ADCARE HEALTH SYSTEMS, INC (Form: 10-Q, Received: 05/14/2015 17:18:07)

Average Occupancy

Three Months Ended March 31,

All Facilities

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33135

AdCare Health Systems, Inc.

(Exact name of registrant as specified in its charter)



Georgia		31-1332119
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)

1145 Hembree Road, Roswell, GA 30076

(Address of principal executive offices)

(678) 869-5116

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 30, 2015 : 19,802,454 shares of common stock with no par value were outstanding.

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AdCare Health Systems, Inc.

Form 10-Q

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		Page Number
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	4
	Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	4
	Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)	5
	Consolidated Statement of Stockholders' Equity/(Deficit) for the three months ended March 31, 2015 (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54

Signatures		62

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Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Quarterly Report") and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. The Company’s actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company’s critical accounting policies and risks and uncertainties related to, but not limited to, overall industry environment, regulatory delays, negative clinical results, and the Company’s financial condition. These and other risks and uncertainties are described in more detail in the Company’s most recent Annual Report on Form 10-K, as well as other reports that the Company files with the SEC.

Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company’s views as of any subsequent date. The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with the SEC that discuss factors germane to the Company’s business.

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Part I. Financial Information

Item 1. Financial Statements

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in 000’s)



	March 31, 2015			December 31, 2014
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	10,680		$	10,735
Restricted cash and investments	3,303			3,321
Accounts receivable, net of allowance of $7,660 and $6,708	23,879			24,294
Prepaid expenses and other	2,650			1,766
Deferred tax asset	569			569
Assets of disposal group held for sale	7,231			5,813
Assets of variable interest entity held for sale	5,954			5,924
Total current assets	54,266			52,422

Restricted cash and investments	4,769			5,456
Property and equipment, net	132,994			135,585
Intangible assets - bed licenses	2,471			2,471
Intangible assets - lease rights, net	3,920			4,087
Goodwill	4,224			4,224
Lease deposits	1,683			1,683
Deferred loan costs, net	3,597			3,464
Other assets	529			569
Total assets	$	208,453		$	209,961

LIABILITIES AND EQUITY / (DEFICIT)

Current liabilities:
Current portion of notes payable and other debt	$	5,430		$	2,537
Current portion of convertible debt, net of discounts	8,349			14,000
Revolving credit facilities and lines of credit	3,823			5,576
Accounts payable	16,564			16,434
Accrued expenses	17,474			15,653
Liabilities of disposal group held for sale	6,180			5,197
Liabilities of variable interest entity held for sale	5,958			5,956
Total current liabilities	63,778			65,353

Notes payable and other debt, net of current portion:
Senior debt, net of discounts	106,631			110,023
Bonds, net of discounts	7,014			7,011
Convertible debt, net of discounts	7,336			—
Revolving credit facilities	1,050			1,059
Other liabilities	2,262			2,129
Deferred tax liability	605			605
Total liabilities	188,676			186,180

Commitments and contingency (Note 13)

Preferred stock, no par value; 5,000 shares authorized; 950 shares issued and outstanding, redemption amount $23,750 at March 31, 2015 and December 31, 2014	20,392			20,392

Stockholders’ equity:
Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 19,664 and 19,151 issued and outstanding at March 31, 2015 and December 31, 2014, respectively	63,787			61,896
Accumulated deficit	(61,732		)	(56,067		)
Total stockholders’ equity	2,055			5,829
Noncontrolling interest in subsidiary	(2,670		)	(2,440		)
Total equity / (deficit)	(615		)	3,389
Total liabilities and equity / (deficit)	$	208,453		$	209,961

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in 000’s, except per share data)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Revenues:
Patient care revenues	$	46,145		$	46,527
Management revenues	218			482
Rental revenues	1,340			296
Total revenues	47,703			47,305

Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)	41,221			38,576
General and administrative expense	3,170			4,559
Facility rent expense	1,931			1,659
Depreciation and amortization	1,706			1,786
Total expenses	48,028			46,580
Income (loss) from operations	(325		)	725

Other Income (Expense):
Interest expense, net	(2,537		)	(2,622		)
Loss on extinguishment of debt	(680		)	(583		)
Other expense	(280		)	(110		)
Total other expense, net	(3,497		)	(3,315		)

Loss from continuing operations before income taxes	(3,822		)	(2,590		)
Income tax expense	(20		)	(8		)
Loss from continuing operations	(3,842		)	(2,598		)

Income (loss) from discontinued operations, net of tax	(1,407		)	75
Net loss	(5,249		)	(2,523		)

Net loss attributable to noncontrolling interests	230			173
Net loss attributable to AdCare Health Systems, Inc.	(5,019		)	(2,350		)

Preferred stock dividend	(646		)	(646		)
Net loss attributable to AdCare Health Systems, Inc. Common Stockholders	$	(5,665	)	$	(2,996	)

Net loss per Share of Common Stock attributable to AdCare Health Systems, Inc.
Common Stockholders -
Basic:
Continuing Operations	$	(0.22	)	$	(0.18	)
Discontinued Operations	(0.07		)	—
	$	(0.29	)	$	(0.18	)

Diluted:
Continuing Operations	$	(0.22	)	$	(0.18	)
Discontinued Operations	(0.07		)	—
	$	(0.29	)	$	(0.18	)

Weighted Average Shares of Common Stock Outstanding:
Basic	19,218			16,916
Diluted	19,218			16,916

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY / (DEFICIT)

(Amounts in 000’s)

(Unaudited)



	Shares	Common Stock and Additional Paid-in Capital		Accumulated Deficit			Noncontrolling Interests			Total
Balances, December 31, 2014	19,151	$	61,896	$	(56,067	)	$	(2,440	)	$	3,389

Stock-based compensation expense	—	203		—			—			203

Exercises of options and warrants, net of shares withheld	453	1,688		—			—			1,688

Issuance of restricted stock, net	40	—		—			—			—

Preferred stock dividend	—	—		(646		)	—			(646		)

Net loss	—	—		(5,019		)	(230		)	(5,249		)
Balances, March 31, 2015	19,644	$	63,787	$	(61,732	)	$	(2,670	)	$	(615	)

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000’s)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net loss	$	(5,249	)	$	(2,523	)
(Income) loss from discontinued operations, net of tax	1,407			(75		)
Loss from continuing operations	(3,842		)	(2,598		)
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities:
Depreciation and amortization	1,706			1,786
Warrants issued for services	—			87
Stock-based compensation expense	203			513
Lease expense in excess of cash paid	195			57
Amortization of deferred financing costs	353			444
Amortization of debt discounts and premiums	(4		)	(20		)
Loss on debt extinguishment	680			583
Bad debt expense	1,355			870
Changes in operating assets and liabilities:
Accounts receivable	(1,981		)	(1,903		)
Prepaid expenses and other	(969		)	(3,021		)
Other assets	40			19
Accounts payable and accrued expenses	2,588			(1,822		)
Net cash provided by (used in) operating activities - continuing operations	324			(5,005		)
Net cash used in operating activities - discontinued operations	(932		)	(881		)
Net cash used in operating activities	(608		)	(5,886		)

Cash flows from investing activities:
Change in restricted cash and investments	705			7,198
Purchase of property and equipment	(376		)	(1,577		)
Net cash provided by investing activities - continuing operations	329			5,621
Net cash used in investing activities - discontinued operations	(39		)	(285		)
Net cash provided by investing activities	290			5,336

Cash flows from financing activities:
Proceeds from debt	21,715			3,255
Proceeds from convertible debt	1,685			6,055
Repayment on notes payable	(21,905		)	(4,839		)
Repayment on bonds payable	—			(3,049		)
Repayment on convertible debt	—			(4,014		)
Proceeds from lines of credit	13,693			18,039
Repayment on lines of credit	(15,454		)	(18,775		)
Debt issuance costs	(513		)	(444		)
Exercise of warrants and options	1,688			2,335
Dividends paid on preferred stock	(646		)	(646		)
Net cash provided by (used in) financing activities - continuing operations	263			(2,083		)
Net cash provided by (used in) financing activities - discontinued operations	—			—
Net cash provided by (used in) financing activities	263			(2,083		)
Net change in cash and cash equivalents	(55		)	(2,633		)
Cash and cash equivalents, beginning	10,735			19,374
Cash and cash equivalents, ending	$	10,680		$	16,741

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	2,513		$	2,472
Supplemental disclosure of non-cash activities:
Conversions of debt and other liabilities to equity	$	—		$	2,930
2011 Notes surrendered and cancelled in payment for 2014 Notes	$	—		$	445
Warrants issued in conjunction with convertible debt offering	$	—		$	87

See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

See Note 1 to our Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , filed with the Securities and Exchange Commission (the "SEC") on March 31, 2015 (the "Annual Report"), for a description of all significant accounting policies.

Description of Business

AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” ) own, operate and manage for third-parties skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, North Carolina, Ohio, Oklahoma and South Carolina.

In July 2014, the Company announced that the Board of Directors had approved a strategic plan to transition the Company to a healthcare property holding and leasing company. Through a series of leasing and subleasing transactions, the Company is in the process of transition to third-parties the operations of the Company’s currently owned and operated healthcare facilities, which are principally skilled nursing facilities. In furtherance of this strategic plan, the Company is now focused on the ownership, acquisition and leasing of healthcare related properties.

As of March 31, 2015 , the Company operated or managed 31 facilities comprised of 28 skilled nursing facilities, two assisted living facilities and one independent living/senior housing facility totaling approximately 3,300 beds. The Company’s facilities provide a range of health care services to their patients and residents including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of March 31, 2015 , of the total 31 facilities, the Company owned and operated 22 facilities, leased and operated six facilities, and managed three facilities for third-parties.

As of March 31, 2015 , the Company also leased three owned and subleased five leased skilled nursing and rehabilitation facilities to local third-party operators in the states of Alabama and Georgia.

On March 31, 2014, the Company executed a representation agreement to sell Companions Specialized Care Center ("Companions"), a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. This facility is reported as discontinued operations (see Note 10 - Discontinued Operations and Note 15 - Subsequent Events ).

During the three months ended March 31, 2015 , the Company entered into certain leasing and operations transfer agreements for facilities located in Arkansas, Georgia, North Carolina, and South Carolina (see Note 7 - Leases for a full description of such leases).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2015 and 2014 , are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2014 , has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

You should read these consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2014 included in the Annual Report.

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The Company operates in one business segment. These statements include the accounts of AdCare Health Systems, Inc. and its controlled subsidiaries. Controlled subsidiaries include AdCare’s majority owned subsidiaries and one variable interest entity (a "VIE") in which AdCare has control as primary beneficiary. All inter-company accounts and transactions were eliminated in the consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain 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 results of operations during the reporting period. Examples of significant estimates include allowance for doubtful accounts, contractual allowances for Medicaid, Medicare, and managed care reimbursements, deferred tax valuation allowance, fair value of derivative instruments, fair value of employee and nonemployee stock based awards, and valuation of goodwill and other long-lived assets. Actual results could differ materially from those estimates.

Reclassifications

Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation with no effect on the Company’s consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities, or stockholders’ equity. Reclassifications were made to the Consolidated Statements of Operations for the three months ended March 31, 2014 to reflect the same facilities in discontinued operations for both periods presented.

Revenue Recognition and Patient Care Receivables

The Company recognizes revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. The Company's revenue is derived primarily from providing healthcare services to residents and is recognized on the date services are provided at amounts billable to the individual. For reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.

Revenue from the Medicaid and Medicare programs accounted for 83.8% of the Company’s revenue for the three months ended March 31, 2015 , and 84.5% of the Company's revenue for the three months ended March 31, 2014 . The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known. The Company recorded retroactive adjustments to revenue which were not material to the Company's consolidated revenue for the three months ended March 31, 2015 and 2014 .

Potentially uncollectible patient accounts are provided for on the allowance method based upon management's evaluation of outstanding accounts receivable at period-end and historical experience. Uncollected accounts that are written off are charged against allowance. As of March 31, 2015 and December 31, 2014 , the Company has an allowance for uncollectible accounts of $7.7 million and $6.7 million , respectively.

Management Fee Revenues and Receivables

Management fee revenues and receivables are recorded in the month that services are provided. As of March 31, 2015 and December 31, 2014 , the Company evaluated collectibility of management fees and determined that no allowance was required.

Rental Revenues and Receivables

The Company, as lessor, makes a determination with respect to each of its leases whether they should be accounted for as operating leases. The Company recognizes rental revenues on a straight-line basis over the term of the lease when collectibility is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to straight-line rent receivable, net. Payments received under operating leases are accounted for in the statements of operations as rental revenue for actual rent collected plus or minus a straight-line adjustment for estimated minimum lease escalators. As of March 31, 2015 and 2014 , the Company evaluated collectibility of rental revenue and determined that no allowance was required.

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Fair Value Measurements and Financial Instruments

Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1— Quoted market prices in active markets for identical assets or liabilities

Level 2— Other observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3— Significant unobservable inputs

The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, notes payable and other debt, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.

Recent Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. The Company has reviewed the FASB accounting pronouncements and ASU interpretations that have effectiveness dates during the periods reported and in future periods.

In April 2014, the FASB issued ASU 2014-08 that amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU should be applied prospectively and is effective for the Company for the 2015 annual and interim periods. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The Company has adopted this ASU as of March 31, 2015.

In May 2014, the FASB issued ASU 2014-09 guidance requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The guidance requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption precluded. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial position or results of operations.

In August 2014, the FASB issued ASU 2014-15 guidance regarding an entity’s ability to continue as a going concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 guidance regarding debt issuance costs as a part of the simplification and productivity initiative. Under this guidance, debt issuance costs will be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The new guidance is to be applied on a retrospective basis and reported as a change in an accounting principle. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating changes in its accounting required by this new guidance and the impact to the Company's financial position, results of operations and related disclosures.

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NOTE 2. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share except net income or loss is adjusted for potentially dilutive securities, such as options, warrants, non-vested shares, and additional shares issuable under subordinated convertible promissory notes outstanding during the period when such potentially dilutive securities are not anti-dilutive. Potentially dilutive securities from options, warrants and unvested restricted shares are calculated in accordance with the treasury stock method. Potentially dilutive securities from subordinated convertible promissory notes are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For the three months ended March 31, 2015 and 2014 , potentially dilutive securities of 7.0 million and 9.1 million , respectively, were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive in both periods.

The following tables provide a reconciliation of net income (loss) for continuing and discontinued operations and the number of shares of common stock used in the computation of both basic and diluted earnings per share:



	Three Months Ended March 31,
	2015							2014
(Amounts in 000’s, except per share data)	Income (loss)			Shares	Per Share			Income (loss)			Shares	Per Share
Continuing Operations:
Loss from continuing operations	$	(3,842	)					$	(2,598	)
Net loss attributable to noncontrolling interests	230							173
Basic loss from continuing operations	$	(3,612	)	19,218	$	(0.19	)	$	(2,425	)	16,916	$	(0.14	)
Preferred stock dividend	(646		)	19,218	$	(0.03	)	(646		)	16,916	$	(0.04	)
Effect of dilutive securities: Stock options, warrants outstanding and subordinated convertible promissory notes ^(a)
Diluted loss from continuing operations	$	(4,258	)	19,218	$	(0.22	)	$	(3,071	)	16,916	$	(0.18	)

Discontinued Operations:
Basic income (loss) from discontinued operations	(1,407		)	19,218	$	(0.07	)	75			16,916	$	—
Diluted income (loss) from discontinued operations	(1,407		)	19,218	$	(0.07	)	75			16,916	$	—

Net Loss Attributable to AdCare:
Basic loss	(5,665		)	19,218	$	(0.29	)	(2,996		)	16,916	$	(0.18	)
Diluted loss	(5,665		)	19,218	$	(0.29	)	(2,996		)	16,916	$	(0.18	)

^(a) Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:



	March 31,
(Amounts in 000’s)	2015	2014
Outstanding Stock Options	894	1,758
Outstanding Warrants - employee	587	1,876
Outstanding Warrants - nonemployee	1,679	1,019
Subordinated Convertible Promissory Notes	3,804	4,406
Total anti-dilutive securities	6,964	9,059

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NOTE 3. LIQUIDITY AND PROFITABILITY

Sources of Liquidity

At March 31, 2015 , the Company had $10.7 million in cash and cash equivalents as well as restricted cash and investments of $8.1 million . Over the next 12 months, the Company anticipates both access to and receipt of several sources of liquidity.

At March 31, 2015 , the Company had one facility, three office buildings and one variable interest entity held for sale that the Company anticipates selling in 2015. The Company expects that the cash proceeds and the release of restricted cash on the sale of the variable interest entity and the sale of the one facility will approximate the related obligations. The Company expects that the cash proceeds from the sale of the office buildings will exceed related obligations by approximately $0.6 million .

The Company routinely has ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs.

During the remainder of 2015, the Company anticipates net proceeds of approximately $2.7 million on refinancing of existing debt, primarily in the second and third quarters of 2015. Further, the Company estimates cash flow from operations and other working capital changes of approximately $1.5 million for the year ending December 31, 2015 .

The Company maintains certain revolving lines of credit for which the Company has limited remaining capacity and all of which are due and expected to be repaid in 2015. Given the Company's ongoing transition out of healthcare operations, the Company does not anticipate any additional draws on these facilities.

On March 31, 2015 , the Company entered into subscription agreements with certain accredited investors pursuant to which the Company accepted subscriptions for an aggregate of $8.5 million in principal amount of the Company’s 10% Convertible Subordinated Notes Due April 30, 2017 (the "2015 Notes"). In connection therewith, the Company received net cash proceeds for working capital of approximately $1.7 million on March 31, 2015, and approximately $6.0 million on April 30, 2015 (see Note 9 – Notes Payable and Other Debt and Note 15 - Subsequent Events ).

On April 13, 2015 , the Company issued and sold 575,000 shares of its Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a public offering price of $25.75 per share in a "best-efforts" underwritten registered public offering. In connection therewith, the Company received net cash proceeds of approximately $13.5 million (see Note 15 – Subsequent Events ).

Other liquidity sources include to a lesser extent, the proceeds from the exercise of options and warrants.

Cash Requirements

At March 31, 2015 , the Company had $151.8 million in indebtedness of which the current portion is $29.7 million . This current portion is comprised of the following components: (i) convertible debt of approximately $8.3 million ; (ii) debt of held for sale entities of approximately $12.1 million , primarily senior debt - bond and mortgage indebtedness; and (iii) remaining debt of approximately $9.3 million which includes revolver debt, senior debt - bonds, and senior debt - mortgage indebtedness (for a complete debt listing and credit facility detail, see Note 9 - Notes Payable and Other Debt ).

The convertible debt includes two subordinated convertible debt issuances. One was issued in 2012 (the “2012 Notes”) and has an outstanding principal amount of $7.5 million at March 31, 2015 with maturity on July 31, 2015 . At any time on or after the six-month anniversary of the date of issuance of the 2012 Notes, they are convertible at the option of the holder into shares of the Company's common stock at a conversion price equal to $3.97 per share (adjusted for a 5% stock dividend paid on October 22, 2012 , and subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events). The other was issued in 2014 (the “2014 Notes”) and has an outstanding principal amount of $0.8 million at March 31, 2015 with maturity on April 30, 2015 . At any time on or after the date of issuance of the 2014 Notes, they are convertible at the option of the holder into shares of the common stock at an initial conversion price equal to $4.50 per share, subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events.

On March 31, 2015 , the Company entered into subscription agreements with certain accredited investors pursuant to which the Company accepted subscriptions for an aggregate of $8.5 million in principal amount of the 2015 Notes. In connection therewith, the Company issued approximately $1.7 million in principal amount of 2015 Notes on March 31, 2015 and approximately $6.0 million on April 30, 2015 (see Note 15 - Subsequent Events ).

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The current debt maturing in 2015 for all other debt approximates $9.3 million . As indicated previously, the Company routinely has ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. The Company anticipates net principal disbursements of approximately $6.8 million which reflect the offset of anticipated proceeds on refinancing of approximately $2.5 million .

The Company anticipates operating cash requirements in 2015 as being substantially less than in 2014 due to the transition to a healthcare property holding and leasing company. Based on the described sources of liquidity and related cash requirements, the Company expects sufficient funds for its operations, scheduled debt service, and capital expenditures at least through the next 12 months. On a longer term basis, at March 31, 2015 , the Company has approximately $67.3 million of debt maturities due over the next two year period ending March 31, 2017 , excluding convertible promissory notes which are convertible into shares of the Company's common stock. The Company has been successful in recent years in raising new equity capital and believes, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015 and beyond. The Company believes its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

In order to satisfy the Company's capital needs, the Company seeks to: (i) improve operating results through a series of leasing and subleasing transactions with favorable terms and consistent and predictable cash flow; (ii) expand borrowing arrangements with certain lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. The Company anticipates that these actions, if successful, will provide the opportunity to maintain liquidity on a short and long term basis, thereby permitting the Company to meet our operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful or that anticipated operating results or the transition of the Company to primarily a property holding and leasing company will be achieved. The Company currently has limited borrowing availability under our existing revolving credit facilities.

NOTE 4. RESTRICTED CASH AND INVESTMENTS

The following table sets forth the Company’s various restricted cash, escrow deposits and investments:



(Amounts in 000’s)	March 31, 2015		December 31, 2014
HUD escrow deposits	$	321	$	289
Lender's collection account	391		35
Current replacement reserves	133		9
HUD current replacement reserves	637		637
Collateral cash and certificates of deposit	1,758		2,302
Property tax escrow	63		49
Total current portion	3,303		3,321

HUD replacement reserves	1,047		1,074
Reserves for capital improvements	256		936
Restricted investments for other debt obligations	3,466		3,446
Total noncurrent portion	4,769		5,456
Total restricted cash and investments	$	8,072	$	8,777

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NOTE 5. PROPERTY AND EQUIPMENT

The following table sets forth the Company’s property and equipment:



(Amounts in 000’s)	Estimated Useful Lives (Years)	March 31, 2015		December 31, 2014
Buildings and improvements	5-40	$	131,452	$	132,842
Equipment	2-10	13,427		13,616
Land	—	7,432		7,437
Computer related	2-10	2,921		2,913
Construction in process	—	46		52
		155,278		156,860
Less: accumulated depreciation and amortization expense		22,284		21,275
Property and equipment, net		$	132,994	$	135,585

Depreciation and amortization expense was approximately $1.7 million and $1.8 million for the three months ended March 31, 2015 and 2014 , respectively. Total depreciation and amortization expense excludes $0.02 million and $0.2 million for the three months ended March 31, 2015 and 2014 , respectively, that is recognized in loss from discontinued operations, net of tax.

There were no impairment charges recorded for the three months ended March 31, 2015 .

NOTE 6. INTANGIBLE ASSETS AND GOODWILL

There have been no impairment adjustments to intangible assets and goodwill during the three months ended March 31, 2015 .

Intangible assets consist of the following:



(Amounts in 000’s)	Bed Licenses (included in property and equipment)			Bed Licenses - Separable		Lease Rights			Total
Balances, December 31, 2014
Gross	$	36,948		$	2,471	$	8,824		$	48,243
Accumulated amortization	(3,855		)	—		(4,737		)	(8,592		)
Net carrying amount	$	33,093		$	2,471	$	4,087		$	39,651

Amortization expense	(308		)	—		(167		)	(475		)

Balances, March 31, 2015
Gross	36,948			2,471		8,824			48,243
Accumulated amortization	(4,163		)	—		(4,904		)	(9,067		)
Net carrying amount	$	32,785		$	2,471	$	3,920		$	39,176

Amortization expense for bed licenses included in property and equipment was approximately $0.3 million for the three months ended March 31, 2015 and 2014 . Amortization expense for lease rights was approximately $0.2 million for the three months ended March 31, 2015 and 2014 .

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Expected amortization expense for all definite lived intangibles for each of the years ended December 31 is as follows:



(Amounts in 000’s)	Bed Licenses		Lease Rights
2015 ^(a)	$	924	$	500
2016	1,232		667
2017	1,232		667
2018	1,232		667
2019	1,232		667
Thereafter	26,933		752
Total expected amortization expense	$	32,785	$	3,920

^(a) Estimated amortization expense for the year ending December 31, 2015 includes only amortization to be recorded after March 31, 2015 .

The following table summarizes the carrying amount of goodwill:



(Amounts in 000’s)	March 31, 2015			December 31, 2014
Goodwill	$	5,023		$	5,023
Accumulated impairment losses	(799		)	(799		)
Total	$	4,224		$	4,224

The Company does not amortize goodwill or indefinite lived intangibles, which consist of separable bed licenses.

NOTE 7. LEASES

Operating Leases

The Company leases certain office space and a total of eleven skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs; six of the skilled nursing facilities that are leased are operated by the Company. For the three months ended March 31, 2015 and 2014 , facility rent expense totaled $1.9 million and $1.7 million , respectively. Total facility rent expense excludes $0.4 million for the three months ended March 31, 2014 that is recognized in Loss from Discontinued Operations, net of tax.

Eight of the Company's skilled nursing facilities are operated under a single master indivisible lease arrangement, dated August 1, 2010 , with William M. Foster as landlord (the "Prime Lease"). The lease has a term of ten years into 2020. Under the Prime Lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicaid and Medicare provider requirements, is a default under the Prime Lease. In addition, other potential defaults related to an individual facility may cause a default of the entire Prime Lease. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The Company is not aware of any defaults and believes it is in compliance with the covenants of the Prime Lease as of March 31, 2015 .

Two of the Company's facilities are operated under a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has an initial term of twelve years into 2022 and two optional ten -year renewal terms, and includes covenants and restrictions. The Company is required to make minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities. As of March 31, 2015 , the Company is in compliance with all financial and administrative covenants of this lease agreement.

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Future minimum lease payments for each of the next five years ending December 31 , are as follows:



	(Amounts in 000's)
2015 ^(a)	$	5,113
2016	6,688
2017	6,593
2018	6,539
2019	6,060
Thereafter	6,637
Total	$	37,630

^(a) Estimated minimum lease payments for the year ending December 31, 2015 include only payments to be recorded after March 31, 2015 .

The Company has also entered into lease agreements for various equipment used in the facilities. These leases are included in future minimum lease payments above.

Leased and Subleased Facilities to Third-Party Operators

In connection with both the Company's strategic plan to transition to a healthcare property holding and leasing company and previous leasing and subleasing opportunities, the operations of eight facilities, three owned by us and five leased to us, have been transferred to third-party skilled nursing facility operators as of March 31, 2015 . The lease and sublease agreements provide current and future rental revenues. These properties are leased and subleased on a triple net basis, meaning that the lessee ( i.e ., the new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all liabilities of the property in respect to insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. For further details regarding the Company's leased and subleased facilities to third-party operators, see Note 15 - Subsequent Events in this Quarterly Report and Note 7 - Leases included in the Annual Report.

Arkansas Leases

On January 16, 2015, ten wholly-owned subsidiaries (each, an “Aria Sublessor”) of the Company entered into separate sublease agreements pursuant to which each Aria Sublessor leased one of ten skilled nursing facilities located in Arkansas, and owned by a subsidiary of AdCare, to an affiliate of Aria Health Group, LLC (each, an "Aria Sublessee"), which subleases were originally scheduled to commence on March 1, 2015, subject to, among other things: (i) such Aria Sublessee’s receipt of all licenses and other approvals from the State of Arkansas to operate such facility; and (ii) approval of the mortgage lender with respect to such facility. Each sublease agreement is structured as triple net lease wherein the Aria Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease.

On April 30, 2015, the Company entered into a Lease Inducement Fee Agreement with Aria Health Consulting, LLC. The Lease Inducement Fee Agreement provides for a one-time payment from the Company to Aria Health Consulting, LLC equal to $2.0 million minus the security deposits and first month's base and special rent for all Aria Sublessees. On April 30, 2015, in connection with the Aria Lease Inducement Fee Agreement, the remaining eight sublease agreements were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of $29,500 per month payable in advance on or before the first day of each month (except for the first special rent payment, which shall be subtracted from the lease inducement fee paid by the Company under the Lease Inducement Fee Agreement).

On April 30, 2015, two Aria Sublessors entered into separate sublease termination agreements with two Aria Sublessees, pursuant to which each Aria Sublessor and Aria Sublessee mutually agreed to terminate two of the separate sublease agreements previously entered into on January 16, 2015. The remaining eight sublease agreements commenced on May 1, 2015 (see Note 15 - Subsequent Events ). In connection with entering into the sublease agreements, each Aria Sublessor and Aria Sublessee also entered into an operations transfer agreement with respect to the applicable facility, each containing customary terms and conditions relating to the transfer of operations of the skilled nursing facilities.

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aggregate, exclusive of any equitable adjustment, and the annual base rent under each sublease will escalate at 2% each year through the initial term and 3% per year upon renewal. The sublease agreements are cross-defaulted. On February 27, 2015 and March 31, 2015, the sublease agreements with the Aria Sublessees were amended to extend the commencement date of the subleases to April 1, 2015, and May 1, 2015, respectively.

Georgia Leases

On January 31, 2015 , a wholly-owned subsidiary (“Wellington Sublessor”) of the Company entered into separate sublease agreements pursuant to which Wellington Sublessor leased two skilled nursing facilities located in Georgia, to affiliates of Wellington Health Services, L.L.C (each a "Wellington Sublessee"). Each sublease agreement was subject to, among other things, each Wellington Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The subleases commenced on April 1, 2015 . The facilities are currently leased by Wellington Sublessor, as tenant, pursuant to the Prime Lease. Each sublease agreement is structured as triple net lease wherein the Wellington Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of each sublease agreement will expire on July 31, 2020 coterminous with the Prime Lease. If Wellington Sublessor and landlord agree to extend the term of the Prime Lease, Wellington Sublessee has the right to extend the term of the sublease agreements through the end of the renewal term of the Prime Lease. The annual rent under the two sublease agreements in the first year will be $3.9 million in the aggregate, and the annual rent under each sublease will escalate at 1% each year through the initial term and 2% per year through the renewal term, if any. The sublease agreements are cross-defaulted. In connection with the sublease agreements, the current licensed operators (wholly-owned subsidiaries of Wellington Sublessor) and the Wellington Sublessees also entered into operations transfer agreements with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

On February 18, 2015 , a wholly-owned subsidiary (“College Park Sublessor”) of the Company entered into separate sublease agreements pursuant to which College Park Sublessor leased one skilled nursing facility located in Georgia, to affiliates of C.R. of College Park, LLC (the "College Park Sublessee"). The sublease agreement was subject to, among other things, the College Park Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease agreement is structured as triple net lease wherein the College Park Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on April 30, 2020 and has a five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.6 million annually, and the annual rent will escalate at $12 thousand annually through the lease term. The sublease commenced on April 1, 2015 (see Note 15 - Subsequent Events ). In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of College Park Sublessor) and the College Park Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

On February 18, 2015 , a wholly-owned subsidiary (“Autumn Breeze Sublessor”) of the Company entered into a sublease agreement pursuant to which Sublessor will lease one skilled nursing facility located in Georgia, to affiliates of C.R. of Autumn Breeze, LLC (the "Autumn Breeze Sublessee"). The sublease agreement is subject to, among other things, the Autumn Breeze Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease agreement is structured as triple net lease wherein the Autumn Breeze Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on April 30, 2020 and has a five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.8 million annually, and the annual rent will escalate at $12 thousand annually through the initial lease term. In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of Autumn Breeze Sublessor) and the Autumn Breeze Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

On March 17, 2015 , a wholly-owned subsidiary (“LaGrange Sublessor”) of the Company entered into a sublease agreement pursuant to which LaGrange Sublessor leased one skilled nursing facility located in Georgia, to affiliates of C.R. of LaGrange, LLC (the "LaGrange Sublessee") The sublease agreement was subject to, among other things, the LaGrange Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease commenced on April 1, 2015 (see Note 15 - Subsequent Events ). The facilities are currently leased by LaGrange Sublessor, as tenant, pursuant to the Prime Lease. The sublease agreement is structured as triple net lease wherein the LaGrange Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on July 31, 2020 coterminous with the Prime Lease. If LaGrange Sublessor and landlord agree to extend the term of the Prime Lease, LaGrange Sublessee has the right to extend the term of the sublease agreements through the end of the renewal term of the Prime Lease. The annual rent under the sublease agreement in the first two years will approximate $1.0 million annually,

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and the annual rent will escalate at 3.0% annually through the lease term. In connection with the sublease agreements, the current licensed operators (wholly-owned subsidiaries of LaGrange Sublessor) and the LaGrange Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

North Carolina and South Carolina Leases

On February 27, 2015 , three wholly-owned subsidiaries (each, a “Symmetry Healthcare Sublessor”) of the Company entered into separate sublease agreements pursuant to which each Symmetry Healthcare Sublessor leased one skilled nursing facility located in North Carolina and two skilled nursing facilities located in South Carolina, respectively, to a wholly-owned subsidiary of Symmetry Healthcare Management (each, a "Symmetry Healthcare Sublessee"). The sublease agreements were subject to, among other things: (i) such Symmetry Healthcare Sublessee’s receipt of all licenses and other approvals from the states of North Carolina and South Carolina to operate such facilities, respectively; and (ii) approval of the mortgage lender with respect to such facility. Each sublease agreement is structured as triple net lease wherein the Symmetry Healthcare Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. Pursuant to each sublease agreement, the initial lease term is fifteen years with a five -year renewal option. The annual rent under all of the sublease agreements in the first year will be $1.8 million in the aggregate, and the annual rent under each sublease will escalate at 3% each year through the initial term and upon renewal. The sublease agreements are cross-defaulted. In connection with entering into the sublease agreements, each Symmetry Healthcare Sublessor and Symmetry Healthcare Sublessee also entered into an operations transfer agreement with respect to the applicable North Carolina and South Carolina facilities, each containing customary terms and conditions.

