Inc., Morgro, Inc. and MDO, L.L.C., dated as of February 18, 1994, incorporated by reference from the Company’s Current Report on Form 8-K, dated February 18, 1994
(1) 10.12
Stock Purchase Agreement, dated March 25, 1994, incorporated by reference from the Company’s Current Report on Form 8-K, dated April 29, 1994
(1) 10.13
Articles of Incorporation of BPJ Holding N.V., incorporated by reference from the Company’s Current Report on Form 8-K, dated April 29, 1994
(1) 10.14
Aruba Caribbean Resort and Casino Lease Agreement, dated January 18, 1993, incorporated by reference from the Company’s Current Report on Form 8-K, dated April 29, 1994
(1) 10.15
Aruba Gaming Permit issued to Dutch Hotel and Casino Development Corporation, incorporated by reference from the Company’s Current Report on Form 8-K, dated April 29, 1994
(1) 10.16
Letter Agreement between Astraea Investment Management, L.P. and Global Casinos, Inc. dated May 11, 1994
(1) 10.17
Guaranty from Global Casinos, Inc. to Astraea Investment Management, L.P. dated May 19, 1994
(1) 10.18
Secured Convertible Promissory Note in favor of Global Casinos, Inc. from Astraea Investment Management, L.P. dated May 19, 1994
(1) 10.19
Registration Rights Agreement between Global Casinos, Inc. and Astraea Investment Management, L.P. dated May 11, 1994
(1) 10.20
Employment Agreement, dated July 1, 1994, between Global Casinos, Inc. and Peter Bloomquist
(2) 10.21
Letter of Agreement, dated September 16, 1994 between Astraea Management Services, L.P., Casinos USA., Inc. and Global Casinos, Inc.
(3) 10.23
Letter of Agreement dated June 27, 1995, between Global Casinos, Inc., Global Casinos International, Inc., Global Casinos Group, Inc., Broho Holding, N.V., and Kenneth D. Brown individually.
(1) 10.24
Second Amended Plan of Reorganization of Casinos USA, Inc., and Order Confirming Plan
(1) 10.25
Warrant Agreement
(4) 10.26
Stock Purchase and Sale Agreement between Alaska Bingo Supply, Inc., Global Alaska Industries, Inc. and Mark Griffin
(5) 10.27
Convertible Promissory Note in the amount of $450,000 dated March 31, 1998 in favor of Mark Griffin
(4) 10.28
General Security Agreement from Global Alaska Industries, Inc. to Mark Griffin
(4) 10.29
Stock Pledge Agreement from Global Alaska Industries, Inc. to Mark Griffin
(5) 10.30
Agreement to Convert Debt dated March 31, 1998 with Mark Griffin
(5) 10.31
Tollgate Casino Lease and Option Agreement
(5) 10.32
Equipment Lease with Plato Foufas & Co., Inc.
(5) 10.33
Employment Agreement of Eric Hartsough
(6) 10.34
Stock Purchase Agreement dated December 30, 1999 between Arufinance, N.V. and Global Casinos, Inc.
(7) 10.35
Term Sheet dated July 24, 2002 between Global Casinos, Inc., Astraea Investment Management L.P. and others.
(7) 10.36
Agreement dated September 17, 2002 among Global Casinos, Inc., Casinos, USA., Inc. and Astraea Investment Management L.P.
(7) 10.37
Agreement and Amendment to Promissory Note dated September 17, 2002 between Casinos USA., Inc. and Astraea Investment Management L.P. for promissory note in the original principal amount of $249,418.48.
(7) 10.38
Agreement and Amendment to Promissory Note dated September 17, 2002 between Casinos USA., Inc. and Astraea Investment Management L.P. for promissory note in the original principal amount of $750,000.
(7) 10.39
Agreement and Amendment to Promissory Note dated September 17, 2002 between Casinos USA., Inc. and Astraea Investment Management L.P. for promissory note in the original principal amount of $783,103.56.
(7) 10.40
Assumption Agreement dated September 17, 2002 among, Global Casinos, Inc., Casinos USA., Inc. and Astraea Investment Management L.P.
(7) 10.41
Bill of Sale, Assignment and Assumption dated October 30, 2002 between Global Casinos, Inc. and Casinos, USA., Inc.
(7) 10.42
Option Agreement dated September 17, 2002 by and between Astraea Investment Management L.P. and Global Casinos, Inc.
(7) 10.43
Security Agreement dated September 17, 2002 by Casinos USA., Inc. in favor of Astraea Investment Management L.P.
(7) 10.44
Service Agreement dated as of September 17, 2002 between Casinos USA., Inc. and Global Casinos, Inc.
(7) 10.45
Stock Pledge Agreement dated as of September 17, 2002 between Global Casinos, Inc. and Astraea Investment Management L.P.
(7) 10.46
Voting Agreement dated as of September 17, 2002 between Casinos USA., Inc. and Global Casinos, Inc.
(9) 10.47
Asset Purchase and Sale Agreement dated June 14, 2007.
(10) 10.49
Amendment No. 1 to Asset Purchase and Sale Agreement dated June 14, 2007
(8) 14.
Code of Ethics
(11) 10.50
Amendment No. 2 to Asset Purchase and Sale Agreement dated June 14, 2007.
(12) 10.51
Amendment No. 3 to Asset Purchase and Sale Agreement dated June 14, 2007.
(13) 10.52
Amendment No. 4 to Asset Purchase and Sale Agreement dated June 14, 2007.
(15)) 10.53
Amendment No. 5 to Asset Purchase and Sale Agreement dated June 14, 2007.