On March 20, 2015 , each Symmetry Healthcare Sublessor entered into a separate First Amendment to the Lease Agreement, which amended each of the separate sublease agreements to, among other things: (i) extended the commencement date of the sublease agreement for the skilled nursing facility located in North Carolina (the "Related Lease") to June 1, 2015 ; and (ii) included a 20% monthly base rent and asset management and professional services fee escalation provision for each of the two skilled nursing facilities located in South Carolina that will take immediate effect if the Related Lease does not commence by June 1, 2015 . The base rent and asset management and professional services fee will continue at the increased rate until the commencement of the Related Lease.

The subleases for the two South Carolina skilled nursing facilities commenced on April 1, 2015 .

NOTE 8. ACCRUED EXPENSES

Accrued expenses consist of the following:



(Amounts in 000’s)	March 31, 2015		December 31, 2014
Accrued payroll related	$	6,521	$	6,915
Accrued employee benefits	3,987		3,405
Real estate and other taxes	1,613		1,335
Other accrued expenses	5,353		3,998
Total accrued expenses	$	17,474	$	15,653

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NOTE 9. NOTES PAYABLE AND OTHER DEBT

Notes payable and other debt consist of the following:



(Amounts in 000’s)	March 31, 2015		December 31, 2014
Revolving credit facilities and lines of credit	$	5,070	$	6,832
Senior debt - guaranteed by HUD	25,883		26,022
Senior debt - guaranteed by USDA	26,964		27,128
Senior debt - guaranteed by SBA	3,665		3,703
Senior debt - bonds, net of discount ^(a)	12,972		12,967
Senior debt - other mortgage indebtedness ^(b)	60,365		60,277
Other debt	1,167		430
Convertible debt issued in 2012	7,500		7,500
Convertible debt issued in 2014	849		6,500
Convertible debt issued in 2015	7,336		—
Total	$	151,771	$	151,359
Less: current portion	17,602		22,113
Less: portion included in liabilities of disposal group held for sale ^(b)	6,180		5,197
Less: portion included in liabilities of variable interest entity held for sale ^(a)	5,958		5,956
Notes payable and other debt, net of current portion	$	122,031	$	118,093

^(a) The senior debt - bonds, net of discount includes $6.0 million at both March 31, 2015 and December 31, 2014 related to the Company's consolidated variable interest entity, Riverchase Village ADK, LLC ("Riverchase"), revenue bonds, in two series, issued by the Medical Clinical Board of the City of Hoover in the State of Alabama, which the Company has guaranteed the obligation under such bonds.

^(b) The senior debt - other mortgage indebtedness includes $5.0 million related to the outstanding loan entered into in conjunction with the acquisition of Companions in August 2012.

Scheduled Maturities

The schedule below summarizes the scheduled maturities for the twelve months ended March 31 of the respective year. The 2016 maturities include outstanding loans of $5.2 million related to the Companions facility and $1.0 million related to one of the two Hembree Road office buildings which are classified as liabilities of a disposal group held for sale and $6.0 million related to the Riverchase bonds classified as liabilities of a variable interest entity held for sale at March 31, 2015 .



	(Amounts in 000’s)
2016	$	29,912
2017	50,287
2018	11,263
2019	1,778
2020	1,866
Thereafter	57,053
Subtotal	152,159
Less: unamortized discounts ($172 classified as current)	(388		)
Total notes and other debt	$	151,771

Debt Covenant Compliance

As of March 31, 2015 , the Company (including its consolidated variable interest entity) has approximately 46 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial measurements). Some covenants are based on annual financial metric measurements whereas others are based on quarterly

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financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of March 31, 2015 , the Company has not been in compliance with certain financial covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including, as necessary, modifications to future covenant requirements or the elimination of certain requirements in future periods.

The table below indicates which of the Company's credit-related instruments are out of compliance as of March 31, 2015 :



Credit Facility	Balance at March 31, 2015 (000's)		Financial Covenant	Min/Max Financial Covenant Required			Financial Covenant Metric Achieved			Future Financial Covenant Metric Required (a)
Gemino Lines of Credit	$	2,274	Fixed Charge Coverage Ratio (FCCR)	0.80			0.58			1.10
PrivateBank - Line of Credit	$	1,550	Coverage of Rent and Debt Service	1.25			0.65			1.25
PrivateBank - Line of Credit			Minimum TTM Fixed Charge Coverage	1.05			0.93			1.05
Contemporary Healthcare Capital - Term Note and Line of Credit - CSCC Nursing, LLC	$	197	Minimum Implied Current Ratio	1.00			0.95			1.00
	$	5,000	DSCR	1.15			(0.76		)	1.15
			Minimum Occupancy	70		%	64		%	70		%
PrivateBank - Mortgage Note - Valley River Nursing, LLC; Park Heritage Nursing, LLC; Benton Nursing, LLC	$	10,946	Minimum EBITDAR (000s)	$	450		$	59		n/a
			Fixed Charge Coverage Ratio (FCCR)	1.05			0.76			n/a
PrivateBank - Mortgage Note - APH&R Property Holdings, LLC; Northridge HC&R Property Holdings, LLC; Woodland Hills HC Property Holdings, LLC	$	11,982	Minimum Debt Service Coverage	1.75			0.53			n/a
			Minimum Quarterly Rent (000s)	$	290		$	177		n/a
			Minimum Operator Fixed Charge Coverage	1.10			0.57			n/a
PrivateBank - Mortgage Note - Georgetown HC&R Property Holdings, LLC; Sumter Valley Property Holdings, LLC	$	9,285	Minimum Quarterly Rent (000s)	$	235		$	199		$	235
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC	$	11,570	Minimum EBITDAR (000s)	$	358		$	42		n/a
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC			Operator's Minimum Fixed Charge Coverage	1.05			0.87			n/a

^(a) Items marked as "n/a" reflect metric requirements which will be revised or eliminated in subsequent testing periods given that operation transfers have occurred subsequent to the period end.

The covenants above are all based on a subsidiary level covenant requirement except the Gemino Lines of Credit which is on a consolidated basis. The measurement period for each is on a quarterly basis.

Revolving Credit Facilities and Lines of Credit

Gemino-Northwest Credit Facility

On May 30, 2013, NW 61 ^st Nursing, LLC (“Northwest”), a wholly-owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC ("Gemino"). The Northwest Credit Facility provided for a $1.0 million principal amount senior-secured revolving credit facility.

The Northwest Credit Facility matured on January 31, 2015. Interest accrued on the principal balance thereof at an annual rate of 4.75% plus the current LIBOR rate. Northwest also paid to Gemino: (i) a collateral monitoring fee equal to 1.0% per annum of the daily outstanding balance of the Northwest Credit Facility; and (ii) a fee equal to 0.5% per annum of the unused portion of the Northwest Credit Facility. The Northwest Credit Facility is secured by a security interest in the accounts receivable and the collections and proceeds thereof relating to the Company’s skilled nursing facility located in Oklahoma City, Oklahoma known as the Northwest Nursing Center. AdCare has unconditionally guaranteed all amounts owing under the Northwest Credit Facility.

On January 30, 2015 and March 25, 2015, Northwest and Gemino amended the Northwest Credit Facility to extend its terms to March 31, 2015 and to April 30, 2015, respectively.

As of March 31, 2015 , $1.0 million was outstanding of the maximum borrowing amount of $1.5 million under the Northwest Credit Facility. At March 31, 2015 , the Company was not in compliance with covenants contained in the Northwest Credit Facility

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and has obtained a waiver from Gemino.

On April 30, 2015, the outstanding principal amount of $1.0 million under the Northwest Credit Facility was repaid in full, thus releasing all liens and security interests as well as terminating all indebtedness on the Northwest Credit Facility.

Gemino-Bonterra Credit Facility

On September 20, 2012, ADK Bonterra/Parkview, LLC, a wholly owned subsidiary of the Company ("Bonterra") entered into a Second Amendment to the Credit Agreement with Gemino, which amended the original Credit Agreement dated April 27, 2011 between Bonterra and Gemino ("Gemino-Bonterra Credit Facility"). The Gemino-Bonterra Credit Facility is a secured credit facility for borrowings up to $2.0 million . The amendment extended the term of the Gemino-Bonterra Credit Facility from October 29, 2013 to January 31, 2014 and amended certain financial covenants regarding Bonterra's fixed charge coverage ratio, maximum loan turn days and applicable margin. Interest accrues on the principal balance outstanding at an annual rate equal to the LIBOR rate plus the applicable margin of 4.75% to 5.00% , which fluctuates depending upon the principal amount outstanding.

On May 30, 2013, Bonterra, entered into a Fourth Amendment to Credit Agreement with Gemino, which among other things: (i) extends the term of the Gemino-Bonterra Credit Facility from January 31, 2014 to January 31, 2015; (ii) amended certain financial covenants regarding Bonterra’s fixed charge coverage ratio and maximum loan turn days; and (iii) amended the Gemino-Bonterra Credit Facility to include the Northwest Credit Facility as an affiliated credit agreement in determining whether certain financial covenants are being met.

On January 30, 2015 and March 31, 2015, Bonterra and Gemino amended the Gemino-Bonterra Credit Facility to extend its term to March 31, 2015 and to April 30, 2015, respectively.

As of March 31, 2015, $1.3 million was outstanding of the maximum borrowing amount of $2.0 million under the Gemino-Bonterra Credit Facility. At March 31, 2015, the Company was not in compliance with covenants contained in the Gemino-Bonterra Credit Facility and has obtained a waiver from Gemino.

On May 1, 2015, Bonterra and Gemino amended the Gemino-Bonterra Credit Facility to extend its term from April 30, 2015 to June 30, 2015.

Georgetown and Sumter Credit Facility

On January 30, 2015, two wholly-owned subsidiaries of the Company entered into a Loan Agreement (the "Georgetown and Sumter Credit Facility"), between the Company and The PrivateBank and Trust Company ("PrivateBank"). The Georgetown and Sumter Credit Facility provides for a $9.3 million principal amount secured credit facility. The facility is secured by real property.

The Georgetown and Sumter Credit Facility matures on September 1, 2016. Interest on the Georgetown and Sumter Credit Facility accrues on the principal balance thereof at the LIBOR rate plus 4.25% . Interest payments on the loan are due and payable monthly, beginning on March 1, 2015. The Georgetown and Sumter Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Georgetown and Sumter Credit Facility.

AdCare has unconditionally guaranteed all amounts owing under the Georgetown and Sumter Credit Facility. On January 30, 2015 , proceeds from the Georgetown and Sumter Credit Facility were used to pay off all amounts outstanding under a separate $9.0 million credit facility with Metro City Bank under which certain subsidiaries of the Company were borrowers.

At March 31, 2015 , the Company was not in compliance with covenants contained in the Georgetown and Sumter Credit Facility and has obtained a waiver from PrivateBank.

Northridge, Woodland Hills and Abington Credit Facility

On February 25, 2015, three wholly-owned subsidiaries of the Company entered into a Loan Agreement (the "Northridge, Woodland Hills and Abington Credit Facility") with PrivateBank. The PrivateBank Credit Facility provides for a $12.0 million principal amount secured credit facility. This facility is secured by real property.

The Northridge, Woodland Hills and Abington Credit Facility matures on September 1, 2016. Interest accrues on the principal balance thereof at the LIBOR rate plus 4.25% . Principal and interest payments on the note are due and payable monthly, beginning on March 1, 2015. The facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Northridge, Woodland Hills and Abington Credit Facility.

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a separate $12.0 million credit facility with KeyBank National Association ("KeyBank") under which certain subsidiaries of the Company were borrowers.

As of March 31, 2015 , $12.0 million was outstanding of the maximum borrowing amount of $12.0 million under the Northridge, Woodland Hills and Abington Credit Facility. As of March 31, 2015 , the Company had $2.0 million of outstanding restricted assets related to this credit facility. At March 31, 2015 , the Company was not in compliance with covenants contained in the Northridge, Woodland Hills and Abington Credit Facility and has obtained a waiver from PrivateBank.

Senior Debt - Other Mortgage Indebtedness

Northridge, Woodland Hills and Abington

On December 28, 2012, the Company entered into a Secured Loan Agreement and Payment Guaranty with KeyBank totaling $16.5 million (the "KeyBank Credit Facility").

On March 28, 2014, the Company entered into a Fourth Amendment to the Secured Loan Agreement and Payment Guaranty with KeyBank, which amended the Secured Loan Agreement of the KeyBank Credit Facility. Pursuant to the amendment, among other things: (i) KeyBank waived the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio, implied debt service coverage, and compliance of making a certain sinking fund payment due on March 1, 2014 such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; (ii) modified and amended certain financial covenants regarding the Company’s fixed charge ratio and implied debt service coverage; and (iii) paid down $3.4 million of loan principal from the release of $3.4 million from a certain collateral account.

On February 25, 2015, the outstanding principal amount of $12.0 million under the KeyBank Credit Facility was repaid by the proceeds from the Northridge, Woodland Hills and Abington Credit Facility, noted above.

Other Debt

Insurance Funding

In March 2014, the Company obtained financing from First Insurance Funding Corporation and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2014 which matured on December 31, 2014. The total amount financed was approximately $3.3 million requiring monthly payments of $0.3 million with interest of 2.50% . The remaining outstanding amount owed was repaid in full during January 2015.

In March 2015, the Company obtained financing from IPFS Corporation and entered into a Commercial Insurance Premium Finance Security Agreement for several insurance programs, including property, casualty, and crime effective March 1, 2015 and maturing on December 31, 2015. The total amount financed was approximately $0.4 million requiring monthly payments with interest of 3.29% starting April 2015. At March 31, 2015 , the outstanding principal and interest was approximately $0.4 million .

KeyBank Promissory Notes

On February 25, 2015 , the Company entered into four separate unsecured Promissory Note Agreements (the "KeyBank Promissory Notes") with KeyBank for an aggregate principal amount of $0.7 million . The indebtedness represents the portion of certain deferred exit fees owed by the Company to KeyBank in connection with the February 2015 repayment of the KeyBank Credit Facility. The KeyBank Promissory Notes mature on August 25, 2016 , at which time the entire principal balance of the non-interest-bearing notes then unpaid shall be due. If, prior to the maturity date, certain refinancing agreements are entered into with KeyBank as lender, affiliate of lender, or by an agency financing originated by KeyBank or any affiliate of KeyBank, then and in such an event the entire remaining principal amount of the KeyBank Promissory Notes shall be forgiven.

On April 3, 2015 , the Company entered into five separate unsecured Amended and Restated Promissory Note Agreements with KeyBank, which amend the KeyBank Promissory Notes to include a fifth note with the aggregate principal total of $0.7 million remaining unaltered. The amendments restate the principal balances on the original notes in order to include a fifth facility.

Convertible Debt

Convertible Subordinated Notes Issued in 2015 (the "2015 Notes")

On March 31, 2015, the Company entered into Subscription Agreements with certain accredited investors for $8.5 million of the 2015 Notes. In connection therewith, the Company issued approximately $1.7 million in principal amount of 2015 Notes on

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March 31, 2015 and approximately $6.0 million in principal amount of 2015 Notes on April 30, 2015 (see Note 15 - Subsequent Events ).

The 2015 Notes are convertible at the option of the holder into shares of common stock at an initial conversion price equal to $4.25 per share. If, prior to September 30, 2015, the Company issues or sells any shares of common stock or common stock equivalents (excluding certain excluded securities, as defined in the 2015 Notes) for a consideration per share (the “New Issuance Price”) less than the conversion price then in effect immediately prior to such issuance or sale, then immediately after such issuance or sale the conversion price then in effect shall be reduced to an amount equal to the New Issuance Price (an “Adjustment for Dilutive Issuances”). Notwithstanding the foregoing, no Adjustment for Dilutive Issuances shall be effected to the extent it would cause the number of shares of common stock issued, plus the number of shares of common stock issuable, in respect of all 2015 Notes in the aggregate to exceed 3,850,405 shares of common stock. In addition, the conversion price will be subject to adjustment for any subdivision (by stock dividend, stock split or similar corporation action) or combination (by reverse stock split or similar corporate action) of the common stock.

The Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2015 Note; provided, however, that: (i) the shares of common stock issuable upon conversion of any 2015 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act of 1933, as amended (the "Securities Act"); or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; (ii) at any time after the issue date of such 2015 Note, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded 125% of the then-current conversion price; and (iii) such prepayment may not be effected prior to March 31, 2016.

The holders holding a majority of the outstanding principal amount with respect to all the 2015 Notes may require the Company to redeem all or any portion of the 2015 Notes upon a change of control (as defined in the 2015 Notes) for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. In addition, upon a change of control, the Company may redeem all or any portion of the 2015 Notes for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.

During the existence and continuance of an event of default under a 2015 Note, the outstanding principal amount of such 2015 Note shall incur interest at a rate of 14% per annum, and the holder of such 2015 Note may require the Company to redeem all or any portion of such 2015 Note at a redemption price in cash equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. An “event of default,” with respect to a 2015 Note includes: (i) the Company’s failure to pay to the holder of such 2015 Note any amount of principal or interest by the 7th business day following the date when due under such 2015 Note; and (ii) specific events of bankruptcy, insolvency, reorganization or liquidation.

On March 31, 2015, the Company also entered into a Registration Rights Agreement with the investors pursuant to which the Company has agreed to file, no later than June 29, 2015, a registration statement with the SEC to register the resale of the shares of common stock issuable upon conversion of the 2015 Notes and to use the Company’s best efforts to cause such registration statement to become effective as soon as practicable after filing.

In connection with the offering, Institutional Securities Corporation, the placement agent in the offering, is entitled to receive from the Company a placement agent fee of approximately $0.1 million . Institutional Securities Corporation is affiliated with Doucet Asset Management, LLC, a greater than 5% beneficial owner of the common stock.

In the offering, the Company accepted Subscription Agreements from certain related parties (see Note 14 - Related Party Transactions ).

NOTE 10. DISCONTINUED OPERATIONS

On March 31, 2014, the Company entered into a representation agreement to sell Companions, a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. During 2014, the Company recognized a $1.8 million loss on impairment to adjust the net book value of Companions to reflect the fair market value. In April 2015, the Company entered into an asset purchase agreement to sell Companions. The closing of the sale is expected after satisfaction of customary closing conditions (see Note 15 - Subsequent Events ).

For the discontinued operations, the patient care revenue, related cost of services, and facility rental expense prior to the commencement of subleasing are classified in the activities below.

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The following table summarizes the activity of discontinued operations for the three months ended March 31, 2015 and 2014 :



	Three Months Ended March 31,
(Amounts in 000’s)	2015			2014
Total revenues from discontinued operations	$	718		$	9,421
Net gain (loss) from discontinued operations	$	(1,407	)	$	75
Interest expense, net from discontinued operations	$	260		$	261

On January 21, 2015, the Company listed for sale its two office buildings located on Hembree Road in Roswell, Georgia as part of its transition to a healthcare property holding and leasing company. The assets and liabilities of the two Hembree Road buildings have been reclassified to assets and liabilities of disposal groups held for sale as of March 31, 2015 .

Assets and liabilities of the disposal groups held for sale at March 31, 2015 and December 31, 2014 are as follows:



(Amounts in 000’s)	March 31, 2015		December 31, 2014
Property and equipment, net	$	5,187	$	3,777
Other assets	2,044		2,036
Assets of disposal groups held for sale	$	7,231	$	5,813

Notes payable	$	5,983	$	5,000
Line of credit	197		197
Liabilities of disposal group held for sale	$	6,180	$	5,197

Assets and liabilities of the variable interest entity held for sale at March 31, 2015 and December 31, 2014 are as follows:



Amounts in (000's)	March 31, 2015		December 31, 2014
Property and equipment, net	$	5,893	$	5,893
Other assets	61		31
Assets of variable interest entity held for sale	$	5,954	$	5,924

Bonds payable	$	5,958	$	5,956
Liabilities of variable interest entity held for sale	$	5,958	$	5,956

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NOTE 11. STOCK BASED COMPENSATION

For the three months ended March 31, 2015 and 2014 , the Company recognized stock-based compensation as follows:



	Three Months Ended March 31,
(Amounts in 000’s)	2015		2014
Employee compensation:
Stock options	$	44	$	182
Employee warrants	33		41
Management restricted stock	63		34
Total employee stock-based compensation expense	$	140	$	257
Non-employee compensation:
Board restricted stock	$	51	$	191
Board stock options	12		54
Warrants	—		11
Total non-employee stock-based compensation expense	$	63	$	256
Total stock-based compensation expense	$	203	$	513

Stock Incentive Plans

The Company uses the Black-Scholes-Merton option-pricing model for estimating the fair values of employee share options, employee and nonemployee warrants and similar instruments with the following key assumptions:

Expected Dividend Yield: The Company has not historically paid cash dividends on its common stock.

Expected Volatility: The Company estimates the expected volatility factor using the Company's historical stock price volatility.

Risk-Free Interest Rate: The Company bases the risk-free interest rate on the U.S. Treasury yield curve in effect at the time of grant or warrant for the period of the expected term as described.

Expected Term: The Company currently uses a simplified method for calculating the expected term based on the historical exercises of employee options and warrants and contractual expiration dates. For nonemployee warrants awarded to certain service providers or financing partners, the Company uses the contractual life of the warrants as the expected term, as the Company does not have sufficient experience with the service providers or financing partners to determine when they could be expected to exercise their warrants.

No stock options or warrants were issued during the three months ended March 31, 2015 .

The assumptions used in calculating the fair value of employee common stock options and warrants granted during the three months ended March 31, 2014 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:



	Three Months Ended March 31,
	2014
Dividend yield	—
Expected volatility	51	%
Risk-free interest rate	1.73	%
Expected term	5.2 years

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The assumptions used in calculating the fair value of non-employee common stock options and warrants granted during the three months ended March 31, 2014 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:



	Three Months Ended March 31,
	2014
Dividend yield	—
Expected volatility	51	%
Risk-free interest rate	1.74	%
Expected term	5.0 years

Employee and Non-employee Stock Options

The Company has two employee stock option plans:


•	The 2005 Stock Incentive Plan, which expires September 30, 2015 and provides for a maximum of 578,812 shares of common stock to be issued.


•	The 2011 Stock Incentive Plan, which expires March 28, 2021 and provides for a maximum of 2,152,500 shares of common stock to be issued.

Both plans permit the granting of incentive or nonqualified stock options. The 2011 Stock Incentive Plan also permits the granting of restricted stock. The plans are administered by the Board which has the authority to determine the employees to whom awards will be made, the amounts of the awards, and the other terms and conditions of the awards. The Company intends to use only the 2011 Stock Incentive Plan to make future grants. The number of securities remaining available for future issuance is 469,580 .

Activity with respect to employee and non-employee stock options is summarized as follows:



	Number of Shares (000's)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)
Outstanding, December 31, 2014	935		$	4.91
Granted	—		$	—
Exercised	(3	)	$	1.30
Forfeited	(10	)	$	4.06
Expired	(28	)	$	4.03
Outstanding, March 31, 2015	894		$	4.96	7.3	$	208
Vested at March 31, 2015	637		$	5.31	6.6	$	130

Total unrecognized compensation expense related to non-vested stock options at March 31, 2015 was approximately $0.3 million and is expected to be recognized over a weighted-average period of 1.9 years.

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The following summary information reflects stock options outstanding and vested and related details as of March 31, 2015 :



	Stock Options Outstanding				Options Exercisable
Exercise Price	Number Outstanding (000's)	Weighted Average Remaining Contractual Term (in years)	Weighted Average Exercise Price		Vested at March 31, 2015	Weighted Average Exercise Price
$1.30	13	0.6	$	1.30	13	$	1.30
$1.31 - $3.99	174	7.3	$	3.91	63	$	3.93
$4.00 - $4.30	352	7.8	$	4.13	224	$	4.10
$4.31 - $4.99	40	8.2	$	4.51	22	$	4.55
$5.00 - $7.62	315	6.8	$	6.67	315	$	6.67
Total	894	7.3	$	4.96	637	$	5.31

In addition to the Company's stock option plans, the Company grants stock warrants to officers, directors, employees and certain consultants to the Company from time to time as determined by the Board and, when appropriate, the Compensation Committee of the Board. The Board administers the granting of warrants, determines the persons to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards.

Employee Common Stock Warrants

Activity with respect to employee common stock warrants is summarized as follows:



	Number of Shares (000's)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000’s)
Outstanding, December 31, 2014	594		$	4.15
Granted	—		$	—
Exercised	(7	)	$	2.24
Forfeited	—		$	—
Expired	—		$	—
Outstanding, March 31, 2015	587		$	4.17	7.6	$	206
Vested at March 31, 2015	287		$	3.83	5.6	$	206

Total unrecognized compensation expense related to non-vested employee stock warrants at March 31, 2015 , was approximately $0.4 million and is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock

Activity with respect to restricted stock is summarized as follows:



	Number of Shares (000's)		Weighted Avg. Grant Date Fair Value
Unvested at December 31, 2014	504		$	3.68
Granted	50		$	4.01
Vested	(21	)	$	3.20
Forfeited	(10	)	$	3.20
Unvested at March 31, 2015	523		$	3.74

Total unrecognized compensation expense related to non-vested restricted stock at March 31, 2015 , was approximately $1.0 million and is expected to be recognized over a weighted-average period of 2.5 years.

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Non-employee Common Stock Warrants

The Company has granted common stock warrants as compensation to consultants and advisors. The warrants have been issued for terms between two and ten years.

On March 28, 2014, the Company issued to the placement agents in the Company’s offering of the 2014 Notes, as partial compensation for serving as placement agents in such offering, five -year warrants to purchase an aggregate of 48,889 shares of common stock at an exercise price of $4.50 per share. The exercise price of the warrants is subject to certain anti-dilution adjustments.

Activity with respect to non-employee common stock warrants is summarized as follows:



	Number of Shares (000's)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (000's)
Outstanding, December 31, 2014	2,123		$	3.26
Granted	—		$	—
Exercised	(444	)	$	3.81
Forfeited	—		$	—
Expired	—		$	—
Outstanding, March 31, 2015	1,679		$	3.11	3.2	$	2,136
Vested at March 31, 2015	1,483		$	2.99	3.0	$	2,069

NOTE 12. . VARIABLE INTEREST ENTITY

As further described in Note 15 to our Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , the Company has one variable interest entity, Riverchase Village ADK, LLC ("Riverchase") that is required to be consolidated because AdCare has control as primary beneficiary. A “primary beneficiary” is the party that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

On March 3, 2014, the Company and certain of its subsidiaries entered into a letter agreement, dated as of February 28, 2014 (the "Letter Agreement"). On May 15, 2014, the Company and certain of its subsidiaries entered into an Amendment to the Letter Agreement (the “Letter Agreement First Amendment”), pursuant to which the Company agreed to pay $92,323 (the “Tax Payment”) to the appropriate governmental authorities of Jefferson County, Alabama, such amount representing outstanding real property taxes due on the Riverchase Village facility. The Company determined that it was in its best interest to make the Tax Payment in order to preserve the Company’s interest in the sale of the Riverchase Village facility. In connection with the Tax Payment, the parties also agreed to amend and restate the promissory note issued by Mr. Brogdon in favor of the Company to reflect a new principal amount of $615,986 , which amount represents the original principal amount of the note plus the Tax Payment. Furthermore, the Letter Agreement First Amendment amended the Letter Agreement to provide that, if the closing of the sale of the Riverchase Village facility does not occur on or before December 31, 2014, then a payment of principal under the amended and restated promissory note equal to the Tax Payment will be due and payable to the Company on or before January 31, 2015.

On October 10, 2014, the Company and certain of its subsidiaries entered into a second amendment to the Letter Agreement, as amended (the “Letter Agreement Second Amendment”), with Mr. Brogdon and entities controlled by Mr. Brogdon, pursuant to which the Company reduced the principal amount of the promissory note issued by Mr. Brogdon by the amount equal to $92,323 (which represents the amount of the Tax Payment) plus $255,000 (which represents an offset of amounts owed by the Company to Mr. Brogdon under his consulting agreement with the Company). See “-Consulting Agreement.”

The Letter Agreement Second Amendment also amended the Letter Agreement, as amended, to provide that upon the closing of the sale of the Riverchase Village facility to a third party purchaser, the net sales proceeds from such sale shall be distributed so that any net sales proceeds shall first be paid to the Company to satisfy the $177,323 outstanding under the note issued by Riverchase to the Company, which note is discussed below.

On March 25, 2015, AdCare and certain of its subsidiaries entered into a third amendment to the Letter Agreement, as amended (the “Letter Agreement Third Amendment”), with Mr. Brogdon and entities controlled by him, pursuant to which Riverchase and

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the Company agreed to amend the promissory notes issued by Riverchase to the Company to: (i) increase the principal amount due under the promissory note issued by Riverchase to the Company by any additional real property tax payments made by the Company with respect to Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama and owned by Riverchase and (ii) to state that such promissory note would not bear interest.

The Letter Agreement Third Amendment amended the Letter Agreement to provide a schedule for the payment to the Company of the net sales proceeds resulting from a sale of the Riverchase Village facility to a third-party purchaser. The net sales proceeds from such sale shall be distributed to the Company as follows: (i) an amount sufficient to satisfy all amounts due and owing under the promissory note issued by Riverchase to the Company; (ii) one-half of the then remaining net sales proceeds; (iii) an amount sufficient to satisfy the amounts due and owing under the promissory note issued by Mr. Brogdon to the Company; and (iv) the then remaining balance of net sales proceeds.

AdCare is a guarantor of Riverchase’s obligations with respect to certain revenue bonds issued by the City of Hoover in connection with the Riverchase Village facility, and in order to preserve the Company's interest in the sale of the Riverchase Village facility, the Company made a payment in the amount of $85,000 (the "Principal Obligation") on behalf of Riverchase with respect to its obligations under the bonds. On October 10, 2014, Riverchase issued a promissory note in favor of the Company in the principal amount of $177,323 , which represented the amount of a $92,323 tax payment plus the Principal Obligation. The note does not bear interest and is due upon the closing of the sale of the Riverchase Village facility.

In connection with the Letter Agreement Third Amendment on March 25, 2015, the Company and Mr. Brogdon agreed to amend the promissory note issued by Mr. Brogdon to the Company. Pursuant to this amendment, the principal balance plus any accrued interest under the promissory note issued by Mr. Brogdon to the Company shall be due and payable on the earlier of: (i) December 31, 2015; or (ii) the closing of the sale of the Riverchase Village facility.

The following summarizes the assets and liabilities of the variable interest entity included in the consolidated balance sheets:



(Amounts in 000’s)	March 31, 2015			December 31, 2014
Cash	$	—		$	—
Assets of variable interest entity held for sale	5,954			5,924
Other assets	337			343
Total assets	$	6,291		$	6,267

Accounts payable	$	1,911		$	1,923
Accrued expenses	914			651
Current portion of notes payable	177			177
Liabilities of variable interest entity held for sale	5,958			5,956
Non-controlling interest	(2,669		)	(2,440		)
Total liabilities and non-controlling interest	$	6,291		$	6,267

NOTE 13. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

Laws and regulations governing federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. The Company believes that it is in compliance in all material respects with all applicable laws and regulations.

A significant portion of the Company’s revenue is derived from Medicaid and Medicare, for which reimbursement rates are subject to regulatory changes and government funding restrictions. Any significant future change to reimbursement rates could have a material effect on the Company’s operations.

Legal Matters

The skilled nursing business involves a significant risk of liability due to the age and health of the Company’s patients and residents and the services the Company provides. The Company and others in the industry are subject to an increasing number of claims

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and lawsuits, including professional liability claims, which may allege that services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payer. A violation may provide the basis for exclusion from federally funded healthcare programs. As of March 31, 2015 , the Company does not have any material loss contingencies recorded or requiring disclosure based upon the evaluation of the probability of loss from known claims, except as disclosed below.