(15) 10.54
Articles of Organization of Doc Holliday Casino II, LLC
(15) 10.55
Operating Agreement of Doc Holliday Casino II, LLC
(15) 10.56
Certificate of Series D for Global Casinos Inc
(15) 10.57
Consent to Assignment of Lease to Global Casinos
(15) 10.58
Consent to Assignment of Lease to Doc Holliday Casino II
(15) 10.59
Assignment & Assumption of Lease by Doc Holliday II
(15) 10.60
Promissory Note $550,000
(15) 10.61
Promissory Note $400,000
(15) 10.62
Promissory Note $155,000
(15) 10.63
Bill of Sale
(15) 10.64
Noncompetition and Confidentiality Agreement
(15) 10.65
Consultation Agreement
(16) 10.66
Lease Agreement
(16) 10.67
Addendum to Lease Agreement
(16) 10.68
Addendum No. 2 to Lease Agreement
(16) 10.69
Loan Agreement with Astraea Investment Management
(16) 10.70
Assignment of Note
(16) 10.71
Assignment and Assumption Agreement
(16) 10.72
Second Amendment to Promissory Note
(21) 10.73
Astraea Loan Document Purchase and Assignment Agreement
(22) 10.74
Martindale Allonge and Loan Participation Agreement
(23) 10.75
Montrose Allonge and Modification Agreement
(24) 10.76
Bloomquist Allonge and Loan Participation Agreement
(25) 10.77
Shupp Allonge and Modification Agreement
(26) 10.78
Amendment to Lease Agreement dated December 28, 2010
(27) 10.79
Class A Stock Purchase Warrant
(27) 10.79
Series 2011 8% unsecured convertible note
(28) 10.80
Split-Off Agreement
(28) 10.81
Stock Purchase Agreement
(29) 10.82
Promissory Note
(29) 10.83
Stock Pledge Agreement
(30) 10.84
Amended and Restated Allonge and Loan Participation Agreement
(30) 10.85
Form of Warrant
(31) 10.86
Second Allonge and Modification Agreement
(31) 10.87
Modification to Second Deed of Trust
(32) 10.88
Amendment No. 2 to Loan Participation Agreement
(33) 10.89
Termination and Mutual Release
(33) 10.90
Amendment No. 1 to Split-Off Agreement
(33) 10.91
Stock Purchase Agreement
(34) 10.92
Amended and Restated Split-Off Agreement
(35) 10.93
Loan Purchase Agreement
(35) 10.94
Assignment of Deed of Trust
(35) 10.95
Assignment of Note
(35) 10.96
Assignment, Assumption and Indemnity Agreement
(35) 10.97
Security and Hypothecation Agreement
(35) 10.98
Intercompany Agreement
(35) 10.99
Promissory Note
(36) 10.100
Scottsburg Membership Purchase Agreement
(37) 10.101
Purchase Agreement dated October 8, 2008
(37) 10.102
Amendment No. 1 to Purchase Agreement dated October 8, 2008
(37) 10.103
Amendment No. 2 to Purchase Agreement dated October 8, 2008
(37) 10.104
Amendment No. 3 to Purchase Agreement dated October 8, 2008
(37) 10.105
Amendment No. 4 to Purchase Agreement dated October 8, 2008
(37) 10.106
Amendment No. 5 to Purchase Agreement dated October 8, 2008
(38) 10.107
Membership Interest Purchase Agreement - Goodwill
(39) 10.108
Purchase and Sale Agreement - Meadowview
(40) 10.109
Purchase and Sale Agreements - Longview, Mountainview, Corpus Christi and Grand Prairie
(41) 10.110
Amendments to Purchase and Sale Agreements - Longview, Corpus Christi and Grand Prairie
(41) 10.111
Assignment of Purchase and Sale Agreements - Longview, Mountainview, Corpus Christi and Grand Prairie
(42) 10.112
Letters Terminating Purchase Agreements - Longview, Mountainview, Corpus Christi and Grand Prairie
(43) 10.113
Stock Purchase Agreement between Tilford, Inc. and TNH Acquisition, LLC
(44) 10.114
First Amendment to Stock Purchase Agreement
(45) 10.115
Purchase and Sale Agreement - Greene Point Health Center
(46) 10.116
Promissory Note Purchase Agreement
(47) 10.117
Form of Security Agreement
(47) 10.118
Form of Agreement Among Lenders
(47) 10.119
Form of Promissory Note
(48) 10.120
2017 Investor Presentation
(49) 10.121
Allonge and Modification Agreement
(50) 10.122
Revised 2017 Investor Presentation
(51) 10.123
HUD Note - Providence HR, LLC
(52) 10.124
Meadowview Note - High Street Nursing, LLC
(53) 10.125
Credit Note - Southern Tulsa, LLC and Southern Tulsa TLC, LLC
(54) 10.126
Form of Agreement Among Lenders
(55) 10.127
Form of Promissory Note
(56) 10.128
Purchase and Sale Agreement
(57) 10.129
2018 Investor Presentation
(58) 10.130
Restricted Stock Award Agreement
(59) 10.131
Notice of Grant
(60) 10.132
Option Agreement
(61) 10.133
Employment Agreement
(62) 10.134
Revised 2018 Investor Presentation
(63) 10.135
Form of Note
(64) 10.136
Asset Purchase Agreement
(65) 10.137
Amendment No. 1 to Employment Agreement
(66) 10.138
Healthcare Facility Note
(67) 10.139
Loan Document Purchase and Assignment Agreement
(68) 10.140
November, 2019 Investor Presentation
(69) 10.141
Asset Purchase Agreement
(70) 10.142
Form of Senior Note
(71) 10.143
Form of Mortgage, Security Agreement and Assignment of Rents
(72) 10.144
Form of Security Agreement
(73) 10.145
Form of Seller Note
(74) 10.146
Form of Corporate Guaranty
* 31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* 32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
** 101.INS
XBRL Instance
** 101.SCH
XBRL Taxonomy Extension Schema
** 101.CAL
XBRL Taxonomy Extension Calculation
** 101.DEF
XBRL Taxonomy Extension Definition
** 101.LAB
XBRL Taxonomy Extension Labels
** 101.PRE
XBRL Taxonomy Extension Presentation
(1) Incorporated by reference to the Registrant’s Registration Statement on Form SB-2, Registration No. 33-76204, on file with the Commission on August 11, 1994.
(2) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for year ended June 30, 1994.
(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 15, 1995.
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 1, 1997, as filed with the Commission on August 14, 1997.
(5) Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 1999.
(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 1999, as filed with the Commission on January 14, 2000.
(7) Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 2002.
(8) Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 2004.
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 14, 2007 as filed with the Commission on June 19, 2007
(10) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated September 28, 2007 as filed with the Commission on October 2, 2007.
(11) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2007 as filed with the Commission on December 3, 2007.
(12) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 5, 2007 as filed with the Commission on December 6, 2007.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 30, 2008 as filed with the Commission on February 4, 2008.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 6, 2008 as filed with the Commission on March 6, 2008.
(15) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 18, 2008 as filed with the Commission on March 24, 2008.
(16) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated March 18, 2008 as filed with the Commission on May 29, 2008.
(17) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 12, 2010 as filed with the Commission on July 14, 2010.
(18) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 19, 2010 as filed with the Commission on July 20, 2010.
(19) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 16, 2010 as filed with the Commission on July 20, 2010.
(20) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 16, 2010 as filed with the Commission on July 20, 2010.
(21) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2009 as filed with the Commission on December 3, 2009.
(22) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2009 as filed with the Commission on December 3, 2009.
(23) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 2009 as filed with the Commission on December 31, 2009.
(24) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 2009 as filed with the Commission on January 5, 2010.
(25) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 25, 2010 as filed with the Commission on March 25, 2010.
(26) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 28, 2010 as filed with the Commission on December 29, 2010 as amended by Form 8-K/A filed with the Commission on February 10, 2011.
(27) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 20, 2011 as filed with the Commission on December 20, 2011
(28) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 1, 2012 as filed with the Commission on June 6, 2012.
(29) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 25, 2012 as filed with the Commission on June 28, 2012.
(30) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 11, 2012 as filed with the Commission on October 16, 2012.
(31) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 9, 2012 as filed with the Commission on November 13, 2012.
(32) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 20, 2012 as filed with the Commission on December 20, 2012.
(33) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 8, 2013 as filed with the Commission on April 12, 2013.
(34) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2013 as filed with the Commission on May 6, 2013.
(35) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 30, 2013 as filed with the Commission on October 4, 2013.
(36) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 27, 2014 as05 filed with the Commission on January 30, 2014.
(37) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 10, 2014 as filed with the Commission on March 14, 2014.