On June 24, 2013, South Star Services, Inc. (“SSSI”), Troy Clanton and Rose Rabon (collectively, the “Plaintiffs”) filed a complaint in the District Court of Oklahoma County, State of Oklahoma against: (i) AdCare, certain of its wholly owned subsidiaries and AdCare’s former Chief Executive Officer (collectively, the “AdCare Defendants”); (ii) Christopher Brogdon and his wife; and (iii) five entities controlled by Mr. and Mrs. Brogdon, which entities own five skilled-nursing facilities located in Oklahoma that were previously managed by an AdCare subsidiary (the "Oklahoma Facilities"). The complaint alleges, with respect to the AdCare Defendants, that: (i) the AdCare Defendants tortuously interfered with contractual relations between the Plaintiffs and Mr. Brogdon, and with Plaintiffs’ prospective economic advantage, relating to SSSI’s right to manage the Oklahoma Facilities and seven other skilled-nursing facilities located in Oklahoma (collectively, the “Facilities”), respectively; (ii) the AdCare Defendants fraudulently induced the Plaintiffs to perform work and incur expenses with respect to the Facilities; and (iii) one of the AdCare subsidiaries which is an AdCare Defendant provided false and defamatory information to an Oklahoma regulatory authority regarding SSSI’s management of one of the Oklahoma Facilities. The complaint seeks damages against the AdCare Defendants, including punitive damages, in an unspecified amount, as well as costs and expenses, including reasonable attorney fees. On March 7, 2014, the Plaintiffs filed an amended complaint in which they alleged additional facts regarding the alleged fraudulent inducement caused by Mr. and Mrs. Brogdon and the AdCare Defendants.

On February 10, 2015, Plaintiffs and the defendants participated in a voluntary mediation in an attempt to resolve the case. Although the case did not settle at the mediation, Plaintiffs and defendants continued to negotiate over the following weeks and executed a settlement agreement on March 30, 2015 (the "Clanton Settlement Agreement") to settle all claims for a lump sum payment of $2.0 million . Under the Clanton Settlement Agreement, the Company is to pay $0.6 million to the Plaintiffs with the balance thereof to be paid by two of the Company's insurance carriers. The Company and the other defendants in the matter deny all of the Plaintiff's claims and any wrongdoing but agreed to settle the matter to avoid the continued expense and unpredictability of litigation.

On March 7, 2014, the Company responded to a letter received from the Ohio Attorney General ("OAG") dated February 25, 2014 demanding repayment of approximately $1.0 million as settlement for alleged improper Medicaid payments related to seven Ohio facilities affiliated with the Company. The OAG alleged that the Company had submitted improper Medicaid claims for independent laboratory services for glucose blood tests and capillary blood draws. The Company intends to defend itself against the claims. The Company has not recorded a liability for this matter because the liability, if any, and outcome cannot be determined at this time.

Income Tax Examinations

In early 2014, the Internal Revenue Service ("IRS") initiated an examination of the Company's income tax return for the 2011 income tax year. On May 7, 2014, the IRS completed and closed the examination and no changes were required to the Company's 2011 income tax return.

To the Company's knowledge, it is not currently under examination by any other major income tax jurisdiction.

NOTE 14. RELATED PARTY TRANSACTIONS

Settlement and Indemnification Agreement

On March 26, 2015, the Company and certain entities controlled by Christopher Brogdon entered into a Settlement and Indemnification Agreement with respect to: (i) certain claims made by the Brogdon entities in connection with management and administrative services provided by the Company to the Brogdon entities under various management agreements; and (ii) certain pending, or threatened, legal proceedings against the Company and certain of its subsidiaries, and Mr. Brogdon and certain entities controlled by him, including the litigation filed in the District Court of Oklahoma County, State of Oklahoma and described in Note 13 - Commitments and Contingencies (collectively, and including any unasserted claims arising from the management agreements, the “AdCare Indemnified Claims”). Pursuant to the Settlement and Indemnification Agreement, the Company agreed

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to contribute up to $0.6 million towards the settlement of the litigation, and Mr. Brogdon and the Brogdon entities agree to release the Company from any and all claims arising in connection with the management agreements and to indemnify the Company with respect to the AdCare Indemnified Claims.

Personal Guarantor on Loan Agreements

Mr. Brogdon serves as personal guarantor on certain loan agreements totaling $17.9 million entered into by the Company prior to 2015.

Park City Capital

On March 27, 2014, the Company accepted a Subscription Agreement from Park City Capital Offshore Master, Ltd. (“Park City Offshore”), an affiliate of Michael J. Fox, the Lead Director of the Board of Directors, pursuant to which the Company issued to Park City Offshore in March 2014 $1.0 million in principal amount of the 2014 Notes. Mr. Fox is a director of Park City Offshore and a director of the Company and a beneficial owner of 5% of the outstanding common stock. The promissory note was offered to and sold to Park City Offshore on the same terms and conditions as all other buyers in the offering.

On March 31, 2015, the Company accepted a Subscription Agreement from Park City Capital Offshore, for 2015 Notes with an aggregate principal amount of $1.0 million . The 2015 Note was offered to Park City Offshore on the same terms and conditions as all other investors in the offering except the 2015 Note to be issued to Park City Capital Offshore is not subject to any Adjustment for Dilutive Equity Issuances.

Doucet Asset Management, LLC

On May 5, 2015, Doucet Capital, LLC, Doucet Asset Management, LLC, Christopher L. Doucet and Suzette A. Doucet jointly filed with the SEC a Schedule 13D reporting beneficial ownership of greater than 5% of the common stock.

On March 31, 2015, the Company accepted Subscription Agreements from Christopher L. Doucet and Suzette A. Doucet for 2015 Notes with an aggregate principal amount of $0.3 million . The 2015 Notes were offered to them on the same terms and conditions as all other investors in the offering. With respect to the offering of 2015 Notes, Institutional Securities Corporation served as the placement agent and Doucet Asset Management, LLC served as the selected dealer. Institutional Securities Corporation is affiliated with Doucet Asset Management, LLC and is entitled to receive a placement agent fee in the offering of approximately $0.1 million .

NOTE 15. SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission. The following is a summary of the material subsequent events.

Convertible Subordinated Note Private Placement

On March 31, 2015, the Company entered into Subscription Agreements with certain accredited investors pursuant to which the Company accepted subscriptions for an aggregate of $8,500,000 in principal amount of the 2015 Notes. In connection therewith, the Company issued $1,685,000 in principal amount of 2015 Notes on March 31, 2015, upon receipt of payment therefor.

On April 30, 2015, the Company issued an additional $6,015,000 in principal amount of 2015 Notes in respect of subscriptions accepted on March 31, 2015 and upon receipt of payment therefor. Accepted subscriptions for $800,000 in principal amount of 2015 Notes were not funded by the April 30, 2015 payment deadline, and 2015 Notes will not be issued in respect thereof. See Note 9 - Notes Payable and Other Debt - Convertible Debt - Convertible Subordinated Notes Issued in 2015 (the "2015 Notes").

Preferred Stock Offering

On April 13, 2015, the Company issued and sold 575,000 shares of Series A Preferred Stock in a “best efforts” underwritten registered public offering for a public offering price of $25.75 per share. In connection therewith, the Company received net proceeds of $13.5 million , after the payment of underwriting commissions and discounts and other offering expense payable by the Company.

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Oklahoma Lease Agreements

On April 29, 2015, two wholly-owned subsidiaries (each, a “Sublessor”) of the Company entered into separate sublease agreements with Southwest LTC-Quail Creek, LLC and Southwest LTC-NW OKC, LLC (each, a "Sublessee") pursuant to which each Sublessor will lease one of two skilled nursing facilities. The two facilities are as follows:


▪	Quail Creek Nursing Home, a 109 -bed skilled nursing facility located in Oklahoma City, OK.


▪	Northwest Nursing Center, an 88 -bed skilled nursing facility located in Oklahoma City OK.

The leases commence on October 1, 2015, subject to, among other things: (i) such Sublessee’s receipt of all licenses and other approvals from the State of Oklahoma to operate such facility; and (ii) approval of the mortgage lender with respect to such facility. Each sublease agreement is structured as triple net lease wherein the Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. Pursuant to each sublease agreement, the initial lease term is ten years with two separate renewal terms of five years each. The annual rent under all of the sublease agreements in the first year will be $0.96 million and will escalate thereafter on an annual basis through the initial term and any renewal terms. The sublease agreements are cross-defaulted. In connection with entering into the sublease agreements, each Sublessor and Sublessee also entered into an operations transfer agreement with respect to the applicable facilities, each containing customary terms and conditions.

Disposition Agreement

On April 29, 2015, a wholly-owned subsidiary of the Company (the “Companions Seller”) entered into an asset purchase agreement (the “Companions Sale Agreement”) with Gracewood Manor, LLC, an Oklahoma limited liability company (the “Companions Purchaser”), to sell Companions, a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. The Companions Sale Agreement may be terminated by the Companions Purchaser for any reason before the 30th day of the due diligence period set forth in the agreement. The sale is subject to the completion of satisfactory due diligence, the receipt of required licenses and other state regulatory approvals, and the satisfaction of other customary closing conditions. Pursuant to the Companions Sale Agreement, the sale price of $3.5 million is due to the Companions Seller on the closing date after completion of customary closing conditions but no later than July 1, 2015. In connection with entering into the Companions Sale Agreement, the Companions Seller and Companions Purchaser entered into an operations transfer agreement to transfer the operations of Companions concurrent with the closing of the asset purchase agreement.

Arkansas Leases

Eight of the separate sublease agreements with affiliates of Aria Health Group, LLC ("Aria") commenced on May 1, 2015. The remaining two sublease agreements with affiliates of Aria terminated effective April 30, 2015.

On April 30, 2015, the Company entered into a Lease Inducement Fee Agreement with Aria Health Consulting, LLC, pursuant to which the Company paid to Aria Health Consulting, LLC a fee of $2.0 million as a lease inducement for the Aria Sublessees to enter into the third amendment of the sublease agreements described below and to commence such subleases and transfer operations thereunder.

On April 30, 2015, the eight Aria Sublessors entered into a third amendment with the eight Aria Sublessees, which amended each separate sublease agreement to, among other things: (i) extend the initial sublease term to ten years and (ii) provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of $29,500 per month payable in advance on or before the first day of each month (except for the first special rent payment, which shall be subtracted from the lease inducement fee paid by the Company under the Lease Inducement Fee Agreement).

Each sublease agreement is structured as triple net lease wherein each Aria Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. Pursuant to each sublease agreement, the initial lease term is ten years with a five -year renewal option. The annual base rent under all of the sublease agreements in the first year is $5.3

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million in the aggregate (exclusive of any equitable adjustment as described above), and the annual base rent under each sublease will escalate at 2% each year through the initial term and 3% per year upon renewal. The sublease agreements are cross-defaulted.

In connection with entering into the sublease agreements, each Aria Sublessor and Aria Sublessee also entered into an operations transfer agreement with respect to the applicable facility, each containing customary terms and conditions.

Loan Modifications

On May 1, 2015, Little Rock HC&R Property Holdings, LLC, a wholly owned subsidiary of the Company (“Private Bank Borrower”), entered into a Fifth Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated March 30, 2012, as amended, between the PrivateBank Borrower and PrivateBank. The Fifth Modification, among other things: (i) provides for lender consent to the sublease of the Company’s Little Rock Health & Rehabilitation Center to an affiliate of Aria; and (ii) amends the minimum EBITDAR covenant discussed in the Loan Agreement to reflect a new facility operator, Highlands of Little Rock West Markham, LLC.

On May 1, 2015, Benton Property Holdings, LLC, Park Heritage Property Holdings, LLC, and Valley River Property Holdings, LLC, each a wholly owned subsidiary of the Company (collectively, the “Borrower Group”), entered into a Loan Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 1, 2011, as amended, between the Borrower Group and PrivateBank. The Modification, among other things: (i) provides for lender consent to the sublease of the Company’s Heritage Park Nursing Center to an affiliate of Aria; and (ii) amends the minimum EBITDA covenant described in the Loan Agreement to (a) reflect a new facility operator, Highlands of Rogers Dixieland, LLC, and (b) change the minimum EBITDA covenant to a “Minimum EBITDAR/Management Fee” covenant, which modifies minimum EBITDAR to take into account management fees equal to the greater of the operator’s actual management fees for such period or imputed management fees equal to 5% of such operator’s gross income for such period, as determined in accordance with generally accepted accounting principles.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”) own, operate and manage for third-parties skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, North Carolina, Ohio, Oklahoma and South Carolina. As of March 31, 2015 , we operate or manage 31 facilities comprised of 28 skilled nursing facilities, two assisted living facilities and one independent living/senior housing facility totaling approximately 3,300 beds. The Company's facilities provide a range of health care services to their patients and residents including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of March 31, 2015 , of the total 31 facilities, we owned and operated 22 facilities, leased and operated six facilities, and managed three facilities for third parties.

As of March 31, 2015 , we also have leased three owned and subleased five leased skilled nursing and rehabilitation facilities to local third-party operators in the states of Alabama and Georgia. The patient care revenue, related cost of services, and facility rental expense prior to the commencement of subleasing are classified as discontinued operations.

On March 31, 2014, we executed a representation agreement to sell Companions Specialized Care Center ("Companions"), a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. This facility is reported as discontinued operations (see Note 10 - Discontinued Operations and Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

During the three months ended March 31, 2015 , we entered into certain leasing and operations transfer agreements for facilities located in Arkansas, Georgia, North Carolina, and South Carolina, which are described below.

The following table provides summary information regarding the number of operational beds at the Company's facilities managed and operated by the Company as of March 31, 2015 (excluding discontinued operations):



		Number of Facilities
State	Number of Operational Beds/Units	Owned	Leased	Managed For Third Parties	Total
Arkansas	1,041	10	—	—	10
Georgia	1,115	3	5	—	8
North Carolina	106	1	—	—	1
Ohio	705	4	1	3	8
Oklahoma	197	2	—	—	2
South Carolina	180	2	—	—	2
Total	3,344	22	6	3	31



Facility Type	Number of Operational Beds/Units	Owned	Leased	Managed For Third Parties	Total
Skilled Nursing	3,149	20	6	2	28
Assisted Living	112	2	—	—	2
Independent Living	83	—	—	1	1
Total	3,344	22	6	3	31

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The following table provides summary information regarding the number of operational beds at our facilities leased and subleased to third-parties as of March 31, 2015 :



		Number of Facilities Leased and Subleased to Third-Parties
State	Number of Operational Beds/Units	Owned	Leased	Total
Alabama	304	2	—	2
Georgia	516	1	5	6
Total	820	3	5	8



Facility Type	Number of Operational Beds/Units	Owned	Leased	Total
Skilled Nursing	820	3	5	8
Assisted Living	—	—	—	—
Total	820	3	5	8

Liquidity Overview

At March 31, 2015 , we had $10.7 million in cash and cash equivalents as well as restricted cash and investments of $8.1 million . Over the next 12 months, we anticipate both access to and receipt of several sources of liquidity. We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. During the remainder of 2015, we anticipate positive cash flow from operations and other working capital changes. At March 31, 2015 , we had $151.8 million in indebtedness of which the current portion is $29.7 million . We anticipate our operating cash requirements in 2015 as being substantially less than in 2014 due to the transition to a healthcare property holding and leasing company. We expect sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next twelve months. We have been successful in recent years in raising new equity capital and believe, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015 and beyond. We believe our long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness (for a more detailed discussion, see Note 3 - Liquidity and Profitability , located in Part I, Item 1., Notes to Consolidated Financial Statements).

Discontinued Operations

On March 31, 2014, we entered into a representation agreement to sell Companions, a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. During 2014, the Company recognized a $1.8 million loss on impairment to adjust the net book value of Companions to reflect the fair market value. In April 2015, we entered into an asset purchase agreement to sell Companions. Closing is expected after completion of customary closing conditions (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

For the discontinued operations, the patient care revenue, related cost of services, and facility rental expense prior to the commencement of subleasing are classified in the activities below.

The following table summarizes the activity of discontinued operations for the three months ended March 31, 2015 and 2014 :



	Three Months Ended March 31,
(Amounts in 000’s)	2015			2014
Total revenues from discontinued operations	$	718		$	9,421
Net income (loss) from discontinued operations	$	(1,407	)	$	75
Interest expense, net from discontinued operations	$	260		$	261

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Primary Performance Indicators

We own, operate and manage skilled nursing facilities and assisted living facilities, and deliver our services through wholly owned separate operating subsidiaries.

We focus on two primary indicators in evaluating the Company's financial performance. Those indicators are facility occupancy and patient mix. Facility occupancy is critical as higher occupancy generally leads to higher revenues. In addition, concentrating on increasing the number of Medicare covered admissions (“the patient mix”) helps in increasing revenues. We include commercial insurance covered admissions that are reimbursed at the same level as those covered by Medicare in our Medicare utilization percentages and analysis.

Average occupancy rates at our facilities, excluding discontinued operations and managed facilities, for the three months ended March 31, 2015 and 2014 were as follows:

Patient mix at our skilled nursing facilities, excluding discontinued operations and managed facilities, for the three months ended March 31, 2015 and 2014 was as follows:



	Patient Mix (SNF only)
	Three Months Ended March 31,
	2015		2014
Medicare	16.2	%	16.2	%
Medicaid	69.8	%	70.7	%
Other	14.0	%	13.1	%
Total	100.0	%	100.0	%

On May 1, 2014, the Centers for Medicare and Medicaid Services ("CMS") issued a proposed rule outlining fiscal year 2015 (which begins October 1, 2014) Medicare payment rates for skilled nursing facilities. Based on proposed changes contained within this rule, CMS projects that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0%, from payments in fiscal year 2014 (which began October 1, 2013), which represents a higher update factor than the 1.3% update finalized for skilled nursing facilities in fiscal year 2014. This estimated increase is attributable to 2.4% market basket increase, reduced by the 0.4 percentage point multifactor productivity adjustment required by law.

On July 31, 2014, CMS issued a final rule outlining fiscal year 2015 (which begins October 1, 2014) Medicare payment rates for skilled nursing facilities. Based on the changes contained within the rule, CMS estimates that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0%, from payments in fiscal year 2014 (which began October 1, 2013), which represents a higher update factor than the 1.3% update finalized for skilled nursing facilities in fiscal year 2014. This estimated increase is attributable to a 2.5% market basket increase, reduced by the 0.5 percentage point multifactor productivity adjustment required by law.

On April 15, 2015, CMS issued a proposed rule outlining fiscal year 2016 (which begins October 1, 2015) Medicare payment rates for skilled nursing facilities. Based on the proposed changes contained within the rule, CMS projects that aggregate payments to skilled nursing facilities will increase by $500 million, or 1.4%, from payments in fiscal year 2015 (which began October 1, 2014), which represents a lower update factor than the 2.0% update finalized for skilled nursing facilities in fiscal year 2015. This estimated increase is attributable to a 2.6% market basket increase, reduced by a 0.6 percentage point forecast error adjustment and further reduced by the 0.6 percentage point multifactor productivity adjustment required by law.

Medicare reimburses our SNFs under a prospective payment system (“PPS”) for certain inpatient covered services. Under PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels (including as a result of automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare revenues derived from our skilled nursing facilities could be reduced, with a corresponding adverse impact on our financial condition or results of operations.

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We also derive a substantial portion of our consolidated revenue from Medicaid reimbursement, primarily through our skilled nursing business. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending nationally has increased significantly in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led the Federal government to institute measures aimed at both controlling the growth of Medicaid spending and, in some instances, reducing it.

Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the Federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.



	For the Three Months Ended March 31, 2015
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Arkansas	1,009	1,009	69.0	%	18.1	%	$	14,095	$	455.76	$	164.09
Georgia	1,115	1,115	88.1	%	14.2	%	$	19,077	$	471.65	$	161.65
North Carolina	106	106	58.1	%	32.3	%	$	1,488	$	449.72	$	164.11
Ohio	293	293	83.0	%	17.1	%	$	5,255	$	444.16	$	165.36
Oklahoma	197	197	75.4	%	17.6	%	$	2,703	$	437.86	$	144.25
South Carolina	180	180	86.9	%	11.4	%	$	2,892	$	407.58	$	166.05
Total/Average	2,900	2,900	78.9	%	16.2	%	$	45,510	$	456.53	$	162.09



	For the Three Months Ended March 31, 2014
State (SNF only)	Operational Beds at Period End (1)	Period's Average Operational Beds	Occupancy (Operational Beds)		Medicare Utilization (Skilled %ADC) (2)		Total Revenues		Medicare (Skilled) $PPD (3)		Medicaid $PPD (3)
Arkansas	1,009	1,009	66.1	%	18.7	%	$	13,670	$	456.36	$	165.35
Georgia	1,115	1,115	91.7	%	14.9	%	$	20,012	$	473.49	$	160.11
North Carolina	106	106	69.8	%	13.0	%	$	1,489	$	464.76	$	161.30
Ohio	293	293	85.1	%	16.2	%	$	5,204	$	442.94	$	164.01
Oklahoma	197	197	67.9	%	17.2	%	$	2,459	$	418.58	$	145.09
South Carolina	180	180	86.1	%	14.9	%	2,960		447.70		164.18
Total/Average	2,900	2,900	79.4	%	16.2	%	$	45,794	$	459.23	$	161.58

⁽¹⁾ Excludes managed beds which are not consolidated.

⁽²⁾ ADC is the Average Daily Census.

⁽³⁾ PPD is the Per Patient Day equivalent.

Critical Accounting Policies

We prepare financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We base estimates on historical experience, business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change.

During the three months ended March 31, 2015 , we adopted FASB issued ASU 2014-08 , which amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU is applied prospectively and is effective for the Company for the 2015 annual and interim periods.

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Results of Operations

Comparison for the three months ended March 31, 2015 and 2014

Continuing Operations:

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein.



	Three Months Ended March 31,						Increase (Decrease)
(Amounts in 000’s)	2015			2014			Amount			Percent
Revenues:
Patient care revenues	$	46,145		$	46,527		$	(382	)	(1	)%
Management revenues	218			482			(264		)	(55	)%
Rental revenues	1,340			296			1,044			353	%
Total revenues	47,703			47,305			398			1	%
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)	41,221			38,576			2,645			7	%
General and administrative expenses	3,170			4,559			(1,389		)	(30	)%
Facility rent expense	1,931			1,659			272			16	%
Depreciation and amortization	1,706			1,786			(80		)	(4	)%
Total expense	48,028			46,580			1,448			3	%
Income (loss) from Operations	(325		)	725			(1,050		)	(145	)%
Other Income (Expense):
Interest expense, net	(2,537		)	(2,622		)	(85		)	(3	)%
Loss on extinguishment of debt	(680		)	(583		)	97			17	%
Other expense	(280		)	(110		)	170			155	%
Total other expense, net	(3,497		)	(3,315		)	182			5	%
Loss from Continuing Operations Before Income Taxes	(3,822		)	(2,590		)	1,232			48	%
Income tax expense	(20		)	(8		)	12			150	%
Loss from Continuing Operations	$	(3,842	)	$	(2,598	)	$	1,244		48	%

Patient Care Revenues —Total patient care revenues decreased by $ 0.4 million , or 1% , for the three months ended March 31, 2015 as compared with the same period in 2014 . The decrease was primarily due to a slight decrease in the skilled nursing facility occupancy rate from 79.4% to 78.9% and a decrease in the skilled nursing facility average Medicare reimbursement rate per patient day from $459.23 to $456.53 , or 0.6% .

Management Revenues— Management revenues (net of eliminations) decreased approximately $0.3 million , or 55% , for the three months ended March 31, 2015 , as compared with the same period in 2014 . The decrease is primarily due to the discontinuance of a management agreement effective as of March 1, 2014.

Cost of Services— Cost of services was approximately $41.2 million for the three months ended March 31, 2015 , as compared with the same period in 2014 of approximately $38.6 million . The increase is primarily due to the following: (i) an increase of approximately $0.2 million in pharmacy and therapy expense and approximately $0.5 million in nursing expense; (ii) an increase of approximately $0.4 million in plant operations expense; (iii) an increase of approximately $0.4 million in employee benefit-related expenses; (iv) an increase of $0.7 million in bad debt expense; (v) an increase of approximately $0.1 million in property tax expense; (vi) an increase of approximately $0.1 million in insurance expenses; and (vii) an increase of approximately $0.2 million in regulatory and other expenses. Cost of services as a percentage of patient care revenue increased from 82.9% for the three months ended March 31, 2014 to 89.3% for the three months ended March 31, 2015 .

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General and Administrative— General and administrative costs decreased by $1.4 million to $ 3.2 million for the three months ended March 31, 2015 , compared with $ 4.6 million for the same period in 2014 . The decrease is primarily due to the following: (i) a decrease in salaries, wages and employee benefits expense of approximately $1.3 million, partially offset by an increase in contract services expense of approximately $0.5 million; (ii) a decrease of approximately $0.2 million in travel and other reimbursable expenses; (iii) a decrease of approximately $0.3 million in stock-based compensation expense; and (iv) a decrease of approximately $0.1 million in legal and director fees. As a percentage of total revenue, general and administrative costs declined to 6.6% for the three months ended March 31, 2015 , compared with 9.6% for the same period in 2014 , reflecting the announcement of the Company's transition to a healthcare property holding and leasing company and the progress we have made in cost control efforts at the general and administrative level.

Facility Rent Expense —Facility rent expense for the three months ended March 31, 2015 increased by approximately $0.2 million to $1.9 million , compared with $1.7 million for the same period in 2014 , respectively. The increase is primarily due to the treatment of certain facility rent expense as part of continuing operations for the three months ended March 31, 2015 but as part of discontinued operations for the same period in 2014 in accordance with Generally Accepted Accounting Principles.

Depreciation and Amortization— Depreciation and amortization for the three months ended March 31, 2015 decreased by $ 0.1 million to $1.7 million , compared with $ 1.8 million for the same period in 2014 . The decrease is primarily due to the expiration of certain software licenses in 2014 .

Interest Expense, net— Interest expense, net decreased by $ 0.1 million , or 3% , to $ 2.5 million for the three months ended March 31, 2015 , compared with $ 2.6 million for the same period in 2014 . The decrease is primarily due to the refinancing of certain loan agreements to more favorable terms and the extinguishment of certain other debt (for further information, see Note 9 - Notes Payable and Other Debt , located in Part I, Item 1., Notes to Consolidated Financial Statements).

Loss on Extinguishment of Debt— The Company recognized a loss on extinguishment of debt of approximately $0.7 million for the three months ended March 31, 2015 compared with approximately $0.6 million for the same period in 2014 . The $0.7 million loss is due to the February 2015 issuance of promissory notes related to the refinancing of certain loan agreements with one of our lenders (for further information, see Note 9 - Notes Payable and Other Debt , located in Part I, Item 1., Notes to Consolidated Financial Statements).

Other Expense— The Company recognized approximately $0.3 million of other expense for the three months ended March 31, 2015 compared with approximately $0.1 million for the same period in 2014 . The $0.3 million expense related to $0.3 million of costs associated with the Company's transition to a healthcare property holding and leasing company and legal fees associated with ongoing litigation matters.

Income Tax Expense— The Company recognized income tax expense of approximately $0.02 million for the three months ended March 31, 2015 , compared with approximately $0.01 million for the same period in 2014 . The increase of $0.01 million is primarily due to the submission of additional filing extensions related to the 2014 tax year.

Liquidity and Capital Resources

Sources of Liquidity

At March 31, 2015 , we had one facility, three office buildings and one variable interest entity held for sale that we anticipate selling in 2015. We expect that the cash proceeds and the release of restricted cash on the sale of the variable interest entity and the sale of the one facility will approximate the related obligations. We expect that the cash proceeds from the sale of the office buildings will exceed related obligations by approximately $0.6 million .

We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs.

During the remainder of 2015, we anticipate net proceeds of approximately $2.7 million on refinancing of existing debt, primarily in the second and third quarters of 2015. Further, we estimate cash flow from operations and other working capital changes of approximately $1.5 million for the year ending December 31, 2015 .

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We maintain certain revolving lines of credit for which we have limited remaining capacity and all of which are due and expected to be repaid in 2015. Given our ongoing transition out of healthcare operations, we do not anticipate any additional draws on these facilities.

On March 31, 2015 , we entered into subscription agreements with certain accredited investors pursuant to which we accepted subscriptions for an aggregate of $8.5 million in principal amount of our 10% Convertible Subordinated Notes Due April 30, 2017 (the "2015 Notes"). In connection therewith, we received net cash proceeds for working capital of approximately $1.7 million on March 31, 2015, and approximately $6.0 million on April 30, 2015 (see Note 9 – Notes Payable and Other Debt and Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

On April 13, 2015, we issued and sold 575,000 shares of its Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a public offering price of $25.75 per share in a "best-efforts" underwritten registered public offering. In connection therewith, we received net cash proceeds of approximately $13.5 million (see Note 15 – Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

Other liquidity sources include to a lesser extent, the proceeds from the exercise of options and warrants.

Cash Requirements

At March 31, 2015 , we had $151.8 million in indebtedness of which the current portion is $29.7 million . This current portion is comprised of the following components: (i) convertible debt of approximately $8.3 million ; (ii) debt of held for sale entities of approximately $12.1 million , primarily senior debt - bond and mortgage indebtedness; and (iii) remaining debt of approximately $9.3 million which includes revolver debt, senior debt - bonds, and senior debt - mortgage indebtedness (for a complete debt listing and credit facility detail, see Note 9 - Notes Payable and Other Debt , located in Part I, Item 1., Notes to Consolidated Financial Statements).

The convertible debt includes two subordinated convertible debt issuances. One was issued in 2012 (the “2012 Notes”) and has an outstanding principal amount of $7.5 million at March 31, 2015 with maturity on July 31, 2015 . At any time on or after the six-month anniversary of the date of issuance of the 2012 Notes, they are convertible at the option of the holder into shares of our common stock at a conversion price equal to $3.97 per share (adjusted for a 5% stock dividend paid on October 22, 2012 , and subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events). The other was issued in 2014 (the “2014 Notes”) and has an outstanding principal amount of $0.8 million at March 31, 2015 with maturity on April 30, 2015 . At any time on or after the date of issuance of the 2014 Notes, they are convertible at the option of the holder into shares of the common stock at an initial conversion price equal to $4.50 per share, subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events.

On March 31, 2015 , we entered into subscription agreements with certain accredited investors pursuant to which the Company accepted subscriptions for an aggregate of $8.5 million in principal amount of the 2015 Notes. In connection therewith, we issued approximately $1.7 million in principal amount of 2015 Notes on March 31, 2015 and approximately $6.0 million on April 30, 2015 (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

The current debt maturing in 2015 for all other debt approximates $9.3 million . As indicated previously, we routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. We anticipate net principal disbursements of approximately $6.8 million which reflect the offset of anticipated proceeds on refinancing of approximately $2.5 million .

We anticipate operating cash requirements in 2015 as being substantially less than in 2014 due to the transition to a healthcare property holding and leasing company. Based on the described sources of liquidity and related cash requirements, we expect sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months. On a longer term basis, at March 31, 2015 , we have approximately $67.3 million of debt maturities due over the next two year period ending March 31, 2017 , excluding convertible promissory notes which are convertible into shares of our common stock. We have been successful in recent years in raising new equity capital and believes, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015 and beyond. We believe its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

In order to satisfy our capital needs, we seek to: (i) improve operating results through a series of leasing and subleasing transactions with favorable terms and consistent and predictable cash flow; (ii) expand borrowing arrangements with certain lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or

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equity securities. We anticipate that these actions, if successful, will provide the opportunity to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful or that anticipated operating results or the transition of the Company to primarily a property holding and leasing company will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities.

Cash Flows

The following table presents selected data from our consolidated statement of cash flows for the periods presented:



	Three Months Ended March 31,
(Amounts in 000’s)	2015			2014
Net cash provided by (used in) operating activities - continuing operations	$	324		$	(5,005	)
Net cash used in operating activities - discontinued operations	(932		)	(881		)
Net cash provided by investing activities - continuing operations	329			5,621
Net cash used in investing activities - discontinued operations	(39		)	(285		)
Net cash provided by (used in) financing activities - continuing operations	263			(2,083		)
Net change in cash and cash equivalents	(55		)	(2,633		)
Cash and cash equivalents at beginning of period	10,735			19,374
Cash and cash equivalents at end of period	$	10,680		$	16,741

Three Months Ended March 31, 2015

Net cash provided by operating activities —continuing operations for the three months ended March 31, 2015 was approximately $ 0.3 million , consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, difference between straight-line rent and rent paid, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity. Net cash used in operating activities—discontinued operations was approximately $0.9 million.

Net cash provided by investing activities —continuing operations for the three months ended March 31, 2015 , was approximately $ 0.3 million . This is primarily the result of a decrease in restricted cash deposits while offset by capital expenditures throughout the facilities. Net cash used in investing activities—discontinued operations was approximately $0.04 million related to restricted cash changes and capital expenditures.

Net cash provided by financing activities —continuing operations was approximately $ 0.3 million for the three months ended March 31, 2015 . This is primarily the result of cash proceeds received from additional debt borrowings, partially offset by repayments of existing debt obligations and payments of preferred stock dividends. The discontinued operations did not have any proceeds or usage of cash from financing activities in the three months ended March 31, 2015.

Three Months Ended March 31, 2014

Net cash used in operating activities —continuing operations for the three months ended March 31, 2014 , was $ 5.0 million , consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, difference between straight-line rent and rent paid, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity. Net cash used in operating activities—discontinued operations was approximately $0.9 million.

Net cash provided by investing activities —continuing operations for the three months ended March 31, 2014 , was approximately $ 5.6 million . This is primarily the result of a decrease in restricted cash deposits while offset by capital expenditures throughout the facilities. Net cash used in investing activities—discontinued operations was approximately $0.3 million related to restricted cash changes and capital expenditures.

Net cash used in financing activities —continuing operations was approximately $ 2.1 million for the three months ended March 31, 2014 . This is primarily the result of cash proceeds received from additional debt borrowings, partially offset by repayments of existing debt obligations and payments of preferred stock dividends. The discontinued operations did not have any proceeds or usage of cash from financing activities in the three months ended March 31, 2014.

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Notes Payable and Other Debt

Total notes payable and other debt obligations as of March 31, 2015 and December 31, 2014 were as follows:



(Amounts in 000’s)	March 31, 2015		December 31, 2014
Revolving credit facilities and lines of credit	$	5,070	$	6,832
Senior debt - guaranteed by HUD	25,883		26,022
Senior debt - guaranteed by USDA	26,964		27,128
Senior debt - guaranteed by SBA	3,665		3,703
Senior debt - bonds, net of discount ^(a)	12,972		12,967
Senior debt - other mortgage indebtedness ^(b)	60,365		60,277
Other debt	1,167		430
Convertible debt issued in 2012	7,500		7,500
Convertible debt issued in 2014	849		6,500
Convertible debt issued in 2015	7,336		—
Total	$	151,771	$	151,359
Less: current portion	17,602		22,113
Less: portion included in liabilities of disposal group held for sale ^(b)	6,180		5,197
Less: portion included in liabilities of variable interest entity held for sale ^(a)	5,958		5,956
Notes payable and other debt, net of current portion	$	122,031	$	118,093

^(b) The senior debt - other mortgage indebtedness includes $5.0 million related to the outstanding loan entered into in conjunction with the acquisition of Companions in August 2012.

Scheduled Maturities

The schedule below summarizes the scheduled maturities for the twelve months ended March 31 of the respective year. The 2016 maturities include outstanding loans of $5.2 million related to the Companions facility and $1.0 million related to one of the two Hembree Road office buildings located in Roswell, Georgia which are classified as liabilities of a disposal group held for sale and $6.0 million related to the Riverchase bonds classified as liabilities of a variable interest entity held for sale at March 31, 2015 .



	(Amounts in 000’s)
2016	$	29,912
2017	50,287
2018	11,263
2019	1,778
2020	1,866
Thereafter	57,053
Subtotal	152,159
Less: unamortized discounts ($172 classified as current)	(388		)
Total notes and other debt	$	151,771

Debt Covenant Compliance

As of March 31, 2015 , we (including our consolidated variable interest entity) have approximately 46 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial

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measurements). Some covenants are based on annual financial metric measurements whereas others are based on quarterly financial metric measurements. We routinely track and monitor our compliance with our covenant requirements. In recent periods, including as of March 31, 2015 , we have not been in compliance with certain financial covenants. For each instance of such non-compliance, we have obtained waivers or amendments to such requirements including, as necessary, modifications to future covenant requirements or the elimination of certain requirements in future periods.

The table below indicates which of our credit-related instruments are out of compliance as of March 31, 2015 :



Credit Facility	Balance at March 31, 2015 (000's)		Financial Covenant	Min/Max Financial Covenant Required			Financial Covenant Metric Achieved			Future Financial Covenant Metric Required (a)
Gemino Lines of Credit	$	2,274	Fixed Charge Coverage Ratio (FCCR)	0.80			0.58			1.10
PrivateBank - Line of Credit	$	1,550	Coverage of Rent and Debt Service	1.25			0.65			1.25
PrivateBank - Line of Credit			Minimum TTM Fixed Charge Coverage	1.05			0.93			1.05
Contemporary Healthcare Capital - Term Note and Line of Credit - CSCC Nursing, LLC	$	197	Minimum Implied Current Ratio	1.00			0.95			1.00
	$	5,000	DSCR	1.15			(0.76		)	1.15
			Minimum Occupancy	70		%	64		%	70		%
PrivateBank - Mortgage Note - Valley River Nursing, LLC; Park Heritage Nursing, LLC; Benton Nursing, LLC	$	10,946	Minimum EBITDAR (000s)	$	450		$	59		n/a
			Fixed Charge Coverage Ratio (FCCR)	1.05			0.76			n/a
PrivateBank - Mortgage Note - APH&R Property Holdings, LLC; Northridge HC&R Property Holdings, LLC; Woodland Hills HC Property Holdings, LLC	$	11,982	Minimum Debt Service Coverage	1.75			0.53			n/a
			Minimum Quarterly Rent (000s)	$	290		$	177		n/a
			Minimum Operator Fixed Charge Coverage	1.10			0.57			n/a
PrivateBank - Mortgage Note - Georgetown HC&R Property Holdings, LLC; Sumter Valley Property Holdings, LLC	$	9,285	Minimum Quarterly Rent (000s)	$	235		$	199		$	235
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC	$	11,570	Minimum EBITDAR (000s)	$	358		$	42		n/a
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC			Operator's Minimum Fixed Charge Coverage	1.05			0.87			n/a

^(a) Items marked as "n/a" reflect metric requirements which will be revised or eliminated in subsequent testing periods given that operation transfers have occurred subsequent to the period end.

The covenants above all maintain a subsidiary level covenant requirement except the Gemino Lines of Credit which is on a consolidated basis. The measurement period for each is on a quarterly basis.

Revolving Credit Facilities and Lines of Credit

Gemino-Northwest Credit Facility

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provided for a $1.0 million principal amount senior-secured revolving credit facility.

The Northwest Credit Facility matured on January 31, 2015. Interest accrued on the principal balance thereof at an annual rate of 4.75% plus the current LIBOR rate. Northwest also paid to Gemino: (i) a collateral monitoring fee equal to 1.0% per annum of the daily outstanding balance of the Northwest Credit Facility; and (ii) a fee equal to 0.5% per annum of the unused portion of the Northwest Credit Facility. In the event the Northwest Credit Facility was terminated prior to January 31, 2015, Northwest was also required to pay a fee to Gemino in an amount equal to 1.0% of the Northwest Credit Facility. The Northwest Credit Facility is secured by a security interest in the accounts receivable and the collections and proceeds thereof relating to the Company’s skilled nursing facility located in Oklahoma City, Oklahoma known as the Northwest Nursing Center. AdCare has unconditionally guaranteed all amounts owing under the Northwest Credit Facility.

On January 30, 2015 and March 25, 2015, Northwest and Gemino amended the Northwest Credit Facility to extend its term to March 31, 2015 and April 30, 2015, respectively.

Gemino-Bonterra Credit Facility

On September 20, 2012, ADK Bonterra/Parkview, LLC, a wholly owned subsidiary of the Company ("Bonterra"), entered into a Second Amendment to the Credit Agreement with Gemino, which amended the original Credit Agreement dated April 27, 2011 between Bonterra and Gemino (the "Gemino-Bonterra Credit Facility"). The Gemino-Bonterra Credit Facility is a secured credit facility for borrowings up to $2.0 million . The amendment extended the term of the Gemino-Bonterra Credit Facility from October 29, 2013 to January 31, 2014 and amended certain financial covenants regarding Bonterra's fixed charge coverage ratio, maximum loan turn days and applicable margin. Interest accrues on the principal balance outstanding at an annual rate equal to the LIBOR rate plus the applicable margin of 4.75% to 5.00% , which fluctuates depending upon the principal amount outstanding.

On January 30, 2015 and March 31, 2015, Bonterra and Gemino amended the Gemino-Bonterra Credit Facility to extend its term to March 31, 2015 and April 30, 2015, respectively.

As of March 31, 2015 , $1.3 million was outstanding of the maximum borrowing amount of $2.0 million under the Gemino-Bonterra Credit Facility. At March 31, 2015 , the Company was not in compliance with covenants contained in the Gemino-Bonterra Credit Facility and has obtained a waiver from Gemino.

On May 1, 2015, Bonterra and Gemino amended the Gemino-Bonterra Credit Facility to extend its term from April 30, 2015 to June 30, 2015.

Georgetown and Sumter Credit Facility

On January 30, 2015, two wholly-owned subsidiaries of the Company entered into a Loan Agreement (the "Georgetown and Sumter Credit Facility"), between Georgetown, Sumter and The PrivateBank and Trust Company ("PrivateBank"). The Georgetown and Sumter Credit Facility provides for a $9.3 million principal amount secured credit facility. The facility is secured by real property.

The Georgetown and Sumter Credit Facility contains customary events of default, including fraud or material misrepresentation or material omission, failure to make required payments, and failure to perform or comply with certain agreements. Upon the

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occurrence of certain events of default, PrivateBank may terminate the Georgetown and Sumter Credit Facility and all amounts under the Georgetown and Sumter Credit Facility will become due and payable.

At March 31, 2015 , the Company was not in compliance with covenants contained in the Georgetown and Sumter Credit Facility and has obtained a waiver from PrivateBank.

Northridge, Woodland Hills and Abington Credit Facility

AdCare has unconditionally guaranteed all amounts owing under the Northridge, Woodland Hills and Abington Credit Facility. Proceeds from the Northridge, Woodland Hills and Abington Credit Facility were used to pay off all amounts outstanding under a separate $12.0 million credit facility with KeyBank National Association ("KeyBank") under which certain subsidiaries of the Company were borrowers.

Senior Debt - Other Mortgage Indebtedness

Northridge, Woodland Hills and Abington

On December 28, 2012, the Company entered into a Secured Loan Agreement and Payment Guaranty with KeyBank National Association ("KeyBank") totaling $16.5 million (the "KeyBank Credit Facility").

Other Debt

Insurance Funding

In March 2014, we obtained financing from First Insurance Funding Corporation and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2014 which matured on December 31, 2014. The total amount financed was approximately $3.3 million requiring monthly payments of $0.3 million with interest of 2.50% . The remaining outstanding amount owed was repaid in full during January 2015.

In March 2015, we obtained financing from IPFS Corporation and entered into a Commercial Insurance Premium Finance Security Agreement for several insurance programs, including property, casualty, and crime effective March 1, 2015 and maturing on

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December 31, 2015. The total amount financed was approximately $0.4 million requiring monthly payments with interest of 3.29% starting April 2015. At March 31, 2015 , the outstanding principal and interest was approximately $0.4 million .

KeyBank Promissory Notes

On April 3, 2015 , the Company entered into five separate unsecured Amended and Restated Promissory Note Agreements with KeyBank, which amend the KeyBank Promissory Notes and include a fifth note with the aggregate principal total of $0.7 million remaining unaltered. The amendments restate the principal balances on the original notes in order to include a fifth facility.

Convertible Debt

Convertible Subordinated Notes Issued in 2015 (the "2015 Notes")

On March 31, 2015, the Company entered into Subscription Agreements with certain accredited investors for $8.5 million of the 2015 Notes. In connection therewith, we issued $1.7 million in principal amount of 2015 Notes on March 31, 2015 and approximately $6.0 million in principal amount of 2015 Notes on April 30, 2015 (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements).

We may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2015 Note; provided, however, that: (i) the shares of common stock issuable upon conversion of any 2015 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act of 1933, as amended (the "Securities Act"); or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; (ii) at any time after the issue date of such 2015 Note, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded 125% of the then-current conversion price; and (iii) such prepayment may not be effected prior to March 31, 2016.

On March 31, 2015, we also entered into a Registration Rights Agreement with the investors pursuant to which the Company has agreed to file, no later than April 30, 2015, a registration statement with the SEC to register the resale of the shares of common

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stock issuable upon conversion of the 2015 Notes and to use the Company’s best efforts to cause such registration statement to become effective as soon as practicable after filing.

In connection with the offering, Institutional Securities Corporation, the placement agent in the offering, is entitled to receive from the Company a placement agent fee of approximately $0.1 million. Institutional Securities Corporation is affiliated with Doucet Asset Management, LLC, a greater than 5% beneficial owner of the common stock.

In the offering, the Company accepted Subscription Agreements from certain related parties (see Note 14 - Related Party Transactions , located in Part I, Item 1., Notes to Consolidated Financial Statements).

Receivables

The Company’s operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid or other third-party revenue sources. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and patient accounts receivable) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the staff at our facilities in the processing of our invoices, could adversely affect our liquidity and results of operations.

Accounts receivable totaled $23.9 million at March 31, 2015 , compared to $24.3 million at December 31, 2014 , representing approximately 55 and 51 days of revenue in accounts receivable as of March 31, 2015 and December 31, 2014 , respectively.

The allowance for doubtful accounts was $7.7 million and $6.7 million at March 31, 2015 and December 31, 2014 , respectively. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, as well as other factors. We continue to evaluate and implement additional processes to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We may not be successful in offsetting future cost increases.

Off-Balance Sheet Arrangements

There were $3.8 million of outstanding letters of credit at both March 31, 2015 and December 31, 2014 . For both periods, the borrowing base capacity was reduced by $3.8 million on the PrivateBank revolver below the total eligible borrowing base amounts pledged in order to pledge collateral for the full outstanding letters of credit.

Operating Leases

We lease certain office space and a total of eleven skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs; six of the skilled nursing facilities that are leased are operated by the Company. For the three months ended March 31, 2015 and 2014 , facility rent expense totaled $1.9 million and $1.7 million , respectively. Total facility rent expense excludes $0.4 million for the three months ended March 31, 2014 that is recognized in Loss from Discontinued Operations, net of tax.

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Eight of our skilled nursing facilities are operated under a single master indivisible lease arrangement dated August 1, 2010, with William M. Foster as landlord (the "Prime Lease"). The lease has a term of ten years into 2020. Under the Prime Lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicaid and Medicare provider requirements, is a default under the Prime Lease. In addition, other potential defaults related to an individual facility may cause a default of the entire Prime Lease. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. We are not aware of any defaults and believe we are in compliance with the covenants of the Prime Lease as of March 31, 2015 .

Two of our facilities are operated under a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has an initial term of twelve years into 2022 and two optional ten -year renewal terms, and includes covenants and restrictions. We are required to make minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities. As of March 31, 2015 , the Company is in compliance with all financial and administrative covenants of this lease agreement.

Future minimum lease payments for each of the next five years ending December 31 , are as follows:



	(Amounts in 000's)
2015 ^(a)	$	5,113
2016	6,688
2017	6,593
2018	6,539
2019	6,060
Thereafter	6,637
Total	$	37,630

^(a) Estimated minimum lease payments for the year ending December 31, 2015 include only payments to be recorded after March 31, 2015 .

We have also entered into lease agreements for various equipment used in the facilities. These leases are included in future minimum lease payments above.

Leased and Subleased Facilities to Third-Party Operators

In connection with both the Company's strategic plan to transition to a healthcare property holding and leasing company and previous leasing and subleasing opportunities, the operations of eight facilities, three owned by us and five leased to us, have been transferred to third-party skilled nursing facility operators as of March 31, 2015 . The lease and sublease agreements provide current and future rental revenues. These properties are leased and subleased on a triple net basis, meaning that the lessee ( i.e ., the new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all liabilities of the property in respect to insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. For further details regarding the Company's leased and subleased facilities to third-party operators, see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements and Note 7 - Leases included in the Annual Report.

Arkansas Leases

On April 30, 2015 , the Company entered into a Lease Inducement Fee Agreement with Aria Health Consulting, LLC. The Lease Inducement Fee Agreement provides for a one-time payment from the Company to Aria Health Consulting, LLC equal to $2.0 million minus the security deposits and first month's base and special rent for all Aria Sublessees. On April 30, 2015 , in connection with the Aria Lease Inducement Fee Agreement, the remaining eight sublease agreements were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of $29,500 per month

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payable in advance on or before the first day of each month (except for the first special rent payment, which shall be subtracted from the lease inducement fee paid by the Company under the Lease Inducement Fee Agreement).

On April 30, 2015, two Aria Sublessors entered into separate sublease termination agreements with two Aria Sublessees, pursuant to which each Aria Sublessor and Aria Sublessee mutually agreed to terminate two of the separate sublease agreements previously entered into on January 16, 2015. The remaining eight sublease agreements commenced on May 1, 2015 (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements). In connection with entering into the sublease agreements, each Aria Sublessor and Aria Sublessee also entered into an operations transfer agreement with respect to the applicable facility, each containing customary terms and conditions relating to the transfer of operations of the skilled nursing facilities.

As a condition to the Aria Sublessees agreement to a commencement date of May 1, 2015, the Company and the Aria Sublessees agreed to assess, in good faith and within thirty (30) days following the commencement date, making a one-time equitable adjustment to base rent equal to the difference between the facilities 2014 professional liability and general liability insurance costs and projected costs for the first lease year of comparable or mutually acceptable insurance as further adjusted by anticipated Medicaid reimbursement rate increases solely from such added costs. Pursuant to each sublease agreement, the initial lease term is ten years with a five-year renewal option. The annual base rent under all of the sublease agreements in the first year is $5.3 million in the aggregate, exclusive of any equitable adjustment, and the annual base rent under each sublease will escalate at 2% each year through the initial term and 3% per year upon renewal. The sublease agreements are cross-defaulted. On February 27, 2015 and March 31, 2015, the sublease agreements with the Aria Sublessees were amended to extend the commencement date of the subleases to April 1, 2015, and May 1, 2015, respectively.

Georgia Leases

On February 18, 2015 , a wholly-owned subsidiary (“College Park Sublessor”) of the Company entered into separate sublease agreements pursuant to which College Park Sublessor leased one skilled nursing facility located in Georgia, to affiliates of C.R. of College Park, LLC (the "College Park Sublessee"). The sublease agreement was subject to, among other things, the College Park Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease agreement is structured as triple net lease wherein the College Park Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on April 30, 2020 and has a five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.6 million annually, and the annual rent will escalate at $12 thousand annually through the lease term. The sublease commenced on April 1, 2015 (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements). In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of College Park Sublessor) and the College Park Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

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five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.8 million annually, and the annual rent will escalate at $12 thousand annually through the initial lease term. In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of Autumn Breeze Sublessor) and the Autumn Breeze Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

On March 17, 2015 , a wholly-owned subsidiary (“LaGrange Sublessor”) of the Company entered into a sublease agreement pursuant to which LaGrange Sublessor leased one skilled nursing facility located in Georgia, to affiliates of C.R. of LaGrange, LLC (the "LaGrange Sublessee") The sublease agreement was subject to, among other things, the LaGrange Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease commenced on April 1, 2015 (see Note 15 - Subsequent Events , located in Part I, Item 1., Notes to Consolidated Financial Statements). The facilities are currently leased by LaGrange Sublessor, as tenant, pursuant to the Prime Lease. The sublease agreement is structured as triple net lease wherein the LaGrange Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on July 31, 2020 coterminous with the Prime Lease. If LaGrange Sublessor and landlord agree to extend the term of the Prime Lease, LaGrange Sublessee has the right to extend the term of the sublease agreements through the end of the renewal term of the Prime Lease. The annual rent under the sublease agreement in the first two years will approximate $1.0 million annually, and the annual rent will escalate at 3.0% annually through the lease term. In connection with the sublease agreements, the current licensed operators (wholly-owned subsidiaries of LaGrange Sublessor) and the LaGrange Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.

North Carolina and South Carolina Leases

The subleases for the two South Carolina skilled nursing facilities commenced on April 1, 2015 .

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations

Due to the material amount of non-cash related items included in the Company’s results of operations, we have developed an Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA from continuing operations”) metric which provides management with a clearer view of operational use of cash (see the table below). The Company has also developed an Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“Adjusted EBITDAR from continuing operations”) metric that is used primarily in some debt covenants of the Company’s loans.

“Adjusted EBITDA from continuing operations” and “Adjusted EBITDAR from continuing operations” are measures of operating performance that are not calculated in accordance with GAAP. We define: (i) “Adjusted EBITDA from continuing operations” as net income (loss) from continuing operations before interest expense, income tax expense, depreciation and amortization (including

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amortization of non-cash stock-based compensation), loss on extinguishment of debt, and other non-routine adjustments; and (ii) “Adjusted EBITDAR from continuing operations” as net income (loss) from continuing operations before interest expense; income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), loss on extinguishment of debt, rent, and other non-routine adjustments. We have provided below supplemental financial disclosure for these measures, including the most directly comparable GAAP measure (Net Loss) and an associated reconciliation.

The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA from continuing operations and EBITDAR from continuing operations for the three months ended March 31, 2015 and 2014 :



	Three Months Ended March 31,
(Amounts in 000’s)	2015			2014
Condensed Consolidated Statements of Operations Data:
Net loss	$	(5,249	)	$	(2,523	)
Discontinued operations	1,407			(75		)
Net loss from continuing operations (Per GAAP)	(3,842		)	(2,598		)
Add back:
Interest expense, net	2,537			2,622
Income tax expense	20			8
Amortization of stock based compensation	203			513
Depreciation and amortization	1,706			1,786
Loss on extinguishment of debt	680			583
Other expense	280			110
Adjusted EBITDA from continuing operations	1,584			3,024
Facility rent expense	1,931			1,659
Adjusted EBITDAR from continuing operations	$	3,515		$	4,683

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided by, or used in, operations as determined in accordance with GAAP. Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations are used by management to focus on operating performance and management without mixing in items of income and expense that relate to the financing and capitalization of the business, fixed rent or lease payments of facilities and other non-routine adjustments.

We believe these measures are useful to investors in evaluating the Company’s performance, results of operations and financial position for the following reasons:


•	They are helpful in identifying trends in the Company’s day-to-day performance because the items excluded have little or no significance to the Company’s day-to-day operations;


•	They provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance; and


•	They provide data that assists management determine whether or not adjustments to current spending decisions are needed.

We believe that the use of the measures provides a meaningful and consistent comparison of the Company’s underlying business between periods by eliminating certain items required by GAAP, which have little or no significance in the Company’s day-to-day operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Disclosure in response to Item 3. of Form 10-Q is not required to be provided by smaller reporting companies.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report (the "Evaluation Date"). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings.

There are no material developments other than disclosed as previously reported in: (i) the section entitled "Note to Consolidated Financial Statements, Note 13 - Commitments and Contingencies " of this Quarterly Report and "Note to Consolidated Financial Statements, Note 20 - Subsequent Events" of the Annual Report.

Item 1A. Risk Factors.

Disclosure in response to Item 1A of Form 10-Q is not required to be provided by smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Oklahoma Lease Agreements

On April 29, 2015, two wholly-owned subsidiaries (each, a “Sublessor”) of the Company entered into separate sublease agreements with Southwest LTC-Quail Creek, LLC and Southwest LTC-NW OKC, LLC (each, a Sublessee") pursuant to which each Sublessor will lease one of two skilled nursing facilities. The two facilities are as follows:


▪	Quail Creek Nursing Home, a 109-bed skilled nursing facility located in Oklahoma City, OK.


▪	Northwest Nursing Center, an 88-bed skilled nursing facility located in Oklahoma City, OK.

Disposition Agreement

On April 29, 2015, a wholly-owned subsidiary of the Company (the "Companions Seller") entered into an asset purchase agreement (the "Companions Sale Agreement") with Gracewood Manor, LLC, an Oklahoma limited liability company (the "Companions Purchaser") to sell Companions, a 102-bed skilled nursing facility located in Tulsa, Oklahoma. The Companions Sale Agreement may be terminated by the Companions Purchaser for any reason before the 30th day of the due diligence period set forth in the agreement. The sale is subject to the completion of satisfactory due diligence, the receipt of required licenses and other state regulatory approvals, and the satisfaction of other customary closing conditions. Pursuant to the Companions Sale Agreement, the sale price of $3.5 million is due to the Companions Seller on the closing date after completion of customary closing conditions but no later than July 1, 2015. In connection with entering into the Companions Sale Agreement, the Companions Seller and Companions Purchaser entered into an operations transfer agreement to transfer the operations of Companions concurrent with the closing of the asset purchase agreement.

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Executive Compensation

On May 12, 2015, the Compensation Committee of the Board of Directors approved a bonus for William McBride, Chairman and Chief Executive Officer. This bonus is for the period beginning on October 10, 2014 and ending on December 31, 2014 and is payable as follows: (i) $50,000 in cash and (ii) 6,157 shares of restricted common stock with a grant date fair value at $4.06 per share and an aggregate value of approximately $25,000. The shares vested upon issuance. In addition to the compensation as reported in Part III, Item 10 of the Annual Report, the inclusion of this bonus subsequently provides total 2014 compensation to Mr. McBride of $1,327,274. The award of restricted common stock was granted under the Company’s 2011 Stock Incentive Plan. See Note 14 - Stock Based Compensation in the Annual Report for a description of the assumptions used to determine fair value of the awards at grant date.

Item 6. Exhibits.

The agreements included as exhibits to this Quarterly Report are included to provide information regarding the terms of these agreements and are not intended to provide any other factual or disclosure information about the Company, its business or the other parties to these agreements. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:


•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;


•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;


•	may apply standards of materiality in a way that is different from what may be viewed as material to investors; and


•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon by investors.

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EXHIBIT INDEX



Exhibit No.	Description	Method of Filing

2.1	Asset Purchase Agreement by and between CSCC Property Holdings, LLC, and Gracewood Manor, LLC, dated March 17, 2015	Incorporated by reference to Exhibit 10.401 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
3.1	Declaration of Conversion of AdCare Health Systems, Inc., an Ohio corporation, to AdCare Health Systems, Inc., a Georgia corporation	Incorporated by reference to Appendix A of the Registrant’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 29, 2013
3.2	Certificate of Conversion of AdCare Health Systems, Inc.	Incorporated by reference to Exhibit 3.2 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
3.3	Certificate for Conversion for Entities Converting Within or Off the Records of the Ohio Secretary of State.	Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
3.4	Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013	Incorporated by reference to Exhibit 3.3 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.5	Articles of Correction to Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013.	Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.6	Bylaws of AdCare Health Systems, Inc.	Incorporated by reference to Exhibit 3.4 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.7	Amendment No. 1 to the Bylaws of AdCare Health Systems, Inc.	Incorporated by reference to Exhibit 3.7 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
3.8	Articles of Amendment to the Articles of Incorporation of AdCare Health Systems, Inc., as amended, filed with the Secretary of State of the State of Georgia on April 7, 2015.	Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on April 13, 2015
4.1	Registration Rights Agreement, dated March 31, 2015, by and among AdCare Health Systems, Inc. and the Purchasers of the Company’s 10% Convertible Subordinated Notes Due April 30, 2017	Filed herewith
4.2	Form of 10% Convertible Subordinated Notes Due April 30, 2017	Filed herewith
10.1	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLC	Incorporated by reference to Exhibit 99.12 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.2	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLC	Incorporated by reference to Exhibit 99.13 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.3	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLC	Incorporated by reference to Exhibit 99.14 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.4	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLC	Incorporated by reference to Exhibit 99.15 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.5	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLC	Incorporated by reference to Exhibit 99.16 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.6	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLC	Incorporated by reference to Exhibit 99.17 of the Registrant's Current Report on Form 8-K filed on May 6, 2015

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10.7	First Amendment to Sublease Agreement, dated February 27, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLC	Incorporated by reference to Exhibit 99.18 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.8	First Amendment to Sublease Agreement, dated February 27, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLC	Incorporated by reference to Exhibit 99.19 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.9	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLC	Incorporated by reference to Exhibit 99.20 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.10	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLC	Incorporated by reference to Exhibit 99.21 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.11	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLC	Incorporated by reference to Exhibit 99.22 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.12	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLC	Incorporated by reference to Exhibit 99.23 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.13	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLC	Incorporated by reference to Exhibit 99.24 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.14	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLC	Incorporated by reference to Exhibit 99.25 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.15	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLC	Incorporated by reference to Exhibit 99.26 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.16	Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLC	Incorporated by reference to Exhibit 99.27 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.17	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLC	Incorporated by reference to Exhibit 99.28 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.18	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLC	Incorporated by reference to Exhibit 99.29 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.19	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLC	Incorporated by reference to Exhibit 99.30 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.20	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLC	Incorporated by reference to Exhibit 99.31 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.21	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLC	Incorporated by reference to Exhibit 99.32 of the Registrant's Current Report on Form 8-K filed on May 6, 2015

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10.22	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLC	Incorporated by reference to Exhibit 99.33 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.23	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLC	Incorporated by reference to Exhibit 99.34 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.24	Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLC	Incorporated by reference to Exhibit 99.35 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.25	Amended and Restated Promissory Note for exit fees (Cumberland), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National Association	Filed herewith
10.26	Amended and Restated Promissory Note for exit fees (Northridge), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National Association	Filed herewith
10.27	Amended and Restated Promissory Note for exit fees (River Valley), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National Association	Filed herewith
10.28	Amended and Restated Promissory Note for exit fees (Sumter Valley), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National Association	Filed herewith
10.29	Promissory Note for exit fees (Stone County), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National Association	Filed herewith
10.30	Eighth Amendment to Credit Agreement, dated March 25, 2015, by and among ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLC	Filed herewith
10.31	Fifth Amendment to Credit Agreement, dated March 25, 2015, by and among NW 61ST Nursing, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and Gemino Healthcare Finance, LLC	Filed herewith
10.32	Ninth Modification Agreement to Loan and Security Agreement, dated May 1, 2015, by and among ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC , ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC , Mountain Trace Nursing ADK, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Coosa Nursing ADK, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.	Filed herewith
10.33	Eighth Modification Agreement to Loan and Security Agreement, dated as of April 1, 2015 by and among ADK Lumber City Operator, LLC, ADK Lagrange Operator, LLC , ADK Powder Springs Operator, LLC , ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC , Mountain Trace Nursing ADK, LLC, Mt. Kenn Nursing, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Glenvue H&R Nursing, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.	Incorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on April 7, 2015
10.34	Sublease Agreement, dated April 1, 2015, by and between ADK Georgia, LLC and C.R. of Lagrange, LLC	Incorporated by reference to Exhibit 99.10 of the Registrant's Current Report on Form 8-K filed on April 7, 2015
10.35	Sublease Agreement, dated as of January 16, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLC	Incorporated by reference to Exhibit 10.363 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

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10.36	Sublease Agreement, dated as of January 16, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLC	Incorporated by reference to Exhibit 10.364 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.37	Sublease Agreement, dated as of January 16, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLC	Incorporated by reference to Exhibit 10.365 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.38	Sublease Agreement, dated as of January 16, 2015, by and among Valley River Property Holdings, LLC, Valley River Nursing, LLC and Highlands of Fort Smith, LLC	Incorporated by reference to Exhibit 10.366 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.39	Sublease Agreement, dated as of January 16, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLC	Incorporated by reference to Exhibit 10.367 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.40	Sublease Agreement, dated as of January 16, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLC	Incorporated by reference to Exhibit 10.368 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.41	Sublease Agreement, dated as of January 16, 2015, by and among Benton Property Holdings, LLC, Benton Nursing, LLC and Highlands of Bentonville, LLC	Incorporated by reference to Exhibit 10.369 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.42	Sublease Agreement, dated as of January 16, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLC	Incorporated by reference to Exhibit 10.370 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.43	Sublease Agreement, dated as of January 16, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLC	Incorporated by reference to Exhibit 10.371 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.44	Sublease Agreement, dated as of January 16, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLC	Incorporated by reference to Exhibit 10.372 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.45	Loan Agreement, dated January 30, 2015, by and among Georgetown HC&R Property Holdings, LLC, Sumter Valley Property Holdings, LLC and The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.373 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.46	Promissory Note, dated January 30, 2015, issued by Georgetown HC&R Property Holdings, LLC, and Sumter Valley Property Holdings, LLC to The PrivateBank and Trust Company in the amount of $9,300,000	Incorporated by reference to Exhibit 10.374 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.47	Guaranty of Payment and Performance, dated January 30, 2015, issued by AdCare Health Systems, Inc. to and for the benefit of The PrivateBank and Trust Company in the amount of $9,300,000	Incorporated by reference to Exhibit 10.375 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.48	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated January 30, 2015, by Georgetown HC&R Property Holdings, LLC to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.376 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.49	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated January 30, 2015, by Sumter Valley Property Holdings, LLC to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.377 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.50	Seventh Amendment to Credit Agreement, dated January 30, 2015, by and between ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference to Exhibit 10.378 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