(38) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 23, 2014 as filed with the Commission on May 19, 2014.
(38) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2014 as filed with the Commission on May 19, 2014.
(39) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 26, 2014 as filed with the Commission on October 2, 2014.
(40) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 16, 2014 as filed with the Commission on December 17, 2014.
(41) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 22, 2015 as filed with the Commission on January 27, 2015
(42) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 28, 2015 as filed with the Commission on February 4, 2015.
(43) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 14, 2015 as filed with the Commission on August 20, 2015.
(44) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 9, 2015 as filed with the Commission on November 12, 2015.
(45) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 30, 2016 as filed with the Commission on July 5, 2016.
(46) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 29, 2016 as filed with the Commission on August 30, 2016.
(47) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 25, 2016 as filed with the Commission on November 29, 2016.
(48) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 25, 2017 as filed with the Commission on January 26, 2017.
(49) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 3, 2017 as filed with the Commission on May 8, 2017.
(50) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 16, 2017 as filed with the Commission on May 16, 2017.
(51) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017.
(52) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017.
(53) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017.
(54) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 8, 2017 as filed with the Commission on November 17, 2017.
(55) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 8, 2017 as filed with the Commission on November 17, 2017.
(56) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 5, 2018 as filed with the Commission on April 17, 2018.
(57) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 24, 2018 as filed with the Commission on April 24, 2018.
(58) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018.
(59) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018.
(60) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018.
(61) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018.
(62) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 27, 2018 as filed with the Commission on August 27, 2018.
(63) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 15, 2018 as filed with the Commission on October 22, 2018.
(64) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 12, 2019 as filed with the Commission on April 16, 2019.
(65) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 15, 2019 as filed with the Commission on April 17, 2019.
(66) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 13, 2019 as filed with the Commission on July 11, 2019.
(67) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 6, 2019 as filed with the Commission on August 14, 2019.
(68) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 19, 2019 as filed with the Commission on November 19, 2019.
(69) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
(70) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
(71) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
(72) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
(73) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
(74) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020.
* Filed herewith
** furnished, not filed.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Global Healthcare REIT, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Global Healthcare REIT, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2016.
Houston, Texas
July 10, 2020
GLOBAL HEALTHCARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to these consolidated financial statements.
GLOBAL HEALTHCARE REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to these consolidated financial statements.
GLOBAL HEALTHCARE REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
See accompanying notes to these consolidated financial statements.
GLOBAL HEALTHCARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
GLOBAL HEALTHCARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
Global Healthcare REIT, Inc. (the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT) for the purpose of investing in real estate and other assets related to the healthcare industry. Prior to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as a reverse acquisition whereby WPF was deemed to be the accounting acquirer.
The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. As of December 31, 2019, the Company owned eleven healthcare properties which are operated internally as well as leased to third-party operators under triple-net operating terms.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (VIE’s) for which the Company has determined itself to be the primary beneficiary. Third party equity interests in subsidiaries and VIE’s are recognized as noncontrolling interests in the consolidated financial statements. All significant inter-company balances and transactions have been eliminated in consolidation.
The Company is the primary beneficiary of a VIE if the Company has the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or receive benefits from the VIE that could be significant to the Company. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which the Company has control and/or substantive participating rights under the respective ownership agreement.
There are judgments and estimates involved in determining if an entity in which the Company has an investment is a VIE. The entity is evaluated to determine if it is a VIE by, among other things, determining if the equity investors as a group have a controlling financial interest in the entity and if the entity has sufficient equity at risk to finance its activities without additional subordinated financial support. For the year ended December 31, 2019, the Company did not have any variable interest entities for which it is the primary beneficiary.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss. Reclassification adjustments include amounts reclassified to Gain on Proceeds from Insurance Claim and Provision for Bad Debt that were presented in General and Administrative Expenses in previous period.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates included herein relate to the recoverability of assets, the purchase price allocation for properties acquired, and the fair value of certain assets and liabilities. Actual results may differ from estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consisted of the following as of December 31:
Concentration of Credit Risk
The Company maintains deposits in financial institutions that at times exceed the insured amount of $250,000 provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The excess amounts at December 31, 2019 and 2018 were $108,356 and $741,197, respectively. The Company believes the financial institutions it uses are credit worthy and stable. The Company does not believe that it is exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Property and Equipment
In accordance with purchase accounting guidance established for entities under common control, the property and equipment acquired from entities under common control are stated at their carrying value on the date of acquisition. Property and equipment not acquired from entities under common control is recorded at its estimated fair value. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties using standard industry valuation techniques.
Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price based on the fair value of tangible assets and intangible assets, if any, acquired and any liabilities assumed. Information used to determine fair value includes comparable sales values, discount rates, capitalization rates, and lease-up assumptions from a third party appraisal or other market sources.
Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred.
Any subsequent betterments and improvements are stated at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, and tenant improvements are depreciated over the remaining term of the lease. Useful lives of the assets are summarized as follows:
Impairment of Long Lived Assets
When circumstances indicate the carrying value of property and equipment may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property and equipment. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of the property using standard industry valuation techniques.
Notes Receivable
The Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the note agreements. Once a note has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the fair value of the note using present value of expected future cash flows discounted at the note’s effective interest rate. If the fair value of the impaired note receivable is less than the recorded investment in the note, a valuation allowance is recognized.
Deferred Loan Costs
Deferred loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest method. For the years ended December 31, 2019 and 2018, deferred loan costs paid in cash totaled $8,885 and $43,680, respectively. Amortization expense for the years ended December 31, 2019 and 2018 totaled $136,352 and $155,011, respectively. Deferred loan cost amortization is included as a component of interest expense in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.
The Company recorded Goodwill as a result of a business acquisition in December 2019. During the year ended December 31, 2019, the Company recorded no impairment of Goodwill.
Intangible Assets
As part of the acquisition of the operations at Southern Hills Rehab Center, LLC (“SHR”), the Company recognized certain intangible assets related to the potential net income from the existing patients in the facility. The Company estimated the value of these contracts to be $42,185 based on historical net revenues and census information provided by the seller. The asset will be depreciated on a straight-line basis over 47 days, starting from December 1, 2019. Accordingly, the Company recognized depreciation expenses of $26,927, and net intangible assets of 15,258 as of December 31, 2019.
Warrant Liability
Warrants to purchase the Company’s common stock with nonstandard antidilution provisions, regardless of the probability or likelihood that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their estimated fair value at each reporting period in accordance with ASC 815 “Derivatives and Hedging.” Any change in fair value of these warrants during the reporting period is recorded as a component of Other (Income) Expense on the Company’s Consolidated Statements of Operations.
Revenue Recognition
The Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets and totaled $553,272 and $665,307 as of December 31, 2019 and 2018, respectively. Adjustments to reflect rental income on a straight-line basis totaled $112,035 and $127,184 for the years ended December 31, 2019 and 2018, respectively.
Rent receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight line recognition of rents. Such allowances are charged to bad debt expense in the accompanying consolidated statements of operations. Our determination of the adequacy of these allowances is based primarily upon evaluations of the tenant’s financial condition, security deposits, lease guarantees and current economic conditions and other relevant factors.
When the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. As of December 31, 2019 and 2018, there were no deferred lease incentives recorded.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company adopted this standard as of January 1, 2018 using the modified retrospective approach. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
For our Nursing Home Operations in Abbeville, the adoption of ASU 2014-09 resulted in changes to Abbeville’s presentation for and disclosure of revenue primarily related to uninsured or underinsured patients. Prior to the adoption of ASU 2014-09, a significant portion of Glen Eagle’s provision for doubtful accounts would have related to self-pay patients, as well as co-pays, co-insurance amounts and deductibles owed to us by patients with insurance. Under ASU 2014-09, the estimated uncollectable amounts due from these patients are generally considered implicit price concessions that are a direct reduction to net operating revenues, with a corresponding material reduction in the amounts presented separately as provision for doubtful accounts. ASU 2014-09 is already in place in subsequent acquisitions.
Under ASU 2014-09 and in accordance with FASB ASC 606-10-05-4, an entity recognizes revenue in accordance with that core principle by applying the following steps:
a. Step 1: Identify the contract(s) with a customer
b. Step 2: Identify the performance obligations in the contract
c. Step 3: Determine the transaction price
d. Step 4: Allocate the transaction price to the performance obligations in the contract
e. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation”
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
Effective January 1, 2019, the Company adopted ASU No. 2018-07, Compensation - Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
Fair Value Measurements
The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Income Taxes
The Company will elect to be taxed as a REIT at such a time as the Board of Directors, with the consultation of professional advisors, determines the Company qualifies as a REIT under applicable provisions of the Internal Revenue Code. The Company cannot predict for which tax year that election will be made. Therefore, applicable taxes have been recorded in the accompanying consolidated financial statements.
The Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the period of enactment. A valuation allowance is established against deferred tax assets when management concludes that the “more likely than not” realization criteria has not been met. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Income (Loss) Per Common Share
Basic income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed based on the weighted average number of common shares and potentially dilutive common shares outstanding. The calculation of diluted net income (loss) per share excludes potential common shares if the effect would be anti-dilutive. Potential common shares consist of incremental common shares issuable upon the exercise of warrants and shares issuable upon the conversion of preferred stock. As of December 31, 2019, the Company had 2,598,130 common stock warrants outstanding, which could be converted into 2,598,130 shares of common stock; 200,500 shares of Series A Preferred Stock outstanding, which could be converted into 200,500 shares of common stock; and 375,000 shares of Series D Preferred Stock outstanding, which could be converted into 375,000 shares of common stock. As of December 31, 2018, the Company had 3,142,586 common stock warrants outstanding, which could be converted into 3,142,586 shares of common stock; 200,500 shares of Series A Preferred Stock outstanding, which could be converted into 200,500 shares of commons stock; and 375,000 shares of Series D Preferred Stock outstanding, which could be converted into 375,000 shares of common stock.
The following table details the calculation of the weighted average number of common shares and dilutive common shares used in diluted loss per share as of December 31:
Comprehensive Income
For the periods presented, there were no differences between reported net income (loss) and comprehensive income (loss).
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases: Topic 842 (ASU 2016-02)”, to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company as of January 1, 2019 and adoption requires using a modified retrospective approach with the option to elect certain practical expedients. The Company has determined that it does not have any leases that fall under the guidance of ASU 2016-02 and it had no impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2019. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
2. GOING CONCERN
The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.
For the year ended December 31, 2019, the Company incurred a net loss of $868,031 and has an accumulated deficit of $11,962,220. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues and cash flows to operate profitably and meet contractual obligations or raise additional capital through debt financing or through sales of common stock.
The failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. INVESTMENTS IN DEBT SECURITIES
At December 31, 2019 and 2018, the Company held investments in marketable securities that were classified as held-to-maturity and carried at amortized costs. Held-to-maturity securities consisted of the following:
Contractual maturities of held-to-maturity securities at December 31, 2019 are as follows:
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The Company had net cash proceeds from the sale of investment in debt securities during 2019 of $151,141, a gain of $1,069 on sale of investment in debt securities, and used $12,353 cash in the purchase of investment in debt securities.
4. PROPERTY AND EQUIPMENT
The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of December 31, 2019 and 2018 are as follows:
We completed approximately $1.0 million in renovations at the Abbeville facility and achieved recertification on October 12, 2018. As such, we have commenced full scale operations at the facility.
5. Notes receivable
Note Receivable - Receiver for Healthcare Management of Oklahoma, LLC
On May 10, 2016, the Company obtained a Court Order appointing a receiver to control and operate the skilled nursing facility in Southern Hills, Tulsa. The former lease operator represented that it was unable to meet the financial commitments of the facility, including the payment of rent, payroll, and other operating requirements. The transition to the receiver was part of a turnaround effort to restore viable operations at the facility. The Court ordered the Company to provide the receiver a revolving line of credit not to exceed $250,000 of which the Company advanced $150,000 during 2016. The receiver was to repay the revolving unsecured line of credit from the operation or sale of the facility or other sources. The Company determined the note as no longer being collectible based on the ability to repay and recorded bad debt expense of $150,000 in the consolidated statements of operations for the year ended December 31, 2016. During November 2017, the Company made a short-term loan in the amount of $84,000 to the operator with the understanding that it would be repaid immediately; the loan was repaid during 2018.
The Company purchased a $750,000 note from F&M Bank on August 6, 2019, as part of a Receivership certificate in our Southern Hills SNF, for $694,609 paid to F&M bank and $55,391 paid to the Receiver. The maturity date of the note is February 7, 2018 and carried an interest rate of 6.75% as of December 31, 2018 (prime rate +2%). The note is past its maturity date and is in default. This purchase was made to facilitate the termination of the Receivership and transfer of the HMO assets and operations, subject to the approval of the Oklahoma Department of Health, to Southern Hills Rehab Center, LLC, a wholly-owned subsidiary of the Company. On December 1, 2019, this note receivable was written-off as consideration to the receiver for acquisition of the assets and operations of Southern Hills Rehabilitation Center.
Note Receivable: Accounts Receivable Line of Credit (“ARLOC”) - Infinity Health Interests, LLC
As part of the transition to a new tenant at High Street Nursing facility, the Company committed a $250,000 Accounts Receivable Line of Credit (“ARLOC”) to an affiliate of Infinity Health Interests, LLC (“Infinity”) in order to ensure that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables of the facility as well as a personal guarantee from the two principals of Infinity. As of December 31, 2018 the Company had loaned $106,334 to Infinity under this agreement and during the year ended December 31, 2019 loaned another $143,666 to bring the balance of the ARLOC to $250,000. During the year ended December 31, 2019, the Company determined the it was unlikely the amount due on the ARLOC would be collected and wrote-off the balance, recording a bad debt expense of $250,000.