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10.51	Fourth Amendment to Credit Agreement, dated January 30, 2015, by and among NW 61st Nursing, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference to Exhibit 10.379 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.52	Sublease Agreement, dated as of January 31, 2015, by and between ADK Georgia, LLC. and 3460 Powder Springs Road Associates, L.P.	Incorporated by reference to Exhibit 10.380 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.53	Sublease Agreement, dated as of January 31, 2015, by and between ADK Georgia, LLC. and 3223 Falligant Avenue Associates, L.P.	Incorporated by reference to Exhibit 10.381 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.54	Promissory Note for exit fees (Northridge), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000	Incorporated by reference to Exhibit 10.382 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.55	Promissory Note for exit fees (Cumberland), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000	Incorporated by reference to Exhibit 10.383 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.56	Promissory Note for exit fees (River Valley), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000	Incorporated by reference to Exhibit 10.384 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.57	Promissory Note for exit fees (Sumter Valley), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000	Incorporated by reference to Exhibit 10.385 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.58	Loan Agreement, dated February 25, 2015, by and among APH&R Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, and The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.386 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.59	Promissory Note, dated February 25, 2015, issued by APH&R Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, and Woodland Hills HC Property Holdings, LLC to The PrivateBank and Trust Company in the amount of $12,000,000	Incorporated by reference to Exhibit 10.387 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.60	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated February 25, 2015, by Woodland Hills HC Property Holdings, LLC to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.388 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.61	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated February 25, 2015, by APH&R Property Holdings, LLC to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.389 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.62	Guaranty of Payment and Performance, dated February 25, 2015, issued by AdCare Health Systems, Inc. to and for the benefit of The PrivateBank and Trust Company in the amount of $12,000,000	Incorporated by reference to Exhibit 10.390 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.63	Absolute Assignment of Rents and Leases, dated February 25, 2015, by Woodland Hills HC Property Holdings, LLC, to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.391 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.64	Absolute Assignment of Rents and Leases, dated February 25, 2015, by APH&R Property Holdings, LLC, to and for the benefit of The PrivateBank and Trust Company	Incorporated by reference to Exhibit 10.392 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.65	Amendment to Promissory Note, dated March 25, 2015, by and between Riverchase Village ADK, LLC and Adcare Health Systems, Inc.	Incorporated by reference to Exhibit 10.393 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

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10.66	Amendment to Second Amended and Restated Note, dated March 25, 2015, by and between Christopher F. Brogdon and Adcare Health Systems, Inc.	Incorporated by reference to Exhibit 10.394 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.67	Third Amendment, dated March 25, 2015, by and among BAN NH, LLC, Senior NH, LLC, Oak Lake, LLC, Kenmetal, LLC, Living Center, LLC, Meeker Nursing, LLC, MCL Nursing, LLC, Harrah Whites Meadows Nursing, LLC, Meeker Property Holdings, LLC, McLoud Property Holdings, LLC, Harrah Property Holdings, LLC, GL Nursing, LLC, Christopher F. Brogdon, AdCare Oklahoma Management, LLC, AdCare Administrative Services, LLC, AdCare Health Systems, Inc., and Hearth & Home of Ohio, Inc.	Incorporated by reference to Exhibit 10.395 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.68	First Amendment to Executive Employment Agreement, dated March 25, 2015, by and among AdCare Health Systems, Inc. and William McBride, III	Incorporated by reference to Exhibit 10.396 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.69	Employment Agreement between AdCare Health Systems, Inc. and Allan J. Rimland, dated March 25, 2015	Incorporated by reference to Exhibit 10.397 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.70	Settlement Agreement and Release dated March 30, 2015, by and among Troy Clanton, Rose Rabon and South Star Services, Inc., and Chris Brogdon , Connie Brogdon, Kenmetal, LLC, Senior NH, LLC, BAN NH, LLC, Living Center, LLC, and Oak Lake, LLC, and Adcare Oklahoma Management, LLC, Adcare Health Systems, Inc., Adcare Property Holdings, LLC, and Boyd Gentry	Incorporated by reference to Exhibit 10.398 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.71	Settlement Agreement and Release dated March 30, 2015, by and among Starr Indemnity & Liability Company, Columbia Casualty Company, Chris Brogdon, Connie Brogdon, Kenmetal, LLC, Senior NH, LLC, BAN NH, LLC, Living Center, LLC, and Oak Lake, LLC, and AdCare Oklahoma Management, LLC, AdCare Health Systems, Inc., AdCare Property Holdings, LLC, and Boyd Gentry	Incorporated by reference to Exhibit 10.399 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.72	Settlement and Indemnification Agreement dated March 26, 2015, by and between Adcare Health Systems, Inc and its wholly owned subsidiaries and affiliates and Chris Brogdon and any affiliates or entities in which Chris Brogdon has an ownership interest	Incorporated by reference to Exhibit 10.400 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.73	Lease Agreement, dated February 27, 2015, by and between Georgetown HC&R Property Holdings, LLC and Blue Ridge in Georgetown LLC	Incorporated by reference to Exhibit 10.408 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.74	First Amendment to Lease Agreement, dated March 20, 2015, by and between Georgetown HC&R Property Holdings, LLC and Blue Ridge in Georgetown, LLC	Incorporated by reference to Exhibit 10.409 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.75	Lease Agreement, dated February 27, 2015 by and between Sumter Valley Property Holdings, LLC and Blue Ridge of Sumter LLC	Incorporated by reference to Exhibit 10.410 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.76	First Lease Amendment to Lease Agreement, dated March 20, 2015, by and between Sumter Valley Property Holdings, LLC and Blue Ridge of Sumter, LLC	Incorporated by reference to Exhibit 10.411 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.77	Lease Agreement dated February 27, 2015 by and between Mountain Trace Nursing ADK, LLC and Blue Ridge on the Mountain LLC	Incorporated by reference to Exhibit 10.412 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.78	First Amendment to Lease Agreement, dated March 20, 2015 by and between Mountain Trace Nursing ADK,LLC and Blue Ridge on the Mountain, LLC	Incorporated by reference to Exhibit 10.413 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

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10.79	Sublease Agreement, dated February 18, 2015 by and between CP Nursing, LLC and C.R. of College Park, LLC	Incorporated by reference to Exhibit 10.417 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.80	Sublease Termination Agreement, dated April 30, 2015, by and among Benton Property Holdings, LLC, Benton Nursing, LLC, and Highlands of Bentonville, LLC	Incorporated by reference to Exhibit 99.36 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.81	Sublease Termination Agreement, dated April 30, 2015, by and among Valley River Property Holdings, LLC, Valley River Nursing, LLC, and Highlands of Fort Smith, LLC	Incorporated by reference to Exhibit 99.37 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.82	Lease Inducement Fee Agreement, dated April 30, 2015, by and between AdCare Health Systems, Inc. and Aria Health Consulting, LLC	Incorporated by reference to Exhibit 99.38 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.83	Sublease Agreement, dated May 1, 2015 by and between NW 61 ^st Nursing, LLC and Southwest LTC-NW OKC, LLC	Filed herewith
10.84	Sublease Agreement, dated May 1, 2015 by and between QC Nursing, LLC and Southwest LTC-Quail Creek, LLC	Filed herewith
10.85	Fifth Modification Agreement, dated May 1, 2015, by and among Little Rock HC&R Property Holdings, LLC, AdCare Health Systems, Inc., Little Rock HC&R Nursing, LLC, and The PrivateBank and Trust Company	Filed herewith
10.86	Loan Modification Agreement, dated May 1, 2015, by and among Benton Property Holdings, LLC, Park Heritage Property Holdings, LLC and Valley River Property Holdings, LLC, as borrowers; AdCare Health Systems, Inc., Benton Nursing, LLC, Park Heritage Nursing, LLC, and Valley River Nursing, LLC, as Guarantors; and The PrivateBank and Trust Company, as lender	Filed herewith
10.87	Underwriting Agreement, dated April 8, 2015, by and between AdCare Health Systems, Inc. and MLV & Co. LLC, as the representative of the several underwriters named therein.	Incorporated by reference to Exhibit 1.1 of the Registrant's Current Report on Form 8-K filed on April 13, 2015
10.88	Fourth Amendment to Credit Agreement, dated May 30, 2013, by and between ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLC	Incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
101	The following financial information from AdCare Health Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (ii) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, (iv) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2015 and (v) the Notes to Consolidated Financial Statements.	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.



		ADCARE HEALTH SYSTEMS, INC.
		(Registrant)

Date:	May 14, 2015	/s/ William McBride III
		William McBride III
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date:	May 14, 2015	/s/ Allan J. Rimland
		Allan J. Rimland
		President and Chief Financial Officer
		(Principal Financial and Accounting Officer)



	Exhibit 4.1

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”), dated as of March 31, 2015, is entered into by and among AdCare Health Systems, Inc., a Georgia corporation (the “ Company ”), and the individuals and entities listed on Schedule A attached hereto (the “ Schedule of Purchasers ”) under the heading “Purchasers” (collectively, the “ Purchasers ” and each, a “ Purchaser ”) who became parties to this Agreement by executing and delivering a signature page in the form of Exhibit A attached hereto.

WHEREAS:

A. In connection with certain Subscription Agreements between the Company and the Purchasers (collectively, the “ Subscription Agreements ” and each, a “ Subscription Agreement ”), the Company has agreed, upon the terms and subject to the conditions of the Subscription Agreements, to issue and sell to the Purchasers the Company’s 10% Convertible Subordinated Notes Due April 30, 2017 (the “ Notes ”), which shall be convertible into the Company’s common stock, no par value per share (the “ Common Stock ”) (as converted, collectively, the “ Conversion Shares ”), in accordance with the terms of the Notes.

B. The Company has agreed to provide certain registration rights with respect to the Conversion Shares under the Securities Act of 1933, as amended (the “ Securities Act ”), as set forth in this Agreement.

NOW, THEREFORE , in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Purchasers hereby agree as follows:


1.	Definitions .

For purposes of this Agreement, the following terms shall have the meanings specified:

“ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

“ Filing Deadline ” means June 29, 2015.

“ Holder ” means any Person owning or having the right to acquire, through conversion of the Notes or otherwise, Registrable Securities, including initially each Purchaser and thereafter any permitted assignee thereof.

“ Other Shareholders ” shall mean Persons who, by virtue of agreements with the Company other than this Agreement, are entitled to include their securities in certain registrations hereunder.

“ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

“ Registrable Securities ” means the Conversion Shares and any other shares of Common Stock issuable pursuant to the terms of the Notes, and any shares of capital stock issued or issuable from time to time (with any adjustments) in replacement of, in exchange for or otherwise in respect of the Conversion Shares.

“ Registration Statement ” means a registration statement or statements prepared in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act (“ Rule 415 ”) or any successor rule providing for the offering of securities on a continuous or delayed basis.

“ Rule 144 ” means Rule 144 as promulgated by the SEC under the Securities Act, as such rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC.

“ SEC ” means the Securities and Exchange Commission.

“ SEC Guidance ” means: (i) any publicly available written or oral guidance, comments, requirements or requests of the staff of the SEC; and (ii) the Securities Act.

2. Registration .

(a) Filing of Registration Statement . On or before the Filing Deadline, the Company shall prepare and file with the SEC a Registration Statement on Form S-3 as a “shelf” registration statement under Rule 415 covering the resale of a number of shares of Registrable Securities equal to one hundred percent (100%) of the number of shares of Common Stock issuable upon conversion of the Notes (such number to be determined without regard to any restriction on such conversion). Such Registration Statement shall state, to the extent permitted by Rule 416 under the Securities Act, that it also covers such indeterminate number of additional shares of Common Stock as may become issuable upon the conversion of the Notes in order to prevent dilution resulting from stock splits, stock dividends or similar events.

(b) Alternative Registration Statement . Notwithstanding the foregoing Section 2(a), if on the date the Registration Statement contemplated by Section 2(a) is filed with the SEC, the Company does not meet the eligibility requirements for filing a Registration Statement on Form S-3, then in such case the Company shall instead prepare and file with the SEC a Registration Statement on Form S-1 covering the resale of the Registrable Securities as otherwise contemplated by Section 2(a).

(c) Effectiveness . The Company shall use its best efforts to cause the Registration Statement to become effective as soon as practicable after filing. The Company shall use its best efforts to: (i) respond promptly to any and all comments made by the staff of the SEC with respect to the Registration Statement; and (ii) submit promptly to the SEC after the Company learns that no review of the Registration Statement will be made by the staff of the SEC, or that the staff of the SEC has no further comments on the Registration Statement, as the case may be, a request for acceleration of the effectiveness of such Registration Statement to a time and date not later than two (2) Business Days

after the submission of such request. The Company shall use commercially reasonable efforts to maintain the effectiveness of each Registration Statement filed pursuant to this Agreement until the earliest to occur of: (A) the date on which all of the Registrable Securities eligible for resale thereunder have been publicly sold pursuant to either the Registration Statement or Rule 144; (B) the date on which all of the Registrable Securities remaining to be sold under such Registration Statement (in the reasonable opinion of counsel to the Company) may be immediately sold to the public under Rule 144 without volume limitations; and (C) the date is twenty-four (24) months after the date hereof (the period beginning on the date hereof and ending on the earliest to occur of (A), (B) or (C) above being referred to herein as the “ Registration Period ”).

(d) Allocation of Conversion Shares . The initial number of Conversion Shares included in any Registration Statement and each increase in the number thereof included therein shall be allocated pro rata among the Holders based on the aggregate number of Registrable Securities issuable to each Holder at the time the Registration Statement covering such initial number of Registrable Securities or increase thereof is declared effective by the SEC (such number to be determined using the conversion price of the Notes in effect at such time and without regard to any restriction on the ability of a Holder to convert such Holder’s Note as of such date). In the event that a Holder sells or otherwise transfers any of such Holder’s Registrable Securities, each transferee shall be allocated the portion of the then remaining number of Registrable Securities included in such Registration Statement allocable to the transferor.

(e) Registration of Other Securities . The Company may include any securities held by Other Shareholders on any Registration Statement filed by the Company on behalf of the Holders.

(f) Additional Registrations . Notwithstanding the registration obligations set forth in Section 2(a) and Section 2(b), in the event the SEC informs the Company that all of the Registrable Securities cannot, as a result of the application of Rule 415, be registered for resale as a secondary offering on a single registration statement, the Company agrees to promptly: (i) inform each of the Holders thereof and use its commercially reasonable efforts to file amendments to the initial Registration Statement as required by the SEC; or (ii) withdraw the Registration Statement and file a new registration statement, in either case covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-3 or such other form available to the Company to register for resale the Registrable Securities as a secondary offering; provided , however , that prior to filing such amendment or new Registration Statement, the Company shall be obligated to use its commercially reasonable efforts to advocate with the SEC for the registration of all of the Registrable Securities in accordance with the SEC Guidance. Notwithstanding any other provision of this Agreement, if any SEC Guidance sets forth a limitation of the number of Registrable Securities or other shares of Common Stock permitted to be registered on a particular Registration Statement as a secondary offering (and notwithstanding that the Company used commercial reasonable efforts to advocate with the SEC for the registration of all or a greater number of Registrable Securities), the number of Registrable Securities or other shares of Common Stock to be registered on such Registration Statement will be reduced on a pro rata basis. If the Company amends the initial Registration Statement or files a new Registration Statement, as the case may be, under clauses (i) or (ii) of this Section 2(f), then the Company will use its best efforts to file with the SEC, as promptly as allowed by SEC or SEC Guidance provided to the Company or to registrants of securities in general, one or more registration

statements on Form S-3 or such other form available to the Company to register for resale those Registrable Securities that were not registered for resale on the initial Registration Statement, as amended, or the new Registration Statement.

3. Obligations of the Company .

In the case of a Registration Statement effected by the Company pursuant to Section 2, the Company will use its commercially reasonable efforts to:

(a) prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act or to maintain the effectiveness of such Registration Statement during the Registration Period, or as may be reasonably requested by a Holder in order to incorporate information concerning such Holder or such Holder’s intended method of distribution;

(b) so long as a Registration Statement is effective covering the resale of the applicable Registrable Securities owned by a Holder, furnish to each Holder such number of copies of the prospectus included in such Registration Statement, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request;

(c) notify each Holder immediately after becoming aware of the occurrence of any event (but shall not, without the prior written consent of such Holder, disclose to such Holder any facts or circumstances constituting material non-public information) as a result of which the prospectus included in such Registration Statement, as then in effect, contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and as promptly as practicable prepare and file with the SEC and furnish to each Holder a copy of a supplement or an amendment to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing;

(d) prevent the issuance of any stop order or other order suspending the effectiveness of such Registration Statement;

(e) notify each Holder promptly after the date that such Registration Statement, or any successor registration statement, becomes effective of such effectiveness; and

(f) permit each Holder to review such Registration Statement and all amendments and supplements thereto within a reasonable period of time prior to the filing thereof with the SEC.

4. Obligations of Each Holder .

In connection with the registration of Registrable Securities pursuant to a Registration Statement, each Holder shall:

(a) timely furnish to the Company: (i) a completed Shareholder Questionnaire in such form as shall be reasonably requested by the Company; and (ii) such information in writing regarding itself and the intended method of disposition of such Registrable Securities as the Company shall reasonably request in order to effect the registration thereof;

(b) upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 3(c) or 3(d), immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement as described in Section 3(c), or withdrawal of the stop order referred to in Section 3(d), and use commercially reasonable efforts to maintain the confidentiality of such notice and its contents;

(d) notify the Company when it has sold all of the Registrable Securities held by it; and

(e) notify the Company in the event that any information supplied by such Holder in writing for inclusion in such Registration Statement or related prospectus is untrue or omits to state a material fact required to be stated therein or necessary to make such information not misleading in light of the circumstances then existing; immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and use commercially reasonable efforts to assist the Company as may be appropriate to make such amendment or supplement effective for such purpose.

5. Indemnification .

In the event that any Registrable Securities are included in a Registration Statement under this Agreement:

(a) To the extent permitted by law, the Company shall indemnify and hold harmless each Holder, the officers, directors, employees, agents and representatives of such Holder, and each Person, if any, who controls such Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), against any losses, claims, damages, liabilities or reasonable out-of-pocket expenses (whether joint or several) (collectively, including reasonable legal expenses or other expenses reasonably incurred in connection with investigating or defending same, “ Losses ”), insofar as any such Losses arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement under which such Registrable Securities were registered, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Subject to the provisions of Section 5(c), the Company will reimburse such Holder, and each such officer, director, employee, agent, representative or controlling Person, for any reasonable legal expenses or other out-of-pocket

expenses as reasonably incurred by any such entity or Person in connection with investigating or defending any Loss; provided , however , that the foregoing indemnity shall not apply to amounts paid in settlement of any Loss if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be obligated to indemnify any Person for any Loss to the extent that such Loss arises out of or is based upon (A) any disclosure or any omission or alleged omission (to state a material fact required to be stated therein or necessary to make statements therein not misleading) that is based upon or in conformity with written information furnished (or not furnished, in the case of an omission) by such Person expressly for use in such Registration Statement or (B) a failure of such Person to deliver or cause to be delivered the final prospectus contained in the Registration Statement and made available by the Company, if such delivery is required by applicable law.

(b) To the extent permitted by law, each Holder who is named in such Registration Statement as a selling shareholder, acting severally and not jointly, shall indemnify and hold harmless the Company, the officers, directors, employees, agents and representatives of the Company, and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any Losses to the extent that any such Losses arise out of or are based upon: (i) any disclosure or any omission or alleged omission (to state a material fact required to be stated therein or necessary to make statements therein not misleading) that is based upon or in conformity with written information furnished (or not furnished, in the case of an omission) by such Person expressly for use in such Registration Statement; or (ii) a failure of such Holder to deliver or cause to be delivered the final prospectus contained in the Registration Statement and made available by the Company, if such delivery is required under applicable law. Subject to the provisions of Section 5(c), such Holder will reimburse any legal or other expenses as reasonably incurred by the Company and any such officer, director, employee, agent, representative, or controlling Person, in connection with investigating or defending any such Loss; provided , however , that the foregoing indemnity shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld).

(c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 5, promptly deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and to assume the defense thereof with counsel selected by the indemnifying party and reasonably acceptable to the indemnified party. The indemnified party shall not have the right to retain its own counsel unless representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate under applicable standards of professional conduct due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the delivery of notice of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5 with respect to such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5 or with respect to any other action unless the indemnifying party is materially prejudiced as a result of not receiving such notice.

(d) In the event that the indemnity provided in Sections 5(a) or 5(b) of this Section 5 is unavailable or insufficient to hold harmless an indemnified party for any reason, the Company and each Holder agree, severally and not jointly, to contribute to the aggregate Losses to which the Company or such Holder may be subject in such proportion as is appropriate to reflect the relative fault of the Company and such Holder in connection with the statements or omissions which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by such Holder. The Company and each Holder agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 5(d), no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each Person who controls a Holder within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of such Holder shall have the same rights to contribution as such Holder, and each Person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this Section 5(d).

(e) The obligations of the Company and each Holder under this Section 5 shall survive the conversion of the Notes in full, the completion of any offering or sale of Registrable Securities pursuant to a Registration Statement under this Agreement, or otherwise.

6. Reports .

With a view to making available to each Holder the benefits of Rule 144 and any other similar rule or regulation of the SEC that may at any time permit such Holder to sell securities of the Company to the public without registration, the Company agrees to use its commercially reasonable efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144;

(b) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and

(c) furnish to such Holder, so long as such Holder owns any Registrable Securities, promptly upon written request (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144 and the Exchange Act; (ii) to the extent not publicly available through the SEC’s EDGAR database, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company with the SEC; and (iii) such other information as may be reasonably requested by such Holder in connection with such Holder’s compliance with any rule or regulation of the SEC which permits the selling of any such securities without registration.

7. Miscellaneous .

(a) Expenses of Registration . All reasonable expenses, other than underwriting discounts and commissions and fees and expenses of counsel and other advisors to each Holder, incurred in connection with the registrations, filings or qualifications described herein, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees and the fees and disbursements of counsel for the Company shall be borne by the Company.

(b) Amendment; Waiver . Except as expressly provided herein, neither this Agreement nor any term hereof may be amended or waived except pursuant to a written instrument executed by the Company and the Holders of at least a majority of the Registrable Securities into which all of the Notes then outstanding are convertible (without regard to any limitation on such conversion or exercise). Any amendment or waiver effected in accordance with this Section shall be binding upon each Holder, each future Holder and the Company. The failure of any party to exercise any right or remedy under this Agreement or otherwise, or the delay by any party in exercising such right or remedy, shall not operate as a waiver thereof.

(c) Notices . Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for the communications shall be:

If to the Company :

AdCare Health Systems, Inc.

Two Buckhead Plaza

3050 Peachtree Road NW

Suite 355

Atlanta, GA 30305

Telephone: (404) 781-2884

Facsimile: (404) 842-1899

Attention: Chief Executive Officer

with a copy (which shall not constitute notice) to:

Rogers & Hardin LLP

2700 International Tower

229 Peachtree Street NE

Atlanta, GA 30303

Attn: Lori A. Gelchion, Esq.

Tel: (404) 402-4646

Fax: (404) 230-0940

If to a Holder, to such Holder’s address and facsimile number provided to the Company on such Holder’s Signature Page to such Holder’s Subscription Agreement (or as may be updated by such Holder from time to time in writing to the Company).

(d) Assignment . Upon the transfer of any Note or Registrable Securities by a Holder, the rights of such Holder hereunder with respect to such securities so transferred shall be assigned automatically to the transferee thereof, and such transferee shall thereupon be deemed to be a “ Holder ” for purposes of this Agreement, as long as: (i) the Company is, within a reasonable period of time following such transfer, furnished with written notice of the name and address of such transferee; (ii) the transferee agrees in writing with the Company to be bound by all of the provisions hereof; and (iii) such transfer is made in accordance with the applicable requirements of the Notes and all applicable state and federal securities laws.

(e) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall be deemed one and the same instrument. This Agreement, once executed by a party, may be delivered to any other party hereto by facsimile or other electronic transmission.

(f) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and to be performed entirely within the State of Georgia.

(g) Holder of Record . A Person is deemed to be a Holder whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the record owner of such Registrable Securities.

(h) Entire Agreement . This Agreement, the Notes and the Subscription Agreements constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Notes and the Subscription Agreements supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

(i) Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(j) Third Party Beneficiaries . This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

[Signature Pages Follow]

IN WITNESS WHEREOF , the undersigned have executed this Registration Rights Agreement as of the date first-above written.



ADCARE HEALTH SYSTEMS, INC.

	By:

		Name:

		Title:

[Additional Signature Pages Follow]

Signature Page to Registration Rights Agreement

EXHIBIT A

PURCHASER SIGNATURE PAGE

By execution and delivery of this signature page, the undersigned hereby agrees to: (i) become a party to that certain Registration Rights Agreement (the “ Registration Rights Agreement ”) by and among AdCare Health Systems, Inc., a Georgia corporation (the “ Company ”), and the purchasers of the Company’s 10% Convertible Subordinated Notes Due April 30, 2017 (the “ Notes ”), dated as of the first date on which of the Company closes upon and issues any of such Notes; and (ii) be bound by the terms and conditions of the Registration Rights Agreement as a Purchaser and a Holder thereunder and authorizes this signature page to be attached to the Registration Rights Agreement.



PURCHASER NAME:

By:
Name:
Title:

DATE:

ADDRESS:

_______________________________

Tel: ___________________________

Fax: ___________________________

Email: _________________________

Signature Page

Registration Rights Agreement



	Exhibit 4.2

THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE.

ADCARE HEALTH SYSTEMS, INC.

10% CONVERTIBLE SUBORDINATED NOTE DUE APRIL 30, 2017



No. [ ]
Issuance Date: [ ]		Original Principal Amount: [ ]

This 10% CONVERTIBLE SUBORDINATED NOTE (including all 10% Convertible Subordinated Notes issued in transfer or replacement hereof, this “ Note ”) is one of a series of 10% Convertible Subordinated Notes originally issued by AdCare Health Systems, Inc., a Georgia corporation (the “ Company ”), as contemplated by the Company’s Confidential Offering Memorandum dated March 24, 2015, and pursuant to Subscription Agreements relating thereto between the Company and the Persons signatory thereto (collectively, the “ Notes ”). Certain capitalized terms used herein are defined in Section 24.

FOR VALUE RECEIVED , the Company hereby promises to pay to [ ] or his, her or its registered assigns (the “ Holder ”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms of this Note by redemption, conversion or otherwise, the “ Principal ”) when due, whether upon the Maturity Date, acceleration, redemption or otherwise (in each case in accordance with the terms of this Note) and to pay interest on any outstanding Principal (“ Interest ”) at the applicable interest rate from the date set forth above as the Issuance Date (the “ Issuance Date ”) until the same becomes due and payable, whether upon an Interest Payment Date, acceleration, conversion, redemption or otherwise (in each case in accordance with the terms of this Note).

1. Payments of Principal . On the Maturity Date, the Company shall pay to the Holder an amount in cash representing all outstanding Principal and accrued and unpaid Interest thereon.

2. Interest; Interest Rate; Default Interest Rate . Interest on this Note shall: (i) accrue daily on the outstanding Principal commencing on the Issuance Date, (ii) be computed on

the basis of a 360-day year of twelve 30-day months, and (iii) be payable in cash in arrears on each of March 31, June 30, September 30 and December 31 of each year during which this Note remains outstanding and the Maturity Date (each, an “ Interest Payment Date ”), with the first Interest Payment Date being, notwithstanding the foregoing, June 30, 2015. Interest hereunder shall be paid to the record holder of this Note. Absent an Event of Default (as defined in Section 4), Interest on the outstanding Principal shall accrue at the rate of 10.00% per annum (the “ Interest Rate ”). During the existence and continuance of an Event of Default, the outstanding Principal shall accrue Interest at a rate of 14.00% per annum (the “ Default Rate ”); provided , however , that if such Event of Default is subsequently cured, then the rate of Interest on this Note will be reduced from the Default Rate to the Interest Rate on the date of such cure.

3. Conversion of Notes . This Note shall be convertible into shares of the Company’s common stock, no par value (the “ Common Stock ”), on the terms and conditions set forth in this Section 3. The shares of Common Stock issuable upon conversion of this Note pursuant to this Section 3 are referred to herein collectively as the “ Conversion Shares .”

(a) Conversion Right . Subject to the provisions of Section 3(d), the Holder shall be entitled to convert any Conversion Amount (as defined in Section 3(b)(i)) into fully paid and nonassessable Conversion Shares in accordance with Section 3(c), at the Conversion Rate (as defined in Section 3(b)). The Company shall not issue any fractional Conversion Shares upon any conversion. If the issuance would result in the issuance of a fractional Conversion Share, then the Company shall round such fractional Conversion Share to the nearest whole Conversion Share. The Company shall pay any and all expenses of issuance, including transfer, stamp and similar taxes that may be payable with respect to the issuance and delivery of Conversion Shares.

(b) Conversion Rate . The number of Conversion Shares issuable upon conversion of any Conversion Amount shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “ Conversion Rate ”).

(i) “ Conversion Amount ” means the sum of (A) the amount of outstanding Principal to be converted, redeemed or otherwise with respect to which this determination is made, plus (B) the amount of accrued and unpaid Interest with respect to such Principal.

(ii) “ Conversion Price ” is $4.25.

(i) Optional Conversion . To convert any Conversion Amount into Conversion Shares on any date (a “ Conversion Date ”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or before 5:00 p.m., Atlanta Time, on such date, a copy of an executed notice of conversion in the form attached as Exhibit I (the “ Conversion Notice ”) to the Company and (B) surrender this Note to a common carrier for delivery to the Company as soon as practicable on or following such date (or provide an indemnification undertaking acceptable to the Company with respect to this Note in the case of its loss, theft or destruction). On or before the second (2nd) Business Day following

the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the “ Transfer Agent ”). On or before the third (3rd) Trading Day following the date of receipt of a Conversion Notice, the Company shall: (x) provided that (1) the Transfer Agent is participating in the Depository Trust Company’s (“ DTC ”) Fast Automated Securities Transfer Program and (2) the Registration Condition is satisfied, credit such aggregate number of Conversion Shares to which the Holder shall be entitled to the Holder’s balance account with DTC through its Deposit/Withdrawal at Custodian system or (y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or if the Registration Condition is not satisfied, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder, for the number of Conversion Shares to which the Holder shall be entitled, provided , however , that such certificate shall bear the following restrictive legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE OFFERED OR SOLD UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE.

Notwithstanding anything herein to the contrary, the Company shall not be obligated to issue any Conversion Shares until this Note is physically surrendered to the Company, or the Holder notifies the Company that this Note has been lost, stolen or destroyed and provides an indemnification undertaking acceptable to the Company to indemnify the Company from any loss incurred by it in connection therewith. If the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than four (4) Trading Days after receipt of this Note and at its own expense, issue and deliver to the Holder a new Note (in accordance with Section 14(d)) representing the outstanding Principal not converted. The Person or Persons entitled to receive the Conversion Shares issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such Conversion Shares.

(ii) Company’s Failure to Timely Convert . If the Company shall fail to issue a certificate to the Holder or credit the Holder’s balance account with DTC for the number of Conversion Shares which the Company is obligated to issue to the Holder upon conversion of any Conversion Amount on or prior to the date which is three (3) Trading Days after the Company’s receipt of the facsimile (or otherwise delivered) copy of a Conversion Notice, then the Holder, upon written notice to the Company, may void its

Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued before the date of such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within three (3) Trading Days after the Company’s receipt of the facsimile (or otherwise delivered) copy of a Conversion Notice, the Company shall fail to issue and deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number of Conversion Shares to which the Company is obligated to issue to the Holder upon conversion of any Conversion Amount or on any date of the Company’s obligation to deliver Conversion Shares as contemplated pursuant to clause (y) below, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a “ Buy-In ”), then the Company shall, within three (3) Trading Days after the Holder’s request and in the Holder’s discretion, either (x) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and other out of pocket expenses, if any) for the shares of Common Stock so purchased (the “ Buy-In Price ”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate and the applicable portion of the Note will be deemed to have been converted, or (y) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (I) such number of shares of Common Stock, times (II) the Closing Bid Price on the Conversion Date.

(iii) Registration; Book-Entry . The Company shall maintain a register (the “ Register ”) for the recordation of the names and addresses of the Holders of the Notes and the principal amount of the Notes held by such Holders (the “ Registered Notes ”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error. The Company and the Holders of the Notes shall treat each Person whose name is recorded in the Register as the owner of a Note for all purposes, including, without limitation, the right to receive payments of Principal and Interest hereunder, notwithstanding notice to the contrary. Subject to compliance with any requirements of applicable federal and state securities laws and regulations and the provisions of Section 13: (A) a Holder may assign or sell a Registered Note in whole or in part only by registration of such assignment or sale on the Register; and (B) upon its receipt of a request to assign or sell all or part of any Registered Note by the Holder, the Company shall record the information contained therein in the Register and issue one or more new Registered Notes in the same aggregate principal amount as the principal amount of the surrendered Registered Note to the designated assignee or transferee pursuant to Section 14.