6. DEBT AND DEBT - RELATED PARTIES
The following is a summary of the Company’s debt and debt - related parties outstanding as of December 31, 2019 and 2018:
Corporate Senior and Senior Secured Promissory Notes
From November through December 2016, the Company undertook a private offering of its 10% Senior Secured Promissory Notes. The notes are secured by all assets of the Company not serving as collateral for other notes. As of December 31, 2016, $600,000 of the notes had been issued of which $450,000 were issued to the directors of the Company or entities or persons affiliated with these directors. The notes initially bore interest at a rate of 10% payable monthly with principal and unpaid interest due at maturity, originally January 13, 2018. The notes were issued with warrants to purchase 600,000 shares of common stock at an exercise price of $0.75 per share. The warrants have a cashless exercise provision. All Series 2016 notes were retired prior to 2019.
In 2017, an additional $600,000 in notes were sold and issued, of which $425,000 were to related parties. At December 31, 2017, there were an aggregate of $1.2 million outstanding in senior secured notes. The maturity date of all the senior secured notes was extended to December 31, 2018 prior to their original maturity date, $225,000 of which occurred in 2018. During 2018, among the $225,000 senior secured notes that were extended to December 31, 2018, $125,000 were to related parties. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise price of $.75 per share. The warrants have a cashless exercise provision and were valued using the Black-Scholes pricing model. The maturity date of the 1.2 million warrants issued along with the notes was extended to December 31, 2018, 225,000 warrants of which occurred in 2018. As of December 31, 2019 the Company had not renewed or repaid $125,000 in 10% notes with a maturity date of December 31, 2018, and those notes were technically in default. Subsequently, $100,000 notes were exchanged in January 2020, and $25,000 remained in default.
In October 2017, the Company sold an aggregate of $300,000 in senior unsecured notes. The notes bear interest at the rate of 10% per annum and are due in October 2020. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise price of $.75 per share. The warrants have a cashless exercise provision. All notes remain outstanding as of December 31, 2019.
In October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years (October 31, 2021) and one Warrant for each $1.00 in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share. The Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants. The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600, and issued 111,000 warrants to the Placement Agent with $21,453 of the fair value of the warrants recorded as loan cost. The Offering also included the exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants for Units in the Offering. No proceeds were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. During 2018, among the $1.075 million senior secured notes that were extended to October 31, 2021 by virtue of the exchange, $875,000 were to related parties. In January 2020 the Company exchanged $100,000 of older 10% notes for 11% Senior Secured Promissory Notes with a maturity date of October 31, 2021. Of the older notes, $25,000 remain outstanding and in default. Subsequent to December 31, 2019, the Company sold an additional $160,000 in 11% Senior Secured Notes due in 2021.
The value of the warrants issued to the note holders was calculated using the Black-Scholes pricing model using the following significant assumptions:
The Company did not issue any warrants during the year ended December 31, 2019. During the year ended December 31, 2018, the Company issued 1,160,000 warrants with a value on the issue date estimated to be $207,025 bifurcated from the value of the note and exchanged 1,075,000 existing warrants for new ones in connection with its note offerings. As a result of the modification the Company recognized a loss on extinguishment of $248,346. As of December 31, 2019, the unamortized balance of discount on notes was $111,236, which compares to the balance of $184,013 as of December 31, 2018. Amortization expense was $72,777 and $93,138 for the years ended December 31, 2019 and December 31, 2018, respectively.
Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:
(1) Mortgage loans are non-recourse to the Company except for (i) the senior loan held by ServisFirst Bank on Meadowview (Ohio), (ii) the loans held by Colony Bank on Eastman and Glen Eagle, and (iii) the Southern Hills line of credit and Goodwill loan owed to Southern Bank (formerly First Commercial Bank).
(2) On October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with Southern Bank (formerly First Commercial Bank) pursuant to a Promissory Note in the principal amount of $7,229,052 (the “Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on its skilled nursing facility in Tulsa for $1,546,801, funded open market and tender offer purchases of its Industrial Revenue Bonds covering the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of December 31, 2019, a total of $7,230,582 was drawn under the Line of Credit, and as of December 31, 2018, a total of $7,119,743 was drawn under the Line of Credit.
The interest rate on the Line of Credit increased from 5.25% to 5.75% effective April 28, 2019 and subsequently was changed to 4.75%. Monthly payments of interest began on November 30, 2017 and continue until the Promissory Note is paid in full on the Maturity Date. The Maturity Date was been extended multiple times in three month increments initially from April 30, 2018 to May 5, 2020, and subsequently to June 18, 2023 with a principal amount of $7,227,074. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for its Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location. With the retirement of the Tulsa Industrial Authority Bonds effective November 1, 2018, Southern Bank (formerly First Commercial Bank) moved into a senior position on the ALF and ILF properties.
(3) The loan at Eastman was renewed on November 26, 2018 with the maturity extended to October 26, 2021.
(4) The maturity for the loan at Goodwill Nursing was extended to April 12, 2025 in June 2020.
(5) The original loan was extended on January 19, 2019 to January 20, 2020 and the Company capitalized $8,885 in loan costs paid. The loan was subsequently refinanced in June 2019. The Company has incurred $156,671 in unamortized loan costs to refinance this debt with another lender. The refinance was treated as debt extinguishment, with a new maturity date of July 1, 2049 and an interest rate of 3.73%. For the year ended December 31, 2019, amortization expense related to loan costs of the prior loan totaled $8,885 and amortization expense related to loan costs for the new loan, which began in July 2019, totaled $2,176.
(6) The maturity for the loan at Edwards Redeemer was extended to June 29, 2021 in June 2020.
(7) Amortization expense related to loan costs of this loan totaled $874 for the year ended December 31, 2019. Amortizing payments began in January 2019. In June 2018 the Company converted the original note to a fixed note which qualified as debt extinguishment, unamortized debt discount on the original note was expensed as a loss on extinguishment of $27,794. In April 2018, the Company capitalized $22,800 in fees and interest and added it to principal. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of December 31, 2019, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender. In October 2018 the Lender extended the Company a line of credit with a limit of $200,365 to provide working capital to scale operations at the facility. As of December 31, 2018 the Company had drawn $120,440 on the line. The line of credit was expanded in February 2019 to $400,000 with a maturity date of September 30, 2019. Prior to September 30, 2019, the Company had drawn $400,000 on the line which was subsequently merged into the amortizing note due May 25, 2021.
(8) The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during 2017. Amortization expense related to loan costs totaled $4,984 for the year ended December 31, 2019.
(9) Amortization expense related to loan costs of this loan totaled $9,303 for the year ended December 31, 2019. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of December 31, 2019, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender.
(10) The mortgage loan collateralized by the GL Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is subject to financial covenants and customary affirmative and negative covenants. As of December 31, 2019, the Company was not in compliance with certain of these financial and non-financial covenants which is considered to be a technical Event of Default as defined in the note agreement. The Company is also delinquent in installment payments due under the mortgage. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are not necessarily limited to the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction from the guarantors. The Company has been notified by the lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility and is dealing with the lender.
Other mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some instances in an untimely manner. These mortgage loans are technically in default.
Bonds Payable - Tulsa County Industrial Authority
During the year ended December 31, 2018 the Company undertook six tender offers with funds from the First Commercial Line of Credit to purchase bonds from note holders, retiring $608,000 bonds for $509,479 and recording a corresponding gain on settlement of debt of $98,521. On November 1, 2018, the Company called and retired these bonds with $4,560,010 of proceeds from the First Commercial Line of Credit in place at the Southern Hills Retirement Center, recognized a net loss on debt settlement of $383,514, and paid $559,158 cash for bond retirement and accrued interest.
Subordinated, Corporate, and Other Debt
Other debt due at December 31, 2019 and 2018 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.
(1) The subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13% beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the principal balance of the notes. Of the $1,536,000 outstanding, $150,000 is owed to related parties. The Company has not repaid or renewed the note subsequent to December 31, 2019 and it is technically in default.
For the years ended December 31, 2019 and 2018, the Company received proceeds from the issuance of debt of $1,801,718 and $2,053,384, respectively. Cash payments on debt totaled $538,534 and $465,704 for the years ended December 31, 2019 and 2018, respectively.
Our corporate debt at December 31, 2019 and December 31, 2018 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
As of December 31, 2019, the Company had not renewed or repaid $25,000 in 10% Senior Secured Promissory Notes with a maturity date of December 31, 2018, and those notes were technically in default. Subsequent to December 31, 2019 the Company exchanged $100,000 of the 10% Senior Secured Promissory Notes for 11% Senior Secured Promissory Notes with a maturity date of October 31, 2021.
Future maturities and principal payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:
(1) Any note or bond that is not in compliance with all financial and non-financial covenants is considered to have an immediate maturity, including those that require compliance with covenants on any and all other notes. The notes secured by the facilities at GL Nursing Home, Meadowview and Abbeville have such covenants which were in technical non-compliance at December 31, 2019, but the Company believes that its relationships with these lenders is good.
7. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.
Series A Convertible Redeemable Preferred Stock
The Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred stock has a senior liquidation preference value of $2.00 per share and does not bear dividends.
As of December 31, 2019 and 2018, the Company has 200,500 shares of Series A Preferred Stock outstanding.
Series D Convertible Preferred Stock
The Company has established a class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share. Holders of the Series D preferred stock are entitled to receive dividends at the annual rate of 8% based on the stated value per share computed on the basis of a 360-day year and twelve 30-day months. Dividends are cumulative, shall be declared quarterly, and are calculated from the date of issue and payable on the 15th day of April, July, October and January. The dividends may be paid, at the option of the holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the dividend record date. Shares of the Series D preferred stock are redeemable at the Company’s option. At the option of the holder, shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s common stock at a conversion rate of $1.00 per share.
As of December 31, 2019 and 2018, the Company had 375,000 shares of Series D Preferred Stock outstanding.
For years ended December 31, 2019 and 2018, the Company declared $30,000 in preferred dividends. During the years ended December 31, 2019 and 2018, the Company paid $30,000 and $30,000, respectively, for Series D preferred stock dividends. $7,500 were accrued as of December 31, 2019 and will be paid in 2020; $7,500 were accrued as of December 31, 2018 and were paid in 2019.
Common Stock
The Company issued 636,363 shares of common stock to directors and executive officers for compensation during 2019, compared to 962,500 during 2018. The fair value of the common stock issued for compensation was measured at the volume weighted average price of the Company’s common stock for the ten trading days prior to issuance.
Under the Company’s stock repurchase program approved by the Board in July 2018, in November 2018 the Company completed repurchases of 458,140 shares of Common Stock for $132,795 in privately negotiated transactions.
For the years ended December 31, 2019 and 2018, the Company did not pay dividends on common stock.
Restricted Stock Awards
The following table summarizes the restricted stock unit activity during the years ended December 31:
In connection with director restricted stock grants, the Company recognized stock-based compensation of $280,087 and $402,392 for the years ended December 31, 2019 and 2018, respectively.
Common Stock Warrants
As of December 31, 2019 and 2018, the Company had 2,598,130 and 3,142,586, respectively, of outstanding warrants to purchase common stock at a weighted average exercise price of $0.54 and $0.60, respectively. Activity for the years ended December 31, 2019 and 2018 related to common stock warrants follows:
As more fully disclosed in Note 6, during the year ended December 31, 2018, the Company issued 2,346,000 warrants in connection with a private offering of its 11% Senior Secured Notes. The weighted average remaining contractual life of all outstanding warrants is 1.81 years as of December 31, 2019.
The aggregate intrinsic value of common stock warrants outstanding as of December 31, 2019 and 2018 was $0 and $0, respectively.
Common Stock Options
As of December 31, 2019 and December 31, 2018, the Company had 600,000 and 600,000, respectively, of outstanding options to purchase common stock at a weighted average exercise price of $0.36. During the years ended December 31, 2019 and 2018, no options expired. The aggregate intrinsic value of the common stock options outstanding at December 31, 2019 was $0.
8. RELATED PARTIES
Mr. Neuman provides office space for the Company’s Controller at no charge. As of December 31, 2019 and December 31, 2018, the Company owed Mr. Neuman for legal services rendered $32,156 and $118,230, respectively.
Creative Cyberweb developed and maintains the Company’s website and is affiliated with CFO Zvi Rhine’s family. The ongoing upkeep is $450 per month.
In January 2018, the Directors modified the Directors’ Compensation Plan to provide the annual grants be subject to ratable vesting over 12 months and approved an annual grant to each of its six Directors of 93,750 shares, subject to vesting. In connection with these director restricted stock grants, the Company recognized stock-based compensation of $180,000 for the year ended December 31, 2018. In March 2019, the Board approved an annual grant to three of its Directors without other compensation plans, restricted stock awards of 90,909 shares each, subject to vesting. In July 2019, the Board approved a pro-rated annual grant to two of its Directors without other compensation plans restricted stock awards of 90,909 shares in aggregate, subject to vesting. In connection with these director restricted stock grants, the Company recognized stock-based compensation of $120,000 and $180,000 for the year ended December 31, 2019 and 2018, respectively.
In May 2018, the Company approved a compensation agreement for CFO Zvi Rhine that included (i) base salary of $165,000 per year (which accrues beginning January 1, 2018 but payable only after the Company raises capital of at least $600,000), (ii) 150,000 shares of restricted stock vesting one-half each on January 1, 2019 and January 1, 2020, and (iii) options to purchase 600,000 of the Company’s common stock at an exercise price of $.36 per share, each expiring on March 31, 2023, and vesting one quarter each on April 1, 2018, April 1, 2019, October 1, 2019, and April 1, 2020. For the year ended December 31, 2018 the Company accrued $165,000 in salaries and recognized $139,892 in stock-based compensation. For the year ended December 31, 2019 the Company has accrued $165,000 in salaries and recognized $120,000 in stock-based compensation for Directors and $160,087 in stock-based and option-based compensation for Mr. Rhine. On April 15, 2019, the Company executed an Amendment No. 1 to Employment Agreement (the “Amendment”), with an effective date of April 1, 2019, with Mr. Rhine. Pursuant to the Amendment, the Company granted Mr. Rhine a bonus for 2018 services in the amount of $90,000 payable in shares of restricted common stock. The shares were valued at $0.33 per share (the closing price of the Company’s stock on April 2, 2019), resulting in 272,727 shares of Common Stock. The Amendment also defines a Bonus Plan for Mr. Rhine for future periods which provides for additional incentive compensation if certain performance milestones are achieved.