(iv) Pro Rata Conversion; Disputes . In the event that the Company receives a Conversion Notice from more than one Holder of the Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(d), shall convert from

each Holder of the Notes electing to have Notes converted on such date a pro rata amount of such Holder’s portion of such Holder’s Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such Holder relative to the aggregate principal amount of all the Notes submitted for conversion on such date. In the event of a dispute as to the number of Conversion Shares issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of Conversion Shares not in dispute and resolve such dispute in accordance with Section 19.

(v) Company Optional Redemption . If (i) at any time after the Issuance Date the arithmetic average of the Weighted Average Price of the Common Stock for any ten (10) consecutive Trading Days equals or exceeds 125% of the Conversion Price (subject to appropriate adjustments pursuant to Section 6) and (ii) the Resale Condition has been satisfied as of the Company Optional Redemption Notice Date (as defined below), then the Company shall have the right, at its option and sole discretion, and without penalty, to redeem all or any portion of the outstanding Principal under this Note (the “ Company Optional Redemption Amount ”) as designated in the Company Optional Redemption Notice (as defined below) (a “ Company Optional Redemption ”). The portion of this Note subject to redemption under this Section shall be redeemed by the Company in cash at a price equal to the sum of (i) 100% of the outstanding Principal being redeemed plus (ii) any accrued and unpaid Interest on such outstanding Principal (the “ Company Optional Redemption Price ”). The Company may exercise its right to require redemption under this Section by delivering a written notice by facsimile or overnight courier to the Holder (the “ Company Optional Redemption Notice ,” and the date the Company sends such notice is referred to as the “ Company Optional Redemption Notice Date ”). Each Company Optional Redemption Notice shall be irrevocable unless revocation by the Company is consented to by the Holder in writing. The Company Optional Redemption Notice shall state (x) the date on which the Company Optional Redemption shall occur (the “ Company Optional Redemption Date ”), which date shall not be prior to March 31, 2016, and shall not be less than sixty (60) days following the Company Optional Redemption Notice Date, and (y) the aggregate outstanding Principal of this Note which the Company has elected to be subject to Company Optional Redemption from the Holder pursuant to this Section 3(c)(v) on the Company Optional Redemption Date. Notwithstanding anything to the contrary in this Section 3(c)(v), until the Company Optional Redemption Price is paid, in full, the Company Optional Redemption Amount may be converted, in whole or in part, by the Holders into Conversion Shares pursuant to Section 3. If the Holder so elects, any or all of the Principal converted by the Holder after the Company Optional Redemption Notice Date shall reduce the Company Optional Redemption Amount of this Note required to be redeemed on the Company Optional Redemption Date. Redemptions made pursuant to this Section 3(c)(v) shall be made in accordance with Section 9.

(d) Limitations on Conversions; Beneficial Ownership .

(i) Notwithstanding anything in this Note to the contrary, the Company shall not effect any conversion of this Note, and the Holder shall not have the right to convert any portion of this Note pursuant to Section 3, to the extent that after giving effect to such conversion, the Holder (together with the Holder’s Affiliates) would (A) beneficially own in excess of 4.9% (the “ Maximum Percentage ”) of the number of shares of Common Stock outstanding immediately after giving effect to such conversion, or (B) control in excess of the Maximum Percentage of the total voting power of the Company’s securities outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (1) conversion of the remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its Affiliates and (2) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Notes) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). For purposes of this Section 3(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written request of the Holder, the Company shall within two (2) Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.9% specified in such notice; provided that (1) any such increase or decrease will not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (2) any such increase or decrease will apply only to the Holder and not to any other Holder of Notes.

(ii) The Company shall not be obligated to issue any Conversion Shares upon conversion of this Note if the issuance of such shares would exceed the aggregate number of shares of Common Stock which the Company may issue upon conversion of the Notes without breaching the Company’s obligations under the rules or regulations of the Principal Market or any other Eligible Market on which the Conversion Stock is then quoted or listed (the “ Exchange Cap ”), except that such limitation shall not apply in the event that the Company obtains the approval of its shareholders as required by the applicable

rules of the Principal Market (or such Eligible Market, as applicable) for issuances of Common Stock in excess of such amount. Unless such approval is obtained, no Holder of the Notes shall be issued in the aggregate upon conversion of Notes, Conversion Shares in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the sum of the aggregate Original Principal Amount of the Notes purchased by such Holder of outstanding Notes and the denominator of which is the sum of the aggregate Original Principal Amount of the Notes purchased by all Holders of outstanding Notes (with respect to each Holder, the “ Exchange Cap Allocation ”). In the event that any Holder shall sell or otherwise transfer any of such Holder’s Notes, the transferee shall be allocated a pro rata portion of such Holder’s Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee. In the event that any Holder of Notes shall convert all of such Holder’s Notes into a number of Conversion Shares which, in the aggregate, is less than such Holder’s Exchange Cap Allocation, then the difference between such Holder’s Exchange Cap Allocation and the number of Conversion Shares actually issued to such Holder shall be allocated to the respective Exchange Cap Allocations of the remaining Holders of Notes on a pro rata basis in proportion to the aggregate Outstanding Principal amount of the Notes then held by each such Holder.

(iii) The Company shall not be obligated to issue any Conversion Shares upon conversion of this Note until the Principal Market has approved the additional listing of such Conversion Shares. The Company shall apply for such approval as soon as practicable after the Issuance Date.

4. Rights Upon Event of Default .

(a) Event of Default . An Event of Default (as defined below) may only be waived by the written consent of the Holder. Unless waived pursuant to the immediately preceding sentence, each of the following events shall constitute an “ Event of Default ”:

(iii) the Company’s failure to pay to the Holder any amount of Principal or Interest by the seventh (7 ^th ) Business Day following the date when due under this Note (including, without limitation, the Company’s failure to pay any redemption amounts hereunder);

(iv) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively, “ Bankruptcy Law ”), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official (a “ Custodian ”), (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due; or

(v) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company or any of its subsidiaries

in an involuntary case, (B) appoints a Custodian of the Company or any of its subsidiaries or (C) orders the liquidation of the Company or any of its subsidiaries.

(b) Redemption Right . Upon the occurrence and during the continuance of an Event of Default with respect to this Note, the Company shall within two (2) Business Days deliver written notice thereof via facsimile and overnight courier (an “ Event of Default Notice ”) to the Holder. Subject to Section 11(c), at any time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (the “ Event of Default Redemption Notice ”) to the Company, which Event of Default Redemption Notice shall indicate the Conversion Amount of this Note the Holder is electing to require the Company to redeem. The portion of this Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the Conversion Amount to be redeemed as specified in the Event of Default Redemption Notice (the “ Event of Default Redemption Price ”). Redemptions required by this Section 4(b) shall be made in accordance with the provisions of Section 9 and Section 11(c). To the extent redemptions required by this Section 4(b) are deemed or determined by a court of competent jurisdiction to be prepayments of this Note by the Company, such redemptions shall be deemed to be voluntary prepayments.

5. Rights Upon Change of Control .

(a) No sooner than twenty (20) days nor later than ten (10) days prior to the consummation of a Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a “ Change of Control Notice ”). At any time during the period commencing on the earlier to occur of (i) any definitive written agreement by the Company, which upon consummation of the transaction contemplated thereby would reasonably be expected to result in a Change of Control, and (ii) the Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days after the date of the consummation of such Change of Control, the Required Holders may require the Company to redeem all or any portion of this Note (and a pro rata portion of all of the other Notes) by delivering written notice thereof (“ Holders Change of Control Redemption Notice ”) to the Company, which Holders Change of Control Redemption Notice shall indicate the Conversion Amount of this Note (and the pro rata portion of all of the other Notes) that the Required Holders are electing to require the Company to redeem. The portion of this Note subject to redemption pursuant to this Section 5(a) shall be redeemed by the Company in cash at a price equal to the Conversion Amount to be redeemed as specified in the Holders Change of Control Redemption Notice (the “ Holders Change of Control Redemption Price ”).

(b) In addition, at any time during the period commencing on the earlier to occur of (i) any definitive written agreement by the Company, which upon consummation of the transaction contemplated thereby would reasonably be expected to result in a Change of Control, and (ii) the Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days

after the date of the consummation of such Change of Control, the Company may redeem all or any portion of this Note (and a pro rata portion of all of the other Notes) by delivering written notice thereof (“ Company Change of Control Redemption Notice ”) to the Holder, which Company Change of Control Redemption Notice shall indicate the Conversion Amount of this Note (and the pro rata portion of all of the other Notes) that the Company is electing to redeem. The portion of this Note subject to redemption pursuant to this Section 5(b) shall be redeemed by the Company in cash at a price equal to the Conversion Amount to be redeemed as specified in the Company Change of Control Redemption Notice (the “ Company Change of Control Redemption Price ”).

(c) Redemptions required by Section 5(a) or Section 5(b) shall be made in accordance with the provisions of Section 9 and Section 11(c) and shall have priority to payments to shareholders in connection with a Change of Control. To the extent redemptions required by Section 5(a) or Section 5(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Notes by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 5, but subject to Section 3(d): (i) until the Holders Change of Control Redemption Price is paid in full, the Conversion Amount submitted for redemption under Section 5(a) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3 and, if so converted, the Holder shall not be entitled to receive the Holders Change of Control Redemption Price with respect to such Conversion Amount; and (ii) until the Company Change of Control Redemption Price is paid in full, the Conversion Amount submitted for redemption under Section 5(b) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3 and, if so converted, the Holder shall not be entitled to receive the Company Change of Control Redemption Price with respect to such Conversion Amount.

6. Conversion Price Adjustments .

(a) Adjustment of Conversion Price Upon Issuance of Common Stock . If prior to September 30, 2015, the Company issues or sells, or in accordance with this Section 6(a) is deemed to have issued or sold, any shares of Common Stock (excluding Excluded Securities and shares of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded Securities) for a consideration per share (the “ New Issuance Price ”) less than a price (the “ Applicable Price ”) equal to the Conversion Price in effect immediately prior to such issue or sale (the foregoing a “ Dilutive Issuance ”), then immediately after such Dilutive Issuance the Conversion Price then in effect shall be reduced to an amount equal to the New Issuance Price. For purposes of determining the adjusted Conversion Price under this Section 6(a), the following shall be applicable (except to Excluded Securities):

(i) Issuance of Options . If the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable

upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6 (a)(i), the “lowest price per share for which one share of Common Stock is issuable upon exercise of any such Options or upon conversion, exercise or exchange of any such Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option less any consideration paid or payable by the Company with respect to such one share of Common Stock upon the granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such shares of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Convertible Securities.

(ii) Issuance of Convertible Securities . If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 6(a)(ii), the “lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security and upon conversion, exercise or exchange of such Convertible Security less any consideration paid or payable by the Company with respect to such one share of Common Stock upon the issuance or sale of such Convertible Security and upon conversion, exercise or exchange of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of this Note has been or is to be made pursuant to other provisions of this Section 6(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

(iii) Change in Option Price or Rate of Conversion . If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such

Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 6(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Subscription Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

(iv) Adjustment Limitation . Notwithstanding anything to the contrary in this Note and subject to Section 3(d) in all respects: (A) no adjustment pursuant to Section 6(a) shall be effected to the extent it would cause the number of shares of Common Stock issued, plus the number of shares of Common Stock issuable, in respect of all Notes in the aggregate to exceed 3,850,405 shares of Common Stock; and (B) the Holder agrees not to convert this Note for more than the Holder’s Exchange Cap Allocation (assuming that the 3,850,405 shares of Common Stock is the Exchange Cap for purposes of this Section 6(a)(iv)).

(b) Adjustment of Conversion Price Upon Subdivision or Combination of Common Stock . If the Company at any time on or after the Issuance Date subdivides (by any stock dividend, stock split, recapitalization or otherwise) outstanding shares of its Common Stock into a greater number of shares, then the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time on or after the Issuance Date combines (by combination, reverse stock split or otherwise) outstanding shares of its Common Stock into a smaller number of shares, then the Conversion Price in effect immediately prior to such combination will be proportionately increased.

7. Noncircumvention . The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note.

8. Reservation of Authorized Shares .

(a) Reservation . The Company shall initially reserve out of its authorized and unissued Common Stock a number of Conversion Shares for each of the Notes equal to 120% of the Conversion Rate with respect to the Conversion Amount of each such Note as of the Issuance Date (assuming the Notes are convertible on such date). So long as any of the Notes are outstanding, the Company shall take all action reasonably necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes, 120% of the number of the Conversion Shares as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding; provided that at no time shall the number

of Conversion Shares so reserved be less than the number of Conversion Shares required to be reserved by the previous sentence (without regard to any limitations on conversions) (the “ Required Reserve Amount ”). The initial number of Conversion Shares reserved for conversions of the Notes and each increase in the number of Conversion Shares so reserved shall be allocated pro rata among the Holders of the Notes based on the Original Principal Amount of the Notes purchased by each Holder or increase in the number of reserved Conversion Shares, as the case may be (the “ Authorized Share Allocation ”). In the event that the initial Holder of any Notes shall sell or otherwise transfer any of such Holder’s Notes, each transferee shall be allocated a pro rata portion of such Holder’s Authorized Share Allocation. Any Conversion Shares reserved and allocated to any Person that ceases to hold any Notes shall be allocated to the remaining Holders of the Notes, pro rata based on the Principal amount of the Notes then held by such Holders.

(b) Insufficient Authorized Shares . If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of Conversion Shares equal to the Required Reserve Amount (an “ Authorized Share Failure ”), then the Company shall use commercially reasonable efforts to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than one hundred twenty (120) days after the occurrence of such Authorized Share Failure, the Company shall either (i) hold a meeting of its shareholders for the approval of an increase in the number of authorized shares of Common Stock or (ii) obtain such approval by written consent and take all action necessary to rectify the Authorized Share Failure. In connection with such meeting, the Company shall provide each shareholder with a proxy statement and shall use commercially reasonable efforts to solicit its shareholders’ approval of such increase in authorized shares of Common Stock and to cause the Company’s Board of Directors to recommend to the shareholders that they approve such proposal. In connection with such written consent, the Company shall provide each shareholder with an information statement and shall use commercially reasonable efforts to solicit its shareholders’ approval of such increase in authorized shares of Common Stock and to cause the Company’s Board of Directors to recommend to the shareholders that they approve such proposal.

9. Redemptions .

(a) Mechanics . The Company shall deliver the applicable Event of Default Redemption Price to the Holder within five (5) Business Days after the Company’s receipt of the Holder’s Event of Default Redemption Notice. If the Required Holders have submitted a Holders Change of Control Redemption Notice in accordance with Section 5(a), then the Company shall deliver the applicable Holders Change of Control Redemption Price to the Holder (i) concurrently with the consummation of such Change of Control if such notice is received at least three (3) Business Days prior to the consummation of such Change of Control and (ii) within five (5) Business Days after the Company’s receipt of such notice otherwise. If the Company has submitted a Company Change of Control Redemption Notice in accordance with Section 5(b), then the Company shall deliver the applicable Company Change of Control Redemption Price to the Holder

within five (5) Business Days after the consummation of such Change of Control. In the event of a redemption of a Conversion Amount which is less than all of the outstanding Principal of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with Section 14(d)) representing the outstanding Principal which has not been redeemed. In the event that the Company does not pay the applicable Redemption Price to the Holder within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion Amount that was submitted for redemption and for which the applicable Redemption Price has not been paid. Upon the Company’s receipt of such notice, (A) the applicable Redemption Notice shall be null and void with respect to such Conversion Amount, (B) the Company shall immediately return this Note, or issue a new Note (in accordance with Section 14(d)) to the Holder representing such Conversion Amount to be redeemed and (C) the Conversion Price of this Note or such new Notes shall be adjusted to the Conversion Price as in effect on the date on which the applicable Redemption Notice is voided.

(b) Redemption by Other Holders . If the Company receives a Redemption Notice and one or more Other Redemption Notices, during the seven (7) Business Day period beginning on and including the date which is three (3) Business Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and including the date which is three (3) Business Days after the Company’s receipt of the Holder’s Redemption Notice and the Company is unable to redeem all amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven (7) Business Day period, then the Company shall redeem a pro rata amount from each Holder of the Notes (including the Holder) based on the principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven (7) Business Day period.

10. Voting Rights . This Note shall not entitle the Holder to any of the rights of a shareholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of shareholders or any other proceedings of the Company, unless and to the extent converted into Conversion Shares in accordance with the terms hereof.

11. Subordination .

(a) Subordination to Senior Debt . The Company, for itself, its successors and assigns, covenants and agrees, and the Holder by acceptance of this Note, likewise covenants and agrees that the payment of the Principal of, Interest on and all other amounts with respect to this Note is subordinated in right of payment to the payment of all existing and future Senior Debt (as defined below) of the Company. “ Senior Debt ” means the principal of, premium, if any, and accrued and unpaid interest on, and all other amounts with respect to, all Indebtedness of the Company, whether outstanding on the date of issuance of this Note or any of the other Notes or thereafter created, incurred or assumed, unless, in the agreement or instrument creating or evidencing such Indebtedness or pursuant to which the same is outstanding, it is provided that such Indebtedness is subordinated to Senior Debt of the Company or that such Indebtedness is not

superior in right of payment to this Note; provided , however , that “Senior Debt” shall not to be deemed to include any Indebtedness of the Company to any of its subsidiaries or Affiliates.

(b) Rank; Future Subordinated Debt . This Note will rank pari passu with all of the other Notes and with all existing and future subordinated debt of the Company, including, without limitation, the Company’s outstanding Subordinated Convertible Notes due April 30, 2017 and July 31, 2015.

(c) Default . Upon any default of the Company in the payment of principal of or interest on Senior Debt, whether at maturity or otherwise, no payment may be made with respect to the Principal of or Interest on this Note or in respect of any redemption, retirement, purchase or other acquisition of this Note, unless and until such default has been cured or waived or has ceased. Upon any other default with respect to any Senior Debt permitting the holders thereof to accelerate the maturity thereof and upon written notice thereof given to the Company, no payment may be made with respect to the Principal of or Interest on this Note or in respect of any redemption, retirement, purchase or other acquisition of this Note for a period terminating upon the cure, waiver or cessation of such default.

(d) Liquidation; Dissolution, Etc . Upon any payment or distribution of the assets of the Company to creditors upon any dissolution, total or partial liquidation or reorganization of or similar proceeding relating to the Company, the holders of Senior Debt will be entitled to receive payment in full before the Holder is entitled to receive any payment in respect of this Note.

12. Vote to Issue, or Change the Terms of, Notes . Except as otherwise provided herein, this Note may only be amended by the written consent of the Holder and the Company.

13. Transfer . This Note has been issued subject to certain investment representations of the Holder set forth in the Holder’s Subscription Agreement. This Note and any Conversion Shares issued upon conversion of this Note may not be offered, sold, assigned or transferred by the Holder unless in compliance with, and subject to, this Section 13. The Holder understands and acknowledges that:

(a) the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (i) subsequently registered thereunder, or (ii) the Holder shall have delivered to the Company an opinion of counsel reasonably acceptable to the Company to the effect that the Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from the registration of the Securities Act, including, but not limited to, Rule 144;

(b) without limiting the generality of the foregoing, any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and

(c) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder, except as required under the Registration Rights Agreement.

Notwithstanding the foregoing, the Securities may be pledged in connection with a bona fide margin account or other loan or financing arrangement secured by the Securities and the pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and the Holder in effecting a pledge of Securities shall not be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Note, including, without limitation, this Section 13; provided , that in order to make any sale, transfer or assignment of Securities, the Holder and the Holder’s pledgee makes the disposition in accordance with or pursuant to a registration statement or an exemption under the Securities Act.

14. Reissuance of this Note .

(a) Transfer and Reissuance . If the Holder seeks to transfer this Note subject to and in compliance with Section 14, then the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 14(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less than the entire outstanding Principal is being transferred, a new Note (in accordance with Section 14(d)) to the Holder representing the outstanding Principal not being transferred.

(b) Lost, Stolen or Mutilated Note . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to the Company acceptable to the Company and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 14(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations . This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 14(d) and in Principal amounts of at least $10,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

(d) Issuance of New Notes . Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note: (i) shall be of like tenor with this Note; (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 14(a) or Section 14(c), the Principal designated by the Holder which, when added to the Principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes); (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note;

(iv) shall have the same rights and conditions as this Note; and (v) shall represent accrued and unpaid Interest on the Principal from the Issuance Date.

15. Remedies and Injunctive Relief . The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note at law or in equity (including a decree of specific performance and/or other injunctive relief). Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

16. Payment of Collection, Enforcement and Other Costs . If (i) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note; or (ii) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.

17. Construction; Headings . This Note shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any Person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

18. Failure or Indulgence Not Waiver . No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

19. Dispute Resolution . In the case of a dispute as to the determination of the Closing Bid Price or the Weighted Average Price or the arithmetic calculation of the Conversion Rate, the Conversion Price or any Redemption Price, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business Days of receipt, or deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within one (1) Business Day submit via facsimile (i) the disputed determination of the Closing Bid Price or the Weighted Average Price to an independent, reputable investment bank or financial advisor selected by the Company or (ii) the disputed arithmetic calculation of the Conversion Rate, Conversion Price or any Redemption Price to the Company’s independent, outside accountant. The Company

shall cause the investment bank, financial advisor or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such investment bank’s, financial advisor’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error. Each of the Company and the Holder shall pay 50% of the fees and expenses of such investment bank, financial advisor or accountant, as the case may be, incurred pursuant to this Section 19.

20. Notices; Payments .

(a) Notices . Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Note must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for the communications shall be:

If to the Company:

AdCare Health Systems, Inc.

Two Buckhead Plaza

3050 Peachtree Road NW

Suite 355

Atlanta, GA 30305

Telephone: (404) 781-2884

Facsimile: (404) 842-1899

Attention: Chief Executive Officer

With a copy (for informational purposes only) to:

Rogers & Hardin LLP

2700 International Tower

229 Peachtree Street, N.E.

Atlanta, GA 30303

Telephone: (404) 420-4646

Facsimile: (404) 230-0940

Attention: Lori A. Gelchion, Esq.

If to the Holder, to the Holder’s address and facsimile number provided to the Company on the Holder’s Signature Page to the Holder’s Subscription Agreement (as may be updated by the Holder from time to time in writing to the Company), with copies to:

Institutional Securities Corporation

3500 Oaklawn Avenue, Suite 400

Dallas, TX 75219

Telephone: (214) 520-1115

Facsimile: (214) 520-3203

Attention: Chris Doucet

or to the other address and/or facsimile number and/or to the attention of the other Person as the recipient party has specified by written notice given to each other party. Written confirmation of receipt (A) given by the recipient of the notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of the transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.

(b) Notices Upon Certain Events . The Company will give written notice to the Holder (i) as soon as practicable upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

(c) Payments . Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing; provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Payment Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date.

21. Cancellation . After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

22. Waiver of Notice . To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note.

23. Governing Law . This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note

shall be governed by, the internal laws of the State of Georgia, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Georgia or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Georgia. The Company and the Holder irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of Georgia and of the United States District Court for the Northern District of Georgia, Atlanta Division, for any lawsuits, claims or other proceedings arising out of or relating to this Note and agree not to commence any such lawsuit, claim or other proceeding except in such courts. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Note. THE COMPANY HEREBY IRREVOCABLY WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

24. Certain Definitions . For purposes of this Note, the following terms shall have the following meanings:

(a) “ Affiliate ” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person, it being understood for purposes of this definition that “control” of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

(b) “ Approved Stock Plan ” means: (i) any employee benefit plan which has been approved by the Company’s shareholders pursuant to which the Company's securities, may be issued to any employee, officer or director for services provided to the Company; or (ii) any warrants to purchase shares of Common Stock (and the shares of Common Stock deemed to have been issued or sold by the Company in connection with such warrants) issued to an employee of the Company or one of its subsidiaries as an inducement to such employee accepting such employment in accordance with Section 711(a) of the NYSE MKT Company Guide, or any successor rule or regulation of the Principal Market or any similar provision of any other Eligible Market.

(d) “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(e) “ Change of Control ” means any Fundamental Transaction other than (i) any consolidation or merger of the Company, or any reorganization, recapitalization or reclassification of the Common Stock, in which holders of the Company’s voting power immediately prior to such consolidation, merger, reorganization, recapitalization or reclassification continue after such consolidation, merger, reorganization, recapitalization or reclassification to hold publicly traded securities and, directly or indirectly, are, in all material respect, the holders of the voting power of the surviving entity (or entities with the authority or voting power to elect the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities) after such consolidation, merger, reorganization, recapitalization or reclassification; or (ii) a Fundamental Transaction (A) in which at least one-half of the members of the Company’s Board of Directors immediately prior to such transaction remain as members of the Company’s Board of Directors immediately after such transaction or (B) in which the replacement of more than one-half of the members of the Company’s Board of Directors immediately after such transaction is approved by a majority of those individuals who are members of the Company’s Board of Directors immediately prior to such transaction.

(f) “ Closing Bid Price ” means, for any security as of any date, the last closing bid price for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price then the last bid price of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported by OTC Markets, Inc. If the Closing Bid Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 19. All such determinations are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction during the applicable calculation period.

(g) “ Contingent Obligation ” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

(h) “ Convertible Securities ” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

(i) “ Eligible Market ” means the Principal Market, The New York Stock Exchange, the NYSE MKT, The NASDAQ Global Select Market, The NASDAQ Capital Market, The NASDAQ Global Market or the OTC Bulletin Board.

(j) “ Excluded Securities ” means the shares of Common Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon the conversion of the Notes; (iii) upon conversion of any Options or Convertible Securities which are outstanding on the Subscription Date, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date; and (iv) for consideration other than cash pursuant to a merger, consolidation, acquisition of stock, acquisition of assets (including leases) or similar business combination.

(k) “ Fundamental Transaction ” means that: (i) the Company shall, directly or indirectly, in one or more related transactions, (A) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person or Persons, or (B) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (C) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding shares of Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), or (D) reorganize, recapitalize or reclassify the Voting Stock of the Company; or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock of the Company.

(l) “ GAAP ” means United States generally accepted accounting principles, consistently applied.

(m) “ Holders ” or “ Holders of the Notes ” mean, collectively, the holders of the Notes (including, without limitation, the Holder of this Note), and each of the foregoing, individually, a “ Holder ” or “ Holder of the Notes .”

(n) “ Indebtedness ” of any Person means, without duplication: (i) all indebtedness for borrowed money; (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property or services, including (without limitation) “capital leases” in accordance with GAAP (other than trade payables entered into in the ordinary course of business); (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments; (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any

property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (vi) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified as a capital lease; (vii) all indebtedness referred to in clauses (i) through (vi) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness; and (viii) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above.

(o) “ Maturity Date ” means April 30, 2017.

(p) “ Options ” means any rights, or warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(q) “ Original Principal Amount ” means, with respect to any Note, the Original Principal Amount set forth on the first page of such Note on the date of its original issuance.

(r) “ Other Redemption Notice ” means a notice from any of the Holders of the other Notes for redemption or repayment as a result of an event or occurrence substantially similar to the events or occurrences described in Section 4(b) or Section 5(a).

(s) “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(t) “ Principal Market ” means the NYSE MKT.

(u) “ Redemption Notices ” means, collectively, the Event of Default Redemption Notices, the Holders Change of Control Redemption Notices, the Company Change of Control Redemption Notices and the Company Optional Redemption Notices, and each of the foregoing, individually, a “ Redemption Notice .”

(v) “ Redemption Prices ” means, collectively, the Event of Default Redemption Price, the Holders Change of Control Redemption Price, the Company Change of Control Redemption Price and the Company Optional Redemption Price, and each of the foregoing, individually, a “ Redemption Price .”

(w) “ Registration Condition ” means that the resale of the Conversion Shares shall have been registered under the Securities Act and that such registration continues to be effective and available for such resale.

(x) “ Registration Rights Agreement ” means the Registration Rights Agreement with respect to the Notes to which the Company, the Holder and the Holders of the other Notes are parties.

(y) “ Required Holders ” means the Holders of the Notes representing at least a majority of the aggregate Principal amount of the Notes then outstanding.

(z) “ Resale Condition ” means that either: (i) the Registration Condition is satisfied as of the date of the Company Optional Redemption Notice; or (ii) that the Conversion Shares are salable under Rule 144 of the Securities Act without any volume limitations.

(aa) “ Rule 144 ” means Rule 144 promulgated under the Securities Act (or any rule successor thereto).

(bb) “ Securities ” means, collectively, this Note and the Conversion Shares.

(cc) “ Securities Act ” means the Securities Act of 1933, as amended.

(dd) “ Subscription Date ” means the date on which the Company accepts Subscription Agreements for the Notes.

(ee) “ Subscription Agreement ” means the Subscription Agreement between the Company and the Holder, with respect to the issuance of this Note.

(ff) “ Trading Day ” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(gg) “ Voting Stock ” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

(hh) “ Weighted Average Price ” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its “ Volume at Price ” functions, or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the

electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or such other time as such market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume- weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported by OTC Markets, Inc. If the Weighted Average Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 19.

[Signature Page Follows]

IN WITNESS WHEREOF , the Company has caused this 10% Convertible Subordinated Note Due April 30, 2017 to be duly executed as of the Issuance Date set out above.




		ADCARE HEALTH SYSTEMS, INC.

		By:
		Name:
		Title:

EXHIBIT I

ADCARE HEALTH SYSTEMS, INC.

CONVERSION NOTICE

Reference is made to the 10% Convertible Subordinated Note Due April 30, 2017 (the “ Note ”) issued to the undersigned by AdCare Health Systems, Inc. (the “ Company ”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the amount of the outstanding Principal (as defined in the Note) of the Note indicated below into shares of Common Stock, no par value (the “ Common Stock ”), of the Company, as of the date specified below. Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Note.


1.	Date of Conversion:


2.	Amount of outstanding Principal to be converted:


3.	Amount of accrued and unpaid Interest on such outstanding Principal:


4.	Total Conversion Amount (Sum of lines 2 and 3):


5.	Please confirm the following information:

Conversion Price:

Number of shares of Common Stock to be issued in respect of the Conversion Amount:


6.	Please issue the Common Stock into which the Note is being converted in the following name and to the following address:

Name of Holder:

Address:

Facsimile Number:

Telephone Number:



By:

Title:

Dated:

Holder Requests Delivery to be made: (check one)

o	By Delivery of Physical Certificates to the Above Address

o	Through Depository Trust Corporation
	(Broker DTC Participant Code: )



(Broker Name, Telephone and Contact Person:

		)
(Account No.:	)



	Exhibit 10.25

EXECUTION VERSION

AMENDED AND RESTATED

PROMISSORY NOTE

(Cumberland)

$93,133.00 April 3, 2015

FOR VALUE RECEIVED, ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “Borrower” ), hereby promises to pay to the order of KEYBANK NATIONAL ASSOCIATION , a national banking association (together with any and all of its successors and assigns and/or any other holder of this Note, “Lender” ), without offset, in immediately available funds in lawful money of the United States of America, at 1200 Abernathy Road, NE, Suite 1550, Atlanta, Georgia 30328 (or such other address as Lender may designate in written notice to Borrower from time to time), the principal sum of NINETY-THREE THOUSAND ONE HUNDRED THIRTY-THREE AND NO/100 DOLLARS ($93,133.00) (the “Indebtedness” ), as hereinafter provided.

Section 1. Indebtedness . The Indebtedness represents the portion of certain deferred “exit fees” allocated by Borrower and Lender to the skilled nursing facility identified as the “ Facility ” on Schedule 1 attached hereto and incorporated herein by this reference, which fees are owing by Borrower to Lender in connection with a mortgage loan in the original principal amount of $16,500,000 (the “ Mortgage Loan ”), made by Lender to the subsidiaries of Borrower identified on Schedule 1 hereto as the “ Mortgage Loan Borrowers, ” pursuant to that certain Secured Loan Agreement dated as of December 28, 2012, as amended (the “ Mortgage Loan Agreement ”), executed by and among Lender, the Mortgage Loan Borrowers, and the guarantors of the Mortgage Loan (including Borrower), and guaranteed by Borrower pursuant to that certain Payment Guaranty dated as of December 28, 2012, as amended. The Mortgage Loan was refinanced by a third-party lender as of February 25, 2015. This Note is being executed and delivered by Borrower to Lender in connection with the other promissory notes, each dated the date hereof, executed by Borrower, payable to the order of Lender and being more particularly described on Schedule 1 hereto (as the same may be modified, amended, extended, renewed, restated, reallocated or replaced from time to time, collectively, the “ Other Notes ,” and each individually, an “ Other Note ”). This Note and the Other Notes are collectively given in place of the obligations of Borrower and the Mortgage Borrowers to pay any “exit fees” pursuant to the terms of the Loan Documents (as defined in the Mortgage Loan Agreement) with respect to the Projects (as defined in the Mortgage Loan Agreement), the Sumter Valley Facility (as defined in Schedule 1 hereto) and the Stone County Facilities (as defined in Schedule 1 hereto).