On September 6, 2018, a stock-based compensation grant was made to Lance Baller in consideration of his services as CEO for the six months ended June 30, 2018. The grant consisted of 250,000 shares of common stock valued at $0.33 per share for a total value of $82,500.
During 2018 the management company involved with the Abbeville facility incurred $15,617 of expenses that are reimbursable by the Company, and the Company accrued $15,617 of liabilities presented net of “other assets” on the balance sheet.
9. FACILITY LEASES
The following table summarizes our leasing arrangements related to the Company’s healthcare facilities:
(1) Monthly lease income reflects rent income on a straight-line basis over, where applicable, the term of each lease.
(2) On October 18, 2019, the Company terminated the lease at its Eastman property. A Receivership was appointed to assume the operations of the facility. The Company has not included rental revenues in its future forecasts and will not until rents are paid consistently for this facility.
(3) In January 2016, the Goodwill facility was closed by Georgia regulators and all residents were removed. We subsequently entered into a ten-year operating lease covering Goodwill. After investing approximately $2.0 million in capital improvements in the property, the lease operator obtained all regulatory approvals and began admitting patients in December 2016. The lease became effective on February 1, 2017, and the facility began generating rental revenue thereafter.
(4) Cadence informed the Company that it intended to close the Edwards Redeemer facility due to unprofitable operations. In violation of the operating lease, Cadence began moving patients from the facility and, as of October 18, 2019, all patients had been removed. In response to our Petition, on October 17, 2019, the District Court of Oklahoma County, State of Oklahoma issued a Temporary Order Appointing Receiver (the “Order”) pursuant to a Motion to Appoint Receiver filed by Edwards Redeemer Property Holdings, LLC (“Edwards Property”), a wholly-owned subsidiary of the Company, with respect as a skilled nursing facility. The Order was issued due to the violations by Cadence of the business-preservation obligations contained in the lease between Edwards Property and the Operator. The Company will allow Edwards Redeemer to remain closed for the purpose of undertaking extensive renovations to the facility. The renovations are expected to take up to 12 months.
(5) The lease was generating $33,000 in monthly gross rent; however, the operator experienced adverse results in late 2017 and throughout 2018. In April 2018 the Company recognized a bad debt expense of $56,000 related to rent receivables previously booked in 2018 at the Meadowview facility. Effective December 1, 2018, the Company completed the operations transfer to an affiliate of Infinity Health Interests, LLC (“Infinity”). The lease is structured with a lower base rent component than the prior operator but also includes occupancy-based escalators that will better align facility operations with future rental payments. The Company did not receive any cash rent for the facility in 2019 and has not recorded any rental revenues or receivables for this facility. The Company has not included rental revenues in its future forecasts and will not until rents are paid consistently for this facility.
(6) Effective January 1, 2016, the GL Nursing facility was leased to another operator for a period of ten years at a monthly base rent of $30,000 which was subject to increases based on census levels. Under the terms of the lease, the Company agreed to fund certain capital expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice that it was terminating the lease effective August 31, 2016. The Company entered into a Lease Termination Agreement under which it paid the tenant $145,000 and is obligated to make future payments. Effective August 30, 2016, the Company entered into a new lease agreement with another nursing home operator. The lease term was to commence at the end of a straddle period. During the straddle period, the Company made working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the facility. Prior to the end of the straddle period, the lease operator informed the Company that it would vacate the facility. An entity affiliated with Mr. Brogdon, who is a guarantor of the mortgage, assumed operations of the facility in March 2018 under an OTA. We do not expect the facility to generate any future revenue for the Company.
(7) The Company entered into a management agreement with Cadence Healthcare Solutions to operate Glen Eagle after expending approximately $1.0 million in capital improvements. The facility passed its licensure survey and began admitting patients in June 2018. Effective October 12, 2018, the facility gained its certification and started collecting revenues from Medicare and Medicaid in April 2019. On October 17, 2019, the Company terminated its management with Cadence Healthcare Solutions and is currently operating the building independently.
(8) Lease agreement dated May 21, 2014 with lease payments commencing February 1, 2015. On May 10, 2016, the Company obtained a Court Order appointing a Receiver to control and operate the Southern Hills SNF. The former lease operator represented that it was unable to meet the financial commitments of the facility, including the payment of rent, payroll and other operating requirements. In October 2017, the Receiver engaged a new manager for the facility at the request of the Company. In May 2019 the lease expired, and in July 2019 the facility was leased to Southern Hills Rehab Center LLC, a wholly owned subsidiary of the Company, to conduct operations. The approval of the transfer of the Certificates of Need and appropriate licenses to operate the facility was granted on December 1, 2019.The Company is currently operating the building independently.
(9) The Company plans to operate the Southern Hills ALF independently once construction is complete and a state license is secured.
(10) The Company has been operating the Southern Hills Independent Living Facility (ILF) directly since September 2019. The facility does not provide healthcare services. It consists of private one- and two-bedroom units leased separately to individual tenants.
Lessees are responsible for payment of insurance, taxes and other charges while under the lease. Should the lessees not pay all such charges as required under the leases, or if there is no tenant, the Company may become liable for such operating expenses. We have been required to cover those expenses at Glen Eagle as well as the Southern Hills SNF, ALF and ILF.
Future cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows (excludes Abbeville, Edwards Redeemer, Southern Tulsa SNF and Southern Tulsa ALF and ILF due to properties being independently operated, and GL Nursing):
10. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on income arising in, or derived from, the tax jurisdictions in which they operate. The Company is current with all its federal and state tax filings. The Company is open to examination for tax years 2000 through 2019 due to the carry back of net operating losses.
The following is a reconciliation of the federal statutory tax rate and the effective tax rate as a percentage for the years ended December 31:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of deferred tax assets as of December 31 are as follows:
The valuation allowance at December 31, 2019 and 2018 was primarily related to federal net operating loss carryforwards that, in the judgment of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $12.6 million prior to the expiration of the net operating loss carryforwards beginning in 2019. Taxable loss for the year ended December 31, 2019 approximated $465,000. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will not realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2019.
When more than a 50% change in ownership occurs, over a three-year period, as defined, the Tax Reform Act of 1986 limits the utilization of net operating loss carry forwards in the years following the change in ownership. No determination has been made as of December 31, 2019, as to what implications, if any, there will be in the net operating loss carry forwards of the Company.
11. FAIR VALUE MEASUREMENTS
Financial assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level 1- Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2- Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level 3- Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, advances to related parties, notes receivable, restricted cash, accounts payable, debt and lease security deposit. We consider the carrying values of our short-term financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the short period of time between origination of the financial assets and liabilities and their expected settlement, or because of their proximity to acquisition date fair values. The carrying value of debt approximates fair value based on borrowing rates currently available for debt of similar terms and maturities.
Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price based on the fair value of the tangible assets and intangible assets, if any, acquired and any liabilities assumed based on Level 3 inputs. These Level 3 inputs can include comparable sales values, discount rates, and capitalization rates from a third party appraisal or other market sources.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 are summarized below:
Because these warrants have full reset adjustments tied to future issuance of equity securities by the Company, it is subject to derivative liability treatment under ASC 815-40-15.
The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other (Income) Expense on the Company’s Consolidated Statement of Operations until the warrants are exercised, expire, or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined each reporting period by utilizing the Black-Scholes option pricing model.
The table presented below is a summary of changes in the fair value of the Company’s level 3 valuation for the warrant liability for the years ended December 31:
The significant assumptions used in the Black-Scholes option pricing model as of December 31, 2019 and 2018 include the following:
12. GOODWILL
On August 5, 2019, Southern Hills Rehab Center, LLC (“SHR”), a wholly-owned subsidiary of the Company, entered into an Operations Transfer Agreement (the “OTA”) with C. David Rhoades, Court-Appointed Receiver (the “Receiver”). Pursuant to terms of the OTA, SHR purchased the Operating Assets (as defined in the OTA) of Southern Hills Rehabilitation Center in Tulsa, Oklahoma (“Southern Hills”) from the Receiver on December 1, 2019, the date on which SHR completed licensing for Southern Hills. The purchase of the Operating Assets was accounted for as a business combination in accordance with ASC 805, “Business Combinations”. The goodwill of $379,479 arising from the acquisition was assigned to the Company’s Healthcare Services segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.
The amounts of SHR’s revenue and earnings included in the Company’s consolidated statement of operations for the year ended December 31, 2019, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2018 are as follows:
13. SEGMENT REPORTING
The Company had two primary reporting segments during the years ended December 31, 2019 and 2018, which include real estate services and healthcare services. The Company reports segment information based on the “management approach” defined in ASC 280, Segment Reporting. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
Total assets for the healthcare services and real estate services segments were $4,654,845 and $35,223,318, respectively, as of December 31, 2019 and $2,857,525 and $35,438,362, respectively, as of December 31, 2018.
14. LEGAL PROCEEDINGS
The Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Southern Tulsa, LLC v. Healthcare Management of Oklahoma, LLC, District Court of Tulsa County, State of Oklahoma, Case No. CJ - 2016- 01781.
This matter was brought by us to have the appointment of a Receiver for the Southern Tulsa SNF and to recover damages from our former operator at that facility. The Court ordered the appointment of a Receiver effective May 10, 2016. Other claims and matters have been dismissed. The Company entered into an agreement with the Receiver to assign operations and assets to a subsidiary of the Company and discharge the Receiver. The transition and discharge were effective December 2019.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. Other claims against the former operator are pending.
Dodge NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.
This action was brought by us against the former lease operator for numerous violations of the operating lease, including violation of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019, the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility. This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions, LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer Agreement with the Company, which Motion was granted.
Village of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.
This is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients) at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not Guilty. We are the landlord and don’t believe we have any liability in this matter. The action was subsequently dismissed without prejudice.
Cadence Healthcare Solutions, LLC.
We received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”) claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this claim and intend to defend vigorously.
15. SUBSEQUENT EVENTS
On January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the offering period of its 2018 Offering of 11% Senior Secured Notes (the “Offering”). The total amount of the Offering has been increased to $2,500,000 and the offering period will continue until terminated by the Board of Directors.
Effective January 28, 2020 the Company exchanged $100,000 of 10% Senior Secured Promissory Notes with a maturity date of December 31, 2018 for $100,000 of 11% Senior Secured Promissory Notes with a maturity date of October 31, 2021. The exchange of note was accompanied by the issuance of 100,000 warrants for the purchase of company stock at $0.50, expiring October 31, 2021.
In January 2020, the Board of Directors approved an amendment to the Director Compensation Plan to provide that the annual $30,000 fee to non-employee directors would be paid proportionately at the end of each fiscal quarter 50% in cash and 50% in stock with the stock valued at the end of each quarter.
The Company completed the sale of an aggregate of $160,000 of its 11% Senior Secured Notes (“Note”), $60,000 effective February 5, 2020 and $100,000 effective March 3, 2020. The purchase price for the Notes is equal to the principal amount of the Notes. The Notes accrue interest at the rate of 11% per annum, payable monthly, and mature in October 2021. No fees or commissions were paid on the sale of the Notes. The notes were accompanied by the issuance of an aggregate of 160,000 warrants for the purchase of Company stock at $0.50, expiring October 31, 2021.The proceeds will be used for general working capital.
On February 11, 2020, former Director John Downs returned 26,515 shares granted but not vested prior to his resignation from the Board of Directors. The shares had been granted under the Company’s compensation plan.
Effective March 2, 2020, the Company, through its wholly-owned subsidiary, Global Quapaw, LLC (“Quapaw”), completed the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center (“Higher Call”) located in Quapaw, Oklahoma for the purchase price of $1,300,000. Quapaw has entered into an Operating Lease Agreement with Global Higher Call Nursing, LLC, a wholly-owned subsidiary of the Company, as lessee, to be the Operator of the facility. The acquisition represents the consummation of an Asset Purchase Agreement dated October 21, 2019 between Higher Call Nursing Center, Inc., as Seller, and Quapaw, as Buyer.
In connection with the acquisition of Higher Call, the Company entered into two credit facilities, summarized as follows:
The Company entered into a senior loan agreement with Security Bank in the principal amount of $1.0 million (the “Senior Loan”). The Senior Loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of $7,907. The Senior Loan matures in 2040. The Senior Loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents (“Mortgage”) covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets.
The Company also executed a promissory note in favor of the Seller, Higher Call Nursing Center, Inc., in the principal amount of $150,000 (the “Seller Note”). The Seller Note accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest, and matures in April 2024. The Seller Note is secured by a Corporate Guaranty of Global.
The Company is in the process of gathering relevant information needed to complete the initial accounting of the acquisition. As a result, the initial accounting for the acquisition is incomplete and, therefore, the Company is unable to disclose the information required by ASC 805, “Business Combinations”.
On April 20, 2020, the Company through its subsidiaries received a loan of $574,975 pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 20, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.
On May 4, 2020, the Company through its subsidiaries received loans of $324,442 and $710,752 pursuant to the Paycheck Protection Program (the “PPP Loans”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Both PPP Loans mature on May 4, 2022 (the “Maturity Date”), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.
On July 2nd, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. The OTA will be effective as of the date that Global Eastman, LLC secures an operating license from the state. Pursuant to the terms of the OTA, Global Eastman will assume all receivables and select critical liabilities associated with the prior operator.
As of June 30th, 2020, the Company purchased from former GWH Investors, LLC $402,000 of interest in the note issued to its partly-owned subsidiary Goodwill Hunting, LLC for an equal amount of cash. The notes matured on December 31, 2019 and were in default. The Company will recognize a gain from elimination of the premium owed to the note holders. The notes cannot be retired until all interests are repaid.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Lance Baller
Lance Baller
Interim CEO
(Principal Executive Officer)
July 10, 2020
/s/ Zvi Rhine
Zvi Rhine
Chief Financial Officer
(Principal Accounting Officer )
July 10, 2020
/s/ Adam Desmond
Adam Desmond
Director
July 10, 2020
/s/ Clifford L. Neuman
Clifford L. Neuman
Director
July 10, 2020