Section 2. Repayment of the Indebtedness .

(a) The entire principal balance of this Note then unpaid shall be finally due and payable upon the Maturity Date (as hereinafter defined). The term “ Maturity Date ,” as used in this Note shall mean the earliest to occur of the following: (i) August 25, 2016, as such date may be extended as provided in Section 2(b) hereof (the “ Scheduled Maturity Date ”), (ii) the date on which a Transfer (as hereinafter defined) shall occur, (iii) the date on which Borrower or any subsidiary of Borrower engages any Person (as hereinafter defined) other than Lender or an affiliate of Lender to originate or otherwise obtain mortgage loan financing (an “ Agency Financing ”) for the Facility that is to be insured or guaranteed by the U.S. Department of Health and Urban Development (“ HUD ”), and (iv) the date on which the maturity of this Note is accelerated as provided in Section 7 hereof. The term, “ Person ,” as used in this Note, means any

6417564.1

natural person, firm, corporation, limited liability company, trust, joint venture, association, company, unlimited liability company, partnership, Governmental Authority or other entity (whether or not having separate legal personality).

(b) In the event Lender or any Lender affiliate shall have submitted a loan package for the Facility to HUD for approval, and the date on which such loan package is submitted (the “ Agency Financing Submission Date ”) is less than one hundred twenty (120) days prior to the original Scheduled Maturity Date, then the original Scheduled Maturity Date shall automatically be deemed to have been extended, on a one-time basis only, to the one hundred twentieth (120 ^th ) day after the Agency Financing Submission Date, without the necessity of any further action on the part of Borrower or Lender.

(c) If, prior to the Maturity Date, the Facility shall have been refinanced either (i) by a permanent loan from Lender or an affiliate of Lender, or (ii) by an Agency Financing originated by Lender or any affiliate of Lender, then and in such an event the entire remaining principal amount of this Note then outstanding shall be forgiven, this Note shall be cancelled and no further amounts shall be payable by Borrower hereunder.

Section 3. Interest . The Indebtedness evidenced by this Note shall not bear interest, except for Default Interest (as hereinafter defined). If Borrower fails to pay the Indebtedness on the Maturity Date, the delinquent Indebtedness shall bear interest at the rate of fifteen percent (15%) per annum, calculated on the basis of a three hundred sixty (360)-day year for the actual number of days elapsed, which interest shall be due and payable on demand.

Section 4. Prepayment . Borrower may prepay the principal balance of this Note, in full at any time or in part from time to time, without fee, premium or penalty.

Section 5. Certain Provisions Regarding Payments . All payments made under this Note shall be applied, to the extent thereof, to Lender’s Expenses (as hereinafter defined), to Default Interest (if any), and to unpaid principal, in such manner and order as Lender may elect in its sole discretion, any instructions from Borrower or anyone else to the contrary notwithstanding. Remittances shall be made without offset, demand, counterclaim, deduction, or recoupment (each of which is hereby waived) and shall be accepted subject to the condition that any check or draft may be handled for collection in accordance with the practice of the collecting bank or banks. Acceptance by Lender of any payment in an amount less than the amount then due on any indebtedness shall be deemed an acceptance on account only, notwithstanding any notation on or accompanying such partial payment to the contrary, and shall not in any way (a) waive or excuse the existence of an Event of Default (as hereinafter defined), (b) waive, impair or extinguish any right or remedy available to Lender hereunder, or (c) waive the requirement of punctual payment and performance or constitute a novation in any respect. Whenever any payment under this Note falls due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day.

Section 6. Events of Default . The occurrence of any one or more of the following shall constitute an “Event of Default” under this Note:

(a) Borrower fails to pay when and as due and payable any amounts payable by Borrower to Lender under the terms of this Note or any of the Other Notes;

(b) Borrower fails to perform, observe or keep any covenant or agreement not referred to in Section 6(a) , and such failure is not cured within ten (10) days after written notice of such failure is given by Lender to Borrower;

(d) Borrower shall commence a voluntary case concerning any Borrower under Title 11 of the United States Code entitled “Bankruptcy” as now or hereafter in effect, or any successor thereto or any other present or future bankruptcy or insolvency statute (the “ Bankruptcy Code ”); or an involuntary proceeding is commenced against Borrower under the Bankruptcy Code and relief is ordered against Borrower, or the petition is controverted but not dismissed or stayed within sixty (60) days after the commencement of the ease, or a custodian (as defined in the Bankruptcy Code) is appointed for or takes charge of all or substantially all of the property of Borrower; or Borrower commences any other proceedings under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Borrower; or there is commenced against Borrower any such proceeding which remains undismissed or unstayed for a period of sixty (60) days; or Borrower fails to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding, or any order of relief or other order approving any such case or proceeding is entered; or Borrower by any act or failure to act indicates its consent to, approval of, or acquiescence in any such case or proceeding or the appointment of any custodian or the like of or for it for any substantial part of its property or suffers any such appointment to continue undischarged or unstayed for a period of sixty (60) days;

(e) Borrower shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall consent to the appointment of a receiver or trustee or liquidator of all of its property or the major part thereof or if all or a substantial part of the assets of Borrower are attached, seized, subjected to a writ or distress warrant, or are levied upon, or come into the possession of any receiver, trustee, custodian or assignee for the benefit of creditors.

For purposes of this Note, the term “ Transfer ” shall mean (a) the sale, transfer or conveyance of the Facility by the Property Subsidiary, or (b) the occurrence of an event or series of events by which (i) Borrower ceases to be the direct or indirect owner of the Property Subsidiary, or (ii) any Person or group of Persons acting in concert as a partnership or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases, merger, consolidation, sale of all or substantially all assets, or otherwise, have become, after the date hereof, the “beneficial owner” (within the meaning of such term under Rule 13d-3 under the federal Securities and Exchange Act of 1934, as amended) of equity interests of Borrower representing voting power having the right to elect at least 49% of the members of Borrower’s board of directors.

Section 7. Remedies . Upon the occurrence of an Event of Default, Lender may at any time thereafter exercise any one or more of the following rights, powers and remedies:

(a) Lender may accelerate the Maturity Date and declare the unpaid principal balance and accrued but unpaid interest (if any) on this Note, and all other amounts payable hereunder, at once due and payable, and upon such declaration the same shall at once be due and payable; and.

(b) Lender may exercise any of its other rights, powers and remedies available at law or in equity.

Notwithstanding the foregoing, upon the occurrence of any Event of Default under Section 6(d) hereof, all amounts evidenced by this Note shall automatically become due and payable, without any presentment, demand, protest or notice of any kind to Borrower.

Section 8. Remedies Cumulative . All of the rights and remedies of Lender under this Note are cumulative of each other and of any and all other rights at law or in equity, and the exercise by Lender of any one or more of such rights and remedies shall not preclude the simultaneous or later exercise by Lender of any or all such other rights and remedies. No single or partial exercise of any right or remedy shall exhaust it or preclude any other or further exercise thereof, and every right and remedy may be exercised at any time and from time to time. No failure by Lender to exercise, nor delay in exercising,

any right or remedy shall operate as a waiver of such right or remedy or as a waiver of any Event of Default.

Section 9 Costs and Expenses of Enforcement and Preparation . Borrower agrees to pay to Lender on demand all costs and expenses incurred by Lender in seeking to collect this Note, including court costs and reasonable attorneys’ fees and expenses actually incurred, whether or not suit is filed hereon, or whether in connection with bankruptcy, insolvency or appeal. Borrower agrees to pay Lender on demand for all costs incurred (including, but not limited to, Lender’s counsel’s attorney’s fees) in preparing this Note and all other documents.

Section 10. Service of Process . Borrower hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by serving of a copy thereof by certified mail, postage prepaid, return receipt requested, to Borrower. Borrower irrevocably agrees that such service shall be deemed to be service of process upon Borrower in any such suit, action, or proceeding. Nothing in this Note shall affect the right of Lender to serve process in any manner otherwise permitted by law and nothing in this Note will limit the right of Lender otherwise to bring proceedings against Borrower in the courts of any jurisdiction or jurisdictions.

Section 11. Successors and Assigns . The terms of this Note shall bind and inure to the benefit of the permitted successors and assigns of the parties; provided, however, that in no event shall Borrower delegate or assign its rights or obligations under this Note to any other Person (whether by operation of law or otherwise), without Lender’s prior written consent, and any such delegation or assignment by Borrower (or attempted by Borrower) in violation of the terms of this Note shall be void.

Section 12. General Provisions . Time is of the essence with respect to Borrower’s obligations under this Note. If more than one Person executes this Note as Borrower, all of said parties shall be jointly and severally liable for payment of the indebtedness evidenced hereby. Borrower and each party executing this Note as Borrower hereby severally (a) waive demand, presentment for payment, notice of dishonor and of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices (except any notices which are specifically required by this Note), filing of suit and diligence in collecting this Note or enforcing any of the security herefor; (b) agree to any substitution, subordination, exchange or release of any such security or the release of any party primarily or secondarily liable hereon; (c) agree that Lender shall not be required first to institute suit or exhaust its remedies hereon against Borrower or others liable or to become liable hereon or to perfect or enforce its rights against them or any security herefor; (d) consent to any extensions or postponements of time of payment of this Note for any period or periods of time and to any partial payments, before or after maturity, and to any other indulgences with respect hereto, without notice thereof to any of them; and (e) submit (and waive all rights to object) to non-exclusive personal jurisdiction of any state or federal court sitting in the State of Georgia for the enforcement of any and all obligations under this Note; (f) waive the benefit of all homestead and similar exemptions as to this Note; (g) agree that their liability under this Note shall not be affected or impaired by any determination that any title, security interest or lien taken by Lender to secure this Note is invalid or unperfected; and (h) hereby subordinate to the Indebtedness any and all rights against Borrower and any security for the payment of this Note, whether by subrogation, agreement or otherwise, until this Note is paid in full. A determination that any provision of this Note is unenforceable or invalid shall not affect the enforceability or validity of any other provision and the determination that the application of any provision of this Note to any Person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to other Persons or circumstances. This Note may not be amended except in a writing specifically intended for such purpose and executed by the party against whom enforcement of the amendment is sought. Captions and headings in this Note are for convenience only and shall be disregarded in construing it. This Note and its validity, enforcement and interpretation shall be governed by the laws of the State of Georgia (without regard to any principles of conflicts of laws) and applicable United States federal law. Whenever a time of day is referred to herein, unless otherwise specified such time shall be the local time of the place where payment of this Note is to be made. The term “Business Day” shall mean a day of the year on which banks are

not required or authorized to close in Atlanta, Georgia. The words “include” and “including” shall be interpreted as if followed by the words “without limitation.”

Section 13. Notices . Any notice, demand, request or other communication which any party hereto may be required or may desire to give hereunder shall be in writing and shall be deemed to have been properly given (a) if hand delivered, when delivered; (b) if mailed by United States Certified Mail (postage prepaid, return receipt requested), three (3) Business Days after mailing (c) if by Federal Express or other reliable overnight courier service, on the next Business Day after delivered to such courier service or (d) if by telecopier, on the day of transmission so long as copy is sent on the same day by overnight courier as set forth below:

If to Borrower :

AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, Georgia 30076

Attention: E. Clinton Cain, CPA, MAcc

Vice President of Finance

Telephone: (404) 781-2896

Facsimile: (404) 842-1899

With a courtesy copy to :

Holt, Ney, Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, Georgia 30339

Attention: Gregory P. Youra, Esq.

Telephone: (770) 956-9600

Facsimile: (770) 956-1490

If to Lender:

KeyBank National Association

1200 Abernathy Road, NE

Suite 1550

Atlanta, Georgia 30328

Attention: Paul F. Di Vito, SVP

Telephone: (770) 510-2085

Facsimile: (770) 510-2195

With a courtesy copy to :

Bryan Cave LLP

One Atlantic Center, Fourteenth Floor

1201 West Peachtree Street, NW

Atlanta, Georgia 30309-3488

Attention: Robert C. Lewinson, Esq.

Telephone: (404) 572-6623

Facsimile: (404) 420-0623

If applicable state or federal law should at any time be judicially interpreted so as to render usurious any amount called for under this Note, or contracted for, charged, taken, reserved, or received with respect to the Indebtedness, or if Lender’s exercise of the option to accelerate the Maturity Date, or if any prepayment by Borrower results in Borrower having paid any interest in excess of that permitted by applicable law, then it is Lender’s express intent that all excess amounts theretofore collected by Lender shall be credited on the principal balance of this Note, and the provisions of this Note shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new documents, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. All sums paid or agreed to be paid to Lender for the use or forbearance of the Indebtedness shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Indebtedness.

Section 15. Reinstatement . To the extent that any payment or payments made to Lender, or any payment or proceeds of any property received by Lender, in the reduction of the principal indebtedness or as payment of accrued interest are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, to a surety, or any other Person liable for any of the repayment of principal or accrued interest, whether directly or indirectly, as a debtor in possession or to a receiver or any other Person under the Bankruptcy Code, or any other state or federal law, common law or equitable cause (collectively, the “Invalidated Payments” ) whether pursuant to a settlement or a judgment by a court of competent jurisdiction, then the portion of such principal repayment or accrued interest payment equal to the Invalidated Payments and the lien or security title, if any, given to secure this Note will be revived and will continue in full force and effect as if such payment or proceeds had never been received by Lender.

Section 16. Amendment and Restatement . THIS NOTE AMENDS AND RESTATES, IN ITS ENTIRETY, THAT CERTAIN PROMISSORY NOTE DATED FEBRUARY 25, 2015, MADE BY BORROWER TO THE ORDER OF LENDER IN THE FACE PRINCIPAL AMOUNT OF $170,000.00 PERTAINING TO THE FACILITY (THE “ PRIOR NOTE ”). THE INDEBTEDNESS EVIDENCED HEREBY DOES NOT CONSTITUTE A NOVATION OR A NEW DEBT, BUT REPRESENTS A CONTINUATION AND REALLOCATION OF THE INDEBTEDNESS EVIDENCED BY THE PRIOR NOTE AND THE OTHER NOTES AND CONSTITUTES A RENEWAL AND RESTRUCTURING OF SUCH INDEBTEDNESS.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the date first above written.

SIGNATURE PAGE TO AMENDED AND RESTATED PROMISSORY NOTE (CUMBERLAND)

SCHEDULE 1

TO AMENDED AND RESTATED PROMISSORY NOTE

(Cumberland)

Mortgage Loan


Borrowers:	Woodland Hills Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, each a Georgia limited liability company


Facility :	Cumberland Health and Rehabilitation Center

1516 South Cumberland Street

Little Rock, AR 72202

Property

Subsidiary : APH&R HC Property Holdings, LLC, a Georgia limited liability company

Other Notes : 1.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $154,038.00, relating to the skilled nursing facility known as Northridge Healthcare and Rehabilitation, 2501 John Ashley Drive, North Little Rock, AR 72114, the owner of which is Northridge HC&R Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $138,877.00, relating to the skilled nursing facility known as River Valley Health and Rehabilitation Center, 5301 Wheeler Avenue, Fort Smith, AR 72901, the owner of which is River Valley Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $185,092.00, relating to the skilled nursing facility known as Sumter Valley Nursing and Rehab Center, 1761 Pinewood Road, Sumter, SC 29154 (the “ Sumter Valley Facility ”), the owner of which is Sumter Valley Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated April 3, 2015 in the original principal amount of $108,861.00, relating to the healthcare facilities known as (i) Stone County Residential Care Center, 414 Massay Ave, Mountain View, AR, 72560, the owner of which is Mountain Top Property Holdings, LLC, a Georgia limited liability company, and (ii) Stone County Nursing and Rehabilitation Center, 706 Oak Grove Street, Mountain View, AR, 72560, the owner of which is Mt. V Property Holdings, LLC, a Georgia limited liability company (collectively the “ Stone County Facilities ).



	Exhibit 10.26

EXECUTION VERSION

AMENDED AND RESTATED

PROMISSORY NOTE

(Northridge)

$154,038.00 April 3, 2015

FOR VALUE RECEIVED, ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “Borrower” ), hereby promises to pay to the order of KEYBANK NATIONAL ASSOCIATION , a national banking association (together with any and all of its successors and assigns and/or any other holder of this Note, “Lender” ), without offset, in immediately available funds in lawful money of the United States of America, at 1200 Abernathy Road, NE, Suite 1550, Atlanta, Georgia 30328 (or such other address as Lender may designate in written notice to Borrower from time to time), the principal sum of ONE HUNDRED FIFTY-FOUR THOUSAND, THIRTY-EIGHT AND NO/100 DOLLARS ($154,038.00) (the “Indebtedness” ), as hereinafter provided.

Section 2. Repayment of the Indebtedness .

6417227.2

Note, means any natural person, firm, corporation, limited liability company, trust, joint venture, association, company, unlimited liability company, partnership, Governmental Authority or other entity (whether or not having separate legal personality).

Section 4. Prepayment . Borrower may prepay the principal balance of this Note, in full at any time or in part from time to time, without fee, premium or penalty.

Section 6. Events of Default . The occurrence of any one or more of the following shall constitute an “Event of Default” under this Note:

(a) Borrower fails to pay when and as due and payable any amounts payable by Borrower to Lender under the terms of this Note or any of the Other Notes;

Section 7. Remedies . Upon the occurrence of an Event of Default, Lender may at any time thereafter exercise any one or more of the following rights, powers and remedies:

(b) Lender may exercise any of its other rights, powers and remedies available at law or in equity.

any right or remedy shall operate as a waiver of such right or remedy or as a waiver of any Event of Default.

of the year on which banks are not required or authorized to close in Atlanta, Georgia. The words “include” and “including” shall be interpreted as if followed by the words “without limitation.”

If to Borrower :

AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, Georgia 30076

Attention: E. Clinton Cain, CPA, MAcc

Vice President of Finance

Telephone: (404) 781-2896

Facsimile: (404) 842-1899

With a courtesy copy to :

Holt, Ney, Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, Georgia 30339

Attention: Gregory P. Youra, Esq.

Telephone: (770) 956-9600

Facsimile: (770) 956-1490

If to Lender:

KeyBank National Association

1200 Abernathy Road, NE

Suite 1550

Atlanta, Georgia 30328

Attention: Paul F. Di Vito, SVP

Telephone: (770) 510-2085

Facsimile: (770) 510-2195

With a courtesy copy to :

Bryan Cave LLP

One Atlantic Center, Fourteenth Floor

1201 West Peachtree Street, NW

Atlanta, Georgia 30309-3488

Attention: Robert C. Lewinson, Esq.

Telephone: (404) 572-6623

Facsimile: (404) 420-0623

this Note. If applicable state or federal law should at any time be judicially interpreted so as to render usurious any amount called for under this Note, or contracted for, charged, taken, reserved, or received with respect to the Indebtedness, or if Lender’s exercise of the option to accelerate the Maturity Date, or if any prepayment by Borrower results in Borrower having paid any interest in excess of that permitted by applicable law, then it is Lender’s express intent that all excess amounts theretofore collected by Lender shall be credited on the principal balance of this Note, and the provisions of this Note shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new documents, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. All sums paid or agreed to be paid to Lender for the use or forbearance of the Indebtedness shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Indebtedness.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the date first above written.

SIGNATURE PAGE TO AMENDED AND RESTATED PROMISSORY NOTE (NORTHRIDGE)

SCHEDULE 1

TO AMENDED AND RESTATED PROMISSORY NOTE

(Northridge)

Mortgage Loan


Borrowers:	Woodland Hills Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, each a Georgia limited liability company


Facility :	Northridge Healthcare and Rehabilitation

2501 John Ashley Drive

North Little Rock, AR 72114

Property


Subsidiary :	Northridge HC&R Property Holdings, LLC, a Georgia limited liability company

Other Notes 1.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $93,133.00, relating to the skilled nursing facility known as Cumberland Health and Rehabilitation Center, 1516 South Cumberland Street, Little Rock, AR 72202, the owner of which is APH&R HC Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $138,877.00, relating to the skilled nursing facility known as River Valley Health and Rehabilitation Center, 5301 Wheeler Avenue, Fort Smith, AR 72901, the owner of which is River Valley Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $185,092.00, relating to the skilled nursing facility known as Sumter Valley Nursing and Rehab Center, 1761 Pinewood Road, Sumter, SC 29154 (the “ Sumter Valley Facility ”), the owner of which is Sumter Valley Property Holdings, LLC, a Georgia limited liability company.



	Exhibit 10.27

EXECUTION VERSION

AMENDED AND RESTATED

PROMISSORY NOTE

(River Valley)

$138,877.00 April 3, 2015

FOR VALUE RECEIVED, ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “Borrower” ), hereby promises to pay to the order of KEYBANK NATIONAL ASSOCIATION , a national banking association (together with any and all of its successors and assigns and/or any other holder of this Note, “Lender” ), without offset, in immediately available funds in lawful money of the United States of America, at 1200 Abernathy Road, NE, Suite 1550, Atlanta, Georgia 30328 (or such other address as Lender may designate in written notice to Borrower from time to time), the principal sum of ONE HUNDRED THIRTY-EIGHT THOUSAND EIGHT HUNDRED SEVENTY-SEVEN AND NO/100 DOLLARS ($138,877.00) (the “Indebtedness” ), as hereinafter provided.

Section 2. Repayment of the Indebtedness .

6417570.1

maturity of this Note is accelerated as provided in Section 7 hereof. The term, “ Person ,” as used in this Note, means any natural person, firm, corporation, limited liability company, trust, joint venture, association, company, unlimited liability company, partnership, Governmental Authority or other entity (whether or not having separate legal personality).

Section 4. Prepayment . Borrower may prepay the principal balance of this Note, in full at any time or in part from time to time, without fee, premium or penalty.

Section 6. Events of Default . The occurrence of any one or more of the following shall constitute an “Event of Default” under this Note:

(a) Borrower fails to pay when and as due and payable any amounts payable by Borrower to Lender under the terms of this Note or any of the Other Notes;

Section 7. Remedies . Upon the occurrence of an Event of Default, Lender may at any time thereafter exercise any one or more of the following rights, powers and remedies:

(b) Lender may exercise any of its other rights, powers and remedies available at law or in equity.

any right or remedy shall operate as a waiver of such right or remedy or as a waiver of any Event of Default.

If to Borrower :

AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, Georgia 30076

Attention: E. Clinton Cain, CPA, MAcc

Vice President of Finance

Telephone: (404) 781-2896

Facsimile: (404) 842-1899

With a courtesy copy to :

Holt, Ney, Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, Georgia 30339

Attention: Gregory P. Youra, Esq.

Telephone: (770) 956-9600

Facsimile: (770) 956-1490

If to Lender:

KeyBank National Association

1200 Abernathy Road, NE

Suite 1550

Atlanta, Georgia 30328

Attention: Paul F. Di Vito, SVP

Telephone: (770) 510-2085

Facsimile: (770) 510-2195

With a courtesy copy to :

Bryan Cave LLP

One Atlantic Center, Fourteenth Floor

1201 West Peachtree Street, NW

Atlanta, Georgia 30309-3488

Attention: Robert C. Lewinson, Esq.

Telephone: (404) 572-6623

Facsimile: (404) 420-0623

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the date first above written.

SIGNATURE PAGE TO AMENDED AND RESTATED PROMISSORY NOTE (RIVER VALLEY)

SCHEDULE 1

TO AMENDED AND RESTATED PROMISSORY NOTE

(River Valley)

Mortgage Loan


Borrowers:	Woodland Hills Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, each a Georgia limited liability company

Facility : River Valley Health and Rehabilitation Center

5301 Wheeler Avenue

Fort Smith, AR 72901

Property

Subsidiary : River Valley Property Holdings, LLC, a Georgia limited liability company

Other Notes : 1.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $93,133.00, relating to the skilled nursing facility known as Cumberland Health and Rehabilitation Center, 1516 South Cumberland Street, Little Rock, AR 72202, the owner of which is APH&R HC Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $185,092.00, relating to the skilled nursing facility known as Sumter Valley Nursing and Rehab Center, 1761 Pinewood Road, Sumter, SC 29154 (the “ Sumter Valley Facility ”), the owner of which is Sumter Valley Property Holdings, LLC, a Georgia limited liability company.



	Exhibit 10.28

EXECUTION VERSION

AMENDED AND RESTATED

PROMISSORY NOTE

(Sumter Valley)

$185,092.00 April 3, 2015

FOR VALUE RECEIVED, ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “Borrower” ), hereby promises to pay to the order of KEYBANK NATIONAL ASSOCIATION , a national banking association (together with any and all of its successors and assigns and/or any other holder of this Note, “Lender” ), without offset, in immediately available funds in lawful money of the United States of America, at 1200 Abernathy Road, NE, Suite 1550, Atlanta, Georgia 30328 (or such other address as Lender may designate in written notice to Borrower from time to time), the principal sum of ONE HUNDRED EIGHTY-FIVE THOUSAND NINETY-TWO AND NO/100 DOLLARS ($185,092.00) (the “Indebtedness” ), as hereinafter provided.

Section 1. Indebtedness . The Indebtedness represents the portion of certain deferred “exit fees” allocated by Borrower and Lender to the skilled nursing facility identified as the “ Facility ” on Schedule 1 attached hereto and incorporated herein by this reference, which fees are owing by Borrower to Lender in connection with a mortgage loan in the original principal amount of $16,500,000 (the “ Mortgage Loan ”), made by Lender to the subsidiaries of Borrower identified on Schedule 1 hereto as the “ Mortgage Loan Borrowers, ” pursuant to that certain Secured Loan Agreement dated as of December 28, 2012, as amended (the “ Mortgage Loan Agreement ”), executed by and among Lender, the Mortgage Loan Borrowers, and the guarantors of the Mortgage Loan (including Borrower), and guaranteed by Borrower pursuant to that certain Payment Guaranty dated as of December 28, 2012, as amended. The Mortgage Loan was refinanced by a third-party lender as of February 25, 2015. This Note is being executed and delivered by Borrower to Lender in connection with the other promissory notes, each dated the date hereof, executed by Borrower, payable to the order of Lender and being more particularly described on Schedule 1 hereto (as the same may be modified, amended, extended, renewed, restated, reallocated or replaced from time to time, collectively, the “ Other Notes ,” and each individually, an “ Other Note ”). This Note and the Other Notes are collectively given in place of the obligations of Borrower and the Mortgage Borrowers to pay any “exit fees” pursuant to the terms of the Loan Documents (as defined in the Mortgage Loan Agreement) with respect to the Projects (as defined in the Mortgage Loan Agreement), the Facility and the Stone County Facilities (as defined in Schedule 1 hereto).

Section 2. Repayment of the Indebtedness .

6417566.1

Section 4. Prepayment . Borrower may prepay the principal balance of this Note, in full at any time or in part from time to time, without fee, premium or penalty.

Section 6. Events of Default . The occurrence of any one or more of the following shall constitute an “Event of Default” under this Note:

(a) Borrower fails to pay when and as due and payable any amounts payable by Borrower to Lender under the terms of this Note or any of the Other Notes;

Section 7. Remedies . Upon the occurrence of an Event of Default, Lender may at any time thereafter exercise any one or more of the following rights, powers and remedies:

(b) Lender may exercise any of its other rights, powers and remedies available at law or in equity.

any right or remedy shall operate as a waiver of such right or remedy or as a waiver of any Event of Default.

not required or authorized to close in Atlanta, Georgia. The words “include” and “including” shall be interpreted as if followed by the words “without limitation.”

If to Borrower :

AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, Georgia 30076

Attention: E. Clinton Cain, CPA, MAcc

Vice President of Finance

Telephone: (404) 781-2896

Facsimile: (404) 842-1899

With a courtesy copy to :

Holt, Ney, Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, Georgia 30339

Attention: Gregory P. Youra, Esq.

Telephone: (770) 956-9600

Facsimile: (770) 956-1490

If to Lender:

KeyBank National Association

1200 Abernathy Road, NE

Suite 1550

Atlanta, Georgia 30328

Attention: Paul F. Di Vito, SVP

Telephone: (770) 510-2085

Facsimile: (770) 510-2195

With a courtesy copy to :

Bryan Cave LLP

One Atlantic Center, Fourteenth Floor

1201 West Peachtree Street, NW

Atlanta, Georgia 30309-3488

Attention: Robert C. Lewinson, Esq.

Telephone: (404) 572-6623

Facsimile: (404) 420-0623

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the date first above written.

SIGNATURE PAGE TO AMENDED AND RESTATED PROMISSORY NOTE (SUMTER VALLEY)

SCHEDULE 1

TO AMENDED AND RESTATED PROMISSORY NOTE

(Sumter Valley)

Mortgage Loan


Borrowers:	Woodland Hills Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, each a Georgia limited liability company

Facility : Sumter Valley Nursing and Rehab Center

1761 Pinewood Road

Sumter, SC 29154

Property

Subsidiary : Sumter Valley Property Holdings, LLC, a Georgia limited liability company

Other Notes : 1.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $93,133.00, relating to the skilled nursing facility known as Cumberland Health and Rehabilitation Center, 1516 South Cumberland Street, Little Rock, AR 72202, the owner of which is APH&R HC Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $138,877.00, relating to the skilled nursing facility known as River Valley Health and Rehabilitation Center, 5301 Wheeler Avenue, Fort Smith, AR 72901, the owner of which is River Valley Property Holdings, LLC, a Georgia limited liability company.

SCHEDULE 1



	Exhibit 10.29

EXECUTION VERSION

PROMISSORY NOTE

(Stone County)

$108,861.00 April 3, 2015

FOR VALUE RECEIVED, ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “Borrower” ), hereby promises to pay to the order of KEYBANK NATIONAL ASSOCIATION , a national banking association (together with any and all of its successors and assigns and/or any other holder of this Note, “Lender” ), without offset, in immediately available funds in lawful money of the United States of America, at 1200 Abernathy Road, NE, Suite 1550, Atlanta, Georgia 30328 (or such other address as Lender may designate in written notice to Borrower from time to time), the principal sum of ONE HUNDRED EIGHT THOUSAND EIGHT HUNDRED SIXTY-ONE AND NO/100 DOLLARS ($108,861.00) (the “Indebtedness” ), as hereinafter provided.

Section 1. Indebtedness . The Indebtedness represents the portion of certain deferred “exit fees” allocated by Borrower and Lender to the skilled nursing facility and assisted living facility identified as the “ Facilities ” on Schedule 1 attached hereto and incorporated herein by this reference, which fees are owing by Borrower to Lender in connection with a mortgage loan in the original principal amount of $16,500,000 (the “ Mortgage Loan ”), made by Lender to the subsidiaries of Borrower identified on Schedule 1 hereto as the “ Mortgage Loan Borrowers, ” pursuant to that certain Secured Loan Agreement dated as of December 28, 2012, as amended (the “ Mortgage Loan Agreement ”), executed by and among Lender, the Mortgage Loan Borrowers, and the guarantors of the Mortgage Loan (including Borrower), and guaranteed by Borrower pursuant to that certain Payment Guaranty dated as of December 28, 2012, as amended. The Mortgage Loan was refinanced by a third-party lender as of February 25, 2015. This Note is being executed and delivered by Borrower to Lender in connection with the other promissory notes, each dated the date hereof, executed by Borrower, payable to the order of Lender and being more particularly described on Schedule 1 hereto (as the same may be modified, amended, extended, renewed, restated, reallocated or replaced from time to time, collectively, the “ Other Notes ,” and each individually, an “ Other Note ”). This Note and the Other Notes are collectively given in place of the obligations of Borrower and the Mortgage Borrowers to pay any “exit fees” pursuant to the terms of the Loan Documents (as defined in the Mortgage Loan Agreement) with respect to the Projects (as defined in the Mortgage Loan Agreement), the Facilities, and the Sumter Valley Facility (as defined in Schedule 1 hereto).

Section 2. Repayment of the Indebtedness .

(a) The entire principal balance of this Note then unpaid shall be finally due and payable upon the Maturity Date (as hereinafter defined). The term “ Maturity Date ,” as used in this Note shall mean the earliest to occur of the following: (i) August 25, 2016, as such date may be extended as provided in Section 2(b) hereof (the “ Scheduled Maturity Date ”), (ii) the date on which a Transfer (as hereinafter defined) shall occur, (iii) the date on which Borrower or any subsidiary of Borrower engages any Person (as hereinafter defined) other than Lender or an affiliate of Lender to originate or otherwise obtain mortgage loan financing (an “ Agency Financing ”) for the Facilities that is to be insured or guaranteed by the U.S. Department of Health and Urban Development (“ HUD ”), and (iv) the date on which the maturity of this Note is accelerated as provided in Section 7 hereof. The term, “ Person ,” as used in this Note, means any natural person, firm, corporation, limited liability company, trust, joint venture,

6417575.2

association, company, unlimited liability company, partnership, Governmental Authority or other entity (whether or not having separate legal personality).

(b) In the event Lender or any Lender affiliate shall have submitted a loan package for the Facilities to HUD for approval, and the date on which such loan package is submitted (the “ Agency Financing Submission Date ”) is less than one hundred twenty (120) days prior to the original Scheduled Maturity Date, then the original Scheduled Maturity Date shall automatically be deemed to have been extended, on a one-time basis only, to the one hundred twentieth (120 ^th ) day after the Agency Financing Submission Date, without the necessity of any further action on the part of Borrower or Lender.

(c) If, prior to the Maturity Date, the Facilities shall have been refinanced either (i) by a permanent loan from Lender or an affiliate of Lender, or (ii) by an Agency Financing originated by Lender or any affiliate of Lender, then and in such an event the entire remaining principal amount of this Note then outstanding shall be forgiven, this Note shall be cancelled and no further amounts shall be payable by Borrower hereunder.

Section 4. Prepayment . Borrower may prepay the principal balance of this Note, in full at any time or in part from time to time, without fee, premium or penalty.

Section 6. Events of Default . The occurrence of any one or more of the following shall constitute an “Event of Default” under this Note:

(a) Borrower fails to pay when and as due and payable any amounts payable by Borrower to Lender under the terms of this Note or any of the Other Notes;

proceeding is commenced against Borrower under the Bankruptcy Code and relief is ordered against Borrower, or the petition is controverted but not dismissed or stayed within sixty (60) days after the commencement of the ease, or a custodian (as defined in the Bankruptcy Code) is appointed for or takes charge of all or substantially all of the property of Borrower; or Borrower commences any other proceedings under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Borrower; or there is commenced against Borrower any such proceeding which remains undismissed or unstayed for a period of sixty (60) days; or Borrower fails to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding, or any order of relief or other order approving any such case or proceeding is entered; or Borrower by any act or failure to act indicates its consent to, approval of, or acquiescence in any such case or proceeding or the appointment of any custodian or the like of or for it for any substantial part of its property or suffers any such appointment to continue undischarged or unstayed for a period of sixty (60) days;

For purposes of this Note, the term “ Transfer ” shall mean (a) the sale, transfer or conveyance of the Facilities (or either of them) by the applicable Property Subsidiary, or (b) the occurrence of an event or series of events by which (i) Borrower ceases to be the direct or indirect owner of the Property Subsidiaries, or either of them, or (ii) any Person or group of Persons acting in concert as a partnership or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases, merger, consolidation, sale of all or substantially all assets, or otherwise, have become, after the date hereof, the “beneficial owner” (within the meaning of such term under Rule 13d-3 under the federal Securities and Exchange Act of 1934, as amended) of equity interests of Borrower representing voting power having the right to elect at least 49% of the members of Borrower’s board of directors.

Section 7. Remedies . Upon the occurrence of an Event of Default, Lender may at any time thereafter exercise any one or more of the following rights, powers and remedies:

(b) Lender may exercise any of its other rights, powers and remedies available at law or in equity.

If to Borrower :

AdCare Health Systems, Inc.

1145 Hembree Road

Roswell, Georgia 30076

Attention: E. Clinton Cain, CPA, MAcc

Vice President of Finance

Telephone: (404) 781-2896

Facsimile: (404) 842-1899

With a courtesy copy to :

Holt, Ney, Zatcoff & Wasserman, LLP

100 Galleria Parkway, Suite 1800

Atlanta, Georgia 30339

Attention: Gregory P. Youra, Esq.

Telephone: (770) 956-9600

Facsimile: (770) 956-1490

If to Lender:

KeyBank National Association

1200 Abernathy Road, NE

Suite 1550

Atlanta, Georgia 30328

Attention: Paul F. Di Vito, SVP

Telephone: (770) 510-2085

Facsimile: (770) 510-2195

With a courtesy copy to :

Bryan Cave LLP

One Atlantic Center, Fourteenth Floor

1201 West Peachtree Street, NW

Atlanta, Georgia 30309-3488

Attention: Robert C. Lewinson, Esq.

Telephone: (404) 572-6623

Facsimile: (404) 420-0623

Section 14. No Usury . It is expressly stipulated and agreed to be the intent of Borrower and Lender at all times to comply with applicable state law or applicable United States federal law (to the extent that it permits Lender to contract for, charge, take, reserve, or receive a greater amount of interest than under state law) and that this Section shall control every other covenant and agreement in this Note. If applicable state or federal law should at any time be judicially interpreted so as to render usurious any amount called for under this Note, or contracted for, charged, taken, reserved, or received with respect to the Indebtedness, or if Lender’s exercise of the option to accelerate the Maturity Date,

or if any prepayment by Borrower results in Borrower having paid any interest in excess of that permitted by applicable law, then it is Lender’s express intent that all excess amounts theretofore collected by Lender shall be credited on the principal balance of this Note, and the provisions of this Note shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new documents, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. All sums paid or agreed to be paid to Lender for the use or forbearance of the Indebtedness shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Indebtedness.

Section 16. Reallocation . THE INDEBTEDNESS EVIDENCED HEREBY DOES NOT CONSTITUTE A NOVATION OR A NEW DEBT, BUT REPRESENTS A CONTINUATION AND REALLOCATION OF THE INDEBTEDNESS EVIDENCED BY THIS NOTE AND THE OTHER NOTES AND CONSTITUTES A RENEWAL AND RESTRUCTURING OF SUCH INDEBTEDNESS.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the date first above written.

PROMISSORY NOTE (STONE COUNTY)

SCHEDULE 1

TO PROMISSORY NOTE

(Stone County)

Mortgage Loan


Borrowers:	Woodland Hills Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, each a Georgia limited liability company


Facilities :	Stone County Nursing and Rehabilitation Center

706 Oak Grove Street

Mountain View, AR 72560

Stone County Residential Care Center

414 Massay Avenue

Mountain View, AR 72560

Property


Subsidiary :	Mt. V Property Holdings, LLC (Stone County Nursing and Rehabilitation Center) and Mountain Top Property Holdings, LLC (Stone County Residential Care Center), each a Georgia limited liability company

Other Notes : 1.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $93,133.00, relating to the skilled nursing facility known as Cumberland Health and Rehabilitation Center, 1516 South Cumberland Street, Little Rock, AR 72202, the owner of which is APH&R HC Property Holdings, LLC, a Georgia limited liability company

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $138,877.00, relating to the skilled nursing facility known as River Valley Health and Rehabilitation Center, 5301 Wheeler Avenue, Fort Smith, AR 72901, the owner of which is River Valley Property Holdings, LLC, a Georgia limited liability company.

Promissory Note dated February 25, 2015 in the original principal amount of $170,000.00, as amended and restated by that certain Amended and Restated Promissory Note dated April 3, 2015 in the reallocated principal amount of $185,092.00, relating to the skilled nursing facility known as Sumter Valley Nursing and Rehab Center, 1761 Pinewood Road, Sumter, SC 29154 (the “ Sumter Valley Facility ”), the owner of which is Sumter Valley Property Holdings, LLC, a Georgia limited liability company.



	Exhibit 10.30

EIGHTH AMENDMENT TO CREDIT AGREEMENT

THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and entered into as of the 25th day of March, 2015, by and between ADK BONTERRA/PARKVIEW, LLC, a Georgia limited liability company (hereinafter referred to as "Borrower"), with its chief executive office at 1145 Hembree Road, Roswell , Georgia 30076, and GEMINO HEALTHCARE FINANCE, LLC, a Delaware l imited liability company (hereinafter referred to as " Lender" ) with an office at One International P l aza, Suite 220, Philade l phia, Pennsylvania 19113.

Recitals:

Lender and Borrower are parties to a certain Credit Agreement dated April 27, 2011 (as at any time amended, restated, modified or supplemented, the " Credit Agreement" ) pursuant to which Lender has made certain revolving credit loans to Borrower.

The parties desire to amend the Credit Agreement as hereinafter set forth.

Events of Default under (and as defined in) the Credit Agreement have occurred. Borrower has requested a waiver of such Events of Default. Lender is willing to waive such Events of Default, subject to the terms and conditions set forth herein.

NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good and valuable consideration, the receipt and sufficiency of which are hereby severally acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Definitions . All capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such terms in the Credit Agreement.


2.	Amendments to Credit Agreement . The Credit Agreement is hereby amended as follows:

(a) By deleting the reference to "March 31, 2015" from Section 2 . 01(d) of the Credit Agreement and by substituting in lieu thereof a reference to "April 30, 2015".


(b)	By deleting Section 6 . 06(a) of the Credit Agreement in its entirety and by substituting

in lieu thereof the following:

(a) Minimum Fixed Charge Coverage Ratio. Borrowers shall cause ADK to maintain at all times a Fixed Charge Coverage Ratio measured quarterly (i) at the end of the fiscal quarter ending March 31, 2014 , of at least 1.00:1, (ii) at the end of the fiscal quarter ending June 30, 20I4, of at least I.05: I, (iii) at the end of the fiscal quarters ending September 30, 2014 and December 31, 2014, of at least 1.10:I, (iv) at the end of the fiscal quarter ending March 3I, 20I5, of at least 0.80: I, and (v) at the end of each fiscal quarter thereafter, of at least 1.10:1 .

3. Limited Waiver of Default . Borrower acknowledges that Events of Default have occurred and currently exist under the Credit Agreement as a result of (i) Borrower's breach of Sec tion 6.06(a) of the Credit Agreement , due to the failure of ADK to maintain a Fixed Charge Coverage Ratio of at least

3701117_2

1.10to 1.0 at the end of the fiscal quarter ending December 31, 2014, and (ii) the occurrence of defaults by certain of Borrower's affiliates in violation of Section 8.01(y) of the Credit Agreement as a result of the same circumstances that resulted in Borrower's breach of Section 6.06(a) of the Credit Agreement (collectively, the " Designated Defaults" ). Borrower represent s and warrant s that the Designated Default s are the only Default s or Events of Default that exist under the Credit Agreement and the other Loan Documents as of the date hereof. Subject to the satisfaction of the conditions precedent set forth in Section 9 hereof , Lender waives the Designated Defaults as in existence on the date hereof . In no event shall such waiver be deemed to constitute a waiver of (a) any Default or Event of Default other than the Designated Defaults in existence on the date of this Amendment or (b) Borrower's obligation to comply with all of the terms and conditions of the Credit Agreement and the other Loan Documents from and after the date hereof. Notwithstanding any prior, temporary mutual disregard of the term s of any contracts between the parties, Borrower hereby agrees that it shall be required strictly to comply with all of the terms of the Loan Documents on and after the date hereof.

4. Ratification and Reaffirmation . Borrower hereby ratifies and reaffirms the Obligations, each of the Loan Documents and all of Borrower' s covenants, duties, indebtednes s and liabilities under the Loan Documents.

5. Acknowledgments and Stipulations . Borrower acknowledges and stipulates that the Credit Agreement and the other Loan Documents executed by Borrower are legal, valid and binding obligations of Borrower that are enforceable again st Borrower in accordance with the terms thereof; all of the Obligation s are owing and payable without defen s e, offset or counterclaim (and to the extent there exists any s uch defense, offset or counterclaim on the date hereof , the same i s hereby waived by Borrower); the security intere s t s and liens granted by Borrower in favor of Lender are duly perfected, first priority security intere s ts and liens; and the unpaid principal amount of the Loans on and as of March 25, 2015, totaled $1,266.601.20.

6. Representations and Warranties . Borrower represents and warrants to Lender, to induce Lender to enter into thi s Amendment, that no Event of Default or Unmatured Event of Default exists on the date hereof other than the Designated Default s; the execution, delivery and performance of this Amendment have been duly authorized by all r eq ui s ite company action on the part of Borrower and thi s Amendment has been duly executed and delivered by Borrower ; and all of the repre se ntation s and warranties made by Borrower in the Credit Agreement are true and correct on and as of the date hereof.

7. Reference to Credit Agreement . Upon the effectiveness of thi s Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," or words of like import s hall mean and be a reference to the Credit Agreement, as amended by thi s Amendment.

8. Breach of Amendment. This Amendment shall be part of the Credit Agreement and a breach of any repre se ntation, warranty or covenant herein s hall constitute an Event of Default.

9. Conditions Precedent . The effectiveness of the amendments contained in Section 2 hereof and the limited waiver contained in Section 3 hereof are subject to the satisfaction of each of the following conditions precedent, in form and substance sat isfactory to Lender, unles s satisfaction thereof is specifically waived in writing by Lender:

(a) Lender s hall have received a counterpart of this Amendment duly executed by Borrower; and

(b) Lender s hall have received a Consent and Reaffirmation to this Amendment duly executed by ADK.

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1. Amendment Fees; Expenses of Lender . In consideration of Lender's willingne ss to enter into this Amendment, Borrower agrees to pay to Lender (i) a waiver and amendment fee in the amount of

$5,000 in immediately available funds on the date hereof and (ii) an extension fee in the amount of $3,333 in immediately available funds on the date hereof . Additionally, Borrower agrees to pay, on demand, all costs and expenses incurred by Lender in connection with the preparation, negotiation and execution of this Amendment and any other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation , the costs and fees of Lender's legal counsel and any taxes or expenses associated with or incurred in connection with any instrument or agreement referred to herein or contemplated hereby.

2. Governing Law . Thi s Amendment shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania .

. "


3.	Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of

the parties hereto and their respective successors and assigns.

4. No Novation, etc. Except as otherwise expressly provided in this Amendment, nothing herein shall be deemed to amend or modify any provision of the Credit Agreement or any of the other Loan Documents, each of which shall remain in full force and effect. This Amendment is not intended to be, nor shall it be construed to create, a novation or accord and satisfaction, and the Credit Agreement as herein modified shall continue in full force and effect.

5. Counterparts; Electronic Signatures. This Amendment may be executed in any number of counterparts and by different parties to this Amendment on separate counterpart s, each of which, when so executed, s hall be deemed an original , but all such counterparts shall constitute one and the sa me agreement. Any manually executed signature page to this Am e ndment delivered by a party by facsimile or other e l ectro nic transmi ssion shall be deemed to be an original signature hereto .

6. Further Assurances. Borrower agrees to take such further actions as Lender s hall reasonably request from time to time in connection herewith to evidence or give effect to the amendments set forth herein or any of the transaction s contemplated hereby.

7. Section Titles. Section title s and references u s ed in this Amendment shall be without s ub sta ntive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto.

8. Manager Certification of Borrower. By his execution and delivery of this Amendment, William McBride, III hereby certifies that: (a) the Unanimous Consent in Lieu of a Sp ec ial Meeting of the Sole Member and the Managers of Borrower dated as of February 21, 2011 (the "Consent"), remains in full force and effect, except that the current Manager of Borrower is now William McBride, III, the individual currently serving as the Chief Executive Officer of ADK; (b) pursuant to the Consent, the Managers or designees of Borrower are authorized and empowered (either alone or in conjunction with any one or more of the other Manager s of Borrower) to take, from time to time, all or any part of the following actions on or in behalf of Borrower , as applicable: (i) to make, execute and deliver to Lender this Amendment and all other agreements, document s and in s trument s contemplated by or referred to herein or executed by Borrower in connection herewith; and (ii) to carry out , modify, amend or terminate any arrangements or agreements at any time existing between Lender and Borrower; (c) any arrangements, agreements, sec urity agreements, or other instruments or document s referred to or executed pursuant to thi s Amendment by William McBride , III , or any other Manager of Borrower or an employee of ADK acting pur s uant to delegation of authority, may be attested by such person and may contain s uch terms

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and provisions as s uch person s hall, in his or her sole discretion , d e termine; and

(d) set forth below is the name and signature of the current Chief Executive Officer of ADK and Manager of Borrower, William McBride , Ill'

William McBride, III Chief Executive Officer of ADK and Manager of Borrower

/s/ William McBride, III

1. Release of Cl aims. To induce Lender to enter into this Amendment, Borrower hereby releases, acquits and forever discharges Lender , and all officers, directors, agents, employees, successors and assigns of Lender, from any and all liabilities, claims, demands, actions or causes of action of any kind or nature (if there be any), whether absolute or contingent, disputed or undisputed, at law or in equity, or known or unknown, that Borrower now has or ever had against Lender arising under or in connection with any of the Loan Documents or otherwise. Borrower represents and warrants to Lender that Borrower has not transferred or assigned to any Person any claim that Borrower ever had or claimed to have against Lender.

2. Waiver of Jury Trial . To the fullest extent permitted by applicable law, the parties hereto each hereby waives the right to trial by jury in any action, suit, counterclaim or proceeding arising out of or related to this Amendment.

[Remainder of page intentionally left blank; signatures begin on following page . ]

IN WITNESS WHEREOF, th e parties hereto have cau s ed this Amendment to be duly executed and delivered by their respectiv e duly . authorized officers on the date first written above .

For purposes of the Manager Certification of Borrower in Section 17 above :

/s/ William McBride, III (SEAL)

William McBride, III

BORROWER: ADK BONTERRA/PARKVIEW, LLC

By: /s/ William McBride, III

Name: William McBride, III

Title: Manager

LENDER: GEMINO HEALTHCARE FINANCE, LLC

By: /s/ Jeffrey M. Joslin

Jeffrey M. Joslin, Vice President

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CONSENT AND REAFFIRMATION

Each under s igned guarantor of th e Obligation s of Borrower at any time owing to Lender hereby

(i) acknowledge s receipt of a copy of the foregoing Eighth Amendment to Credit Agreement; (ii) con s ent s to Borrower's execution and deliv e ry thereof and of the other document s, instruments or agreements Borrower agrees to ex e cute and deliver pur s uant thereto ; (iii) agree s to be bound thereby; and (iv) affirm s that nothing contained therein shall modify in an y re s pect what s oever it s respective guaranty of th e Obligations and reaffirms that such guaranty is and s hall remain in full force and effect.

IN WITNESS WHEREOF , the under s i g ned ha s executed thi s Con s ent and Reaffirmation as of the date of such Eighth Amendment to Credit Agreement.

ADCARE HEALTH SYSTEMS, INC

By: /s/ William McBride, III

Name: William McBride, III

Title: Chief Executive Officer

NW 61ST NURSING, LLC

By: /s/ William McBride, III

Name: William McBride, III

Title: Manager

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	Exhibit 10.31

FIFTH AMENDMENT TO CREDIT AGREEMENT

THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and entered into as of t he 25th day of March, 2015, by and among NW 61ST NURSING, LLC , a Georgia limit ed liability company (" NW 61 st " ) , GEORGETOWN HC&R NURSING, LLC, a Georgia limited liability company (" Georgetown" ), SUMTER N&R, LLC, a Georgia limited liability company (" Sumter" ; NW 6t t, Georgetown a nd Sumter are hereinaft er referred to collectively as " Borrowers" and each individually as a " Borrower" ), each with its chief executive office at 1145 Hembree Road , Roswell, Georgia 30076, and GEMINO HEALTH CARE FINANCE, LLC, a Delaware limited liability company (hereinafter referred to a s "Le nder") with an office at One Intern ational Plaza , Suite 220 , Philadelphia , Pennsylvania 19113.

Recitals:

Lender and Borrower s are parties to a certain Credit Agreement dated May 30, 2013 (as at any tim e amended, restated, modified or supp lem ented, the "Credit Agreement") pursuant to which Lender ha s made certain revolving credit loans to Borrowers.

The parties desire to amend th e Credit Agreement as hereinafter set forth.

Events of Default und er (and as defined in) the Credit Agreement h ave occurred. Borrowers have reque s ted a waiver of s uch Events of Default. Lender i s willing to waive s uch Events of Default, s ubject to the term s a nd condition s set forth herein.

NOW, THEREFORE, for TEN DOLLARS ($10.00) in h and paid and other good and valuable con s id eration, the receipt and s uffici ency of which are hereby severa lly acknowledged, the parties hereto, intending to be le ga ll y bound h ereby, agree as follow s:

1. Definitions. All capitalized terms u sed in this Amendment, unle ss otherwise defined herein,

s hall h ave the meaning ascr ib ed to s uch term s in the Credit Agreement.

1. Amendments to Credit Agreement. The Credit Agreement is her eby amended as follows:

(a) By deleting th e reference to "March 31, 2015" from Section 2.01(d) of the Credit Agreement a nd by s ub st ituting in lieu ther eof a reference to "April 30, 2015".


(b)	By deleting Section 6.06(a) of the Credit Agreement in its entirety and by substit utin g

in lieu thereof the following:

(a) Minimum Fixed Charge Coverage Ratio. Borrowers sha ll cause ADK to maintain at a ll times a Fixed Charge Coverage Ratio mea s ur e d quarterly (i) at the end of the fiscal quarter ending March 31, 2014, of at least 1.00:1, (ii) at the end of th e fi sc al quarter ending June 30, 2014, of at l east 1.05:I, (iii) at the end of the fi sca l quarter s ending September 30,2014 and December 31,2014, of at le ast 1.10:1, (iv) at the end of the fi s cal quarter ending March 31, 2015 , of at lea s t 0.80: 1 , and (v) at the end of each fiscal quarter thereafter, of at le ast 1 . 10: 1 .

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2. Limited Waiver of Default. Borrowers acknowledge that Events of Default have occurred and currently exist under the Credit Agreement as a result of (i) Borrower s ' breach of Sec tion 6.06(a) of the Credit Agreement , due to the failure of ADK to maintain a Fixed Charge Coverage Ratio of at least 1.10to 1.0 at the end of the fiscal quarter ending December 31,

2014, and (ii) the occurrence of defaults by certain of Borrowers' affiliate s in violation of Section 8.01 (y) of the Credit Agreement as a result of the s ame circumstances that resulted in Borrowers' breach of Section 6.06(a) of the Credit Agreement (collectively , the " Designated Default s" ). Each Borrower represent s and warrants that the Designated Defaults are the only Defaults or Events of Default that exist under the Credit Agreement and the other Loan Documents as of the date hereof. Subject to the satisfaction of the conditions precedent se t forth in Section 9 hereof, Lender waives the Designated Defaults as in existence on the date hereof . In no event shall such waiver be deemed to constitute a waiver of (a) any Default or Event of Default other than the Designated Defaults in existence on the date of thi s Amendment or (b) Borrowers' obligations to comply with all of the terms and conditions of the Credit Agreement and the other Loan Documents from and after the date hereof. Notwithstanding any prior, temporary mutual disregard of the term s of any contracts between the parties , each Borrower hereby agree s that it shall be required strictly to comply with all of the terms of the Loan Documents on and after the date hereof.

3. Ratification and Reaffirmation. Each Borrower hereby ratifies and reaffirms the Obligations, each of the Loan Documents and all of s uch Borrower's covenant s, duties , indebtedness and liabilities under the Loan Documents.

S. Acknowledgments and Stipulations . Each Borrower acknowledges and s tipulates that the Credit Agreement and the other Loan Documents executed by such Borrower are legal, valid and binding obligations of such Borrower that are enforceable against such Borrower in accordance with the terms thereof; all of the Obligations are owing and payable without defense, offset or counterclaim (and to the extent there exists any such d efe nse , offset or counterclaim on the date hereof , the sa me is hereby waived by each Borrower); the sec urity interests and liens granted by such Borrower in favor of Lender are duly perfected , first priority security int e re s ts and liens; and the unpaid principal amount of the Loan s on and as of March 25,2015, totaled $1.018,695.56.

1. Representations and Warranties. Each Borrower represents and warrants to Lender, to induce Lender to enter into thi s Amendment, that no Event of Default or Unmatured Event of Default exists on the date hereof other than the De s ignated Defaults; the execution, delivery and performance of this Amendment have been duly authorized by all requisite company action on the part of each Borrower and this Amendment ha s been duly executed and delivered by each Borrower; and all of the representation s and warranties made by Borrower s in the Credit Agreement are true and correct on and as of the date hereof.

2. Reference to Credit Agreement. Upon the effectiveness of thi s Amendment, each reference in the Credit Agreement to "this Agr ee ment," "hereunder," or words of like import s hall mean and be a refer e nce to the Credit Agreement , as amended by this Amendment.


3.	Breach of Amendment. This Amendment shall be part of the Credit Agreement and a breach

of any representation, warranty or covenant herein shall constitute an Event of Default.

4. Conditions Precedent. The effectiveness of th e amendments contained in Sectio n 2 hereof and the limited waiver contained in Section 3 hereof are s ubj ec t to the satisfaction of each of the following conditions precedent, in form and substance sa tisfactory to Lender, unles s satisfaction thereof i s specifically waived in writing by Lender:

Borrowers; and


(a)	Lender shall ha ve received a counterpart of thi s Amendment duly executed by

(b) Lender shall have received a Consent and R ea ffirmation to this Amendment duly executed by ADK.

1. Amendment Fees; Expenses of Lender. In consideration of Lender' s willingness to enter

into this Amendment, Borrowers agree to pay to Lender (i) a waiver and amendment fee in the amount of

$5,000 in immediately available funds on the date hereof and (ii) an exten s ion fee in the amount of $2, 500 in imm e diately available fund s on the date h e r e of . Additionally, Borrowers agree to pay , on demand , all costs and expenses incurred by Lender in conn e ction with the preparation , negotiation and execution of thi s Amendment and any oth e r Loan Document s executed pur s uant h e r e to and any and all am e ndment s, modification s, and s upplem e nt s thereto , includin g, without limitation , th e costs and fee s of Lender's le ga l coun se l and any taxe s or expenses associated with or incurred in connection with any in s trument or agreement referred to herein or contemplated hereby.


2.	Governing Law. Thi s Amendment shall be governed by and con s tru e d in accordance with

the intern a l l a w s of the Commonwealth of Penn s ylvania.

3. Successors and Assigns. This Amendment s h a ll b e binding upon a nd inur e to the benefit of the parti es h e r e to and their respective s uc cess or s and assigns.

4. No Novation, etc. Except as otherwi se ex pre ss ly provided in thi s Amendment, nothing herein s hall be deemed to amend or modify any provi s ion of the Credit Agreement or any of the other Loan Document s, each of which s hall remain in full force and effect. This Amendment is not intended to be, nor s hall it be con s trued to create, a no va tion or accord and sa ti s facti o n , and the Credit Agreement as herein modified s hall continue in full force and effect.

5. Counterparts; Electronic Signatures. This Amendment m a y b eexec uted in any number of counterparts and by diff ere nt partie s to thi s Amendment on se parat e co unt e rpart s, each of which, when so executed, shall be deemed an original, but all s uch counterparts s hall co n s titut e one and th e sa me agreement. An y manually executed s ignature page t o thi s Amendment deliver e d by a part y by fac s imil e or other electronic transmi ssion s hall be deemed to be a n original sig nature hereto.

6. Further Assurances. Bo rrowers ag r ee to take such further ac tion s as Lender s h a ll reasonably requ es t from tim e to tim e in connection her ew ith to evidence or give effect to th e amendments set forth h e r e in or an y of th e tr a n s action s contemplated hereby .

7. Section Titles. S ec tion titl es a nd r e f ere nc es u se d in this Am e ndment s hall b e without s ub s tantive m ea nin g or content of a ny kind what soever a nd are not a part of th e agr ee m e nt s among the parti es hereto.

8. Manager Certification of each Borrower. By hi s execution and delivery of this Amendm e nt, Willi a m McBride, III he re by c ertifie s th a t: ( a) th e Unanimous Consents of the Sole Member a nd th e Mana ge r s (th e "Cons e nt") of NW 6ls 1 Nur s ing , LLC d a ted as of May 30, 2013 , Georgetown HC&R Nur s ing , LLC, dat ed as of Jun e 24, 2013, a nd Sumter N&R , LLC, dated as of June 24,2 013, remain in full force a nd effec t , except that the current Man age r of all Borrowers i s now Willi a m McBride , III , th e individual currently se rvin g a s Chief Exec uti ve Offic e r of ADK ; (b) pursuant to th e Consents, th e Manag ers or d es i g n ees of e ach Borrow e r ar e authorized and empower e d (either alone or in conjunction with a ny one or mor e of the other Mana ge r s of s uch Borrower) to take, from tim e to tim e , all or any part of the followin g action s on or in b e half of s uch Borrow e r , a s applicable: (i) to make , exec ut e and deliv e r to Lender thi s Amendment and a ll other agreements, do c ument s and in st rum e nt s contemplated by or r efe rr ed to h e r e in or executed by s u c h B o rrowe r in co nn ec tion h e rewith; a nd (ii) to carry out, modify, a mend or terminate a ny arrangements o r

IN WITNESS WH E REOF, the partie s hereto have cau s ed thi s Amendment to be duly e x ecuted and delivered by their re s pective duly authori z ed o f ficer s on the date first written above.

For purposes of the Manager Certification of Borrowers in Section 17 above:

/s/ William McBride, III (SEAL)

William McBride, III

Borrowers: NW 61st NURSING, LLC

GEORGETOWN HC&R NURSING, LLC

SUMTER N&R, LLC

By: /s/ William McBride, III

Name: William McBride, III

Title: Manager of each Borrower

[Signature s continued on following page.]

Fi ft h A mendm e nt t o Cred i t Agree m e nt (ADK ..: NW 6l s t )

a g r e em e nts at any tim e exi s ting betw e en Lender and s uch Borrower, as applicable; (c) any arran g ement s , agr e em e nts , security agreements , or other in s truments or document s r e ferr e d to or e xecuted pur s uant to thi s Amendment by William McBride , III , or any other M a na g er of a Borrower or an employee of a Borrower or ADK actin g pur s uant to dele g ation of authority, may be atte s ted by s uch p e r s on and m a y contain s uch term s and provi s ion s a s s uch per s on s hall , in hi s or her s ole discretion , d e termin e; and (d) s et forth below i s the name and signature of the current Chief Executive Officer of ADK and Manager o f e a c h . w - , William McBride , III:

William McBride, III Chief Exe c utive Offic e r of ADK and Manager of each Borrow e r

/s/ William McBride, III

1. Release of Claims. To induce Lender to enter into this Amendment, each Borrower hereby releases, acquits and forever discharges Lender, and all officers, directors, agents, employees, succes s ors and assigns of Lender, from any and all liabilities, claims, demands, actions or causes of action of any kind or nature (if there be any), whether ab s olute or contingent, disputed or undisputed, at law or in equity , or known or unknown, that such Borrower now has or ever had against Lender arising under or in connection with any of the Loan Documents or otherwise. Each Borrower represents and warrants to Lender that such Borrower has not tran s ferred or a s signed to any Person any claim that such Borrower ever had or claimed to have again s t Lender.

2. Waiver of Jury Trial . To the fullest extent permitted by applicable law, the parties hereto each hereby waives the right to trial by jury in any action , suit, counterclaim or proceeding arisin g out of or related to this Amendment.

[R e m a ind e r of pa ge in t entionall y l ef t blank; s i g n a tur es b eg in o n fo llowin g pa ge .]

LENDER: GEMINO HEALTHCARE FINANCE, LLC

By: /s/ Jeffrey M. Joslin

Jeffrey M. Joslin, Vice President

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CONSENT AND R EA FFIRMATION

The undersigned guarantor of the Obligations of Borrowers at any time owing to Lender hereby

(i) acknowledges receipt of a copy of the foregoing Fifth Amendment to Credit Agreement; (ii) consents to Borrower s ' execution and delivery thereof and of the other document s, instrument s or agreements Borrowers agree to execute and deliver pur s uant thereto; (iii) agrees to be bound thereby; and (iv) affirms that nothing contained therein shall modify in any respect whatsoever it s guaranty of the Obligation s and reaffirm s that such guaranty is and shall remain in full force and effect.

IN WITNESS WHEREOF , the undersigned has executed this Consent and Reaffirmation as of the date of s uch Fifth Amendment to Credit Agreement.

ADCARE HEALTH SYSTEMS, INC.

By: /s/ William McBride, III

Name: William McBride, III

Title : Chief Executive Officer



	Exhibit 10.32

NINTH MODIFICATION AGREEMENT

THIS NINTH MODIFICATION AGREEMENT dated as of May 1, 2015 (this “ Agreement ” ), is entered into by and among ADK LUMBER CITY OPERATOR, LLC ( “ Borrower 2 ” ), ADK LAGRANGE OPERATOR, LLC ( “ Borrower 4 ” ), ADK POWDER SPRINGS OPERATOR, LLC ( “ Borrower 5 ” ), ADK THUNDERBOLT OPERATOR, LLC ( “ Borrower 7 ” ), ATTALLA NURSING ADK, LLC ( “ Borrower 9 ” ), MOUNTAIN TRACE NURSING ADK, LLC , an Ohio limited liability company ( “ Borrower 10 ” ), ERIN NURSING, LLC ( “ Borrower 12 ” ), CP NURSING, LLC ( “ Borrower 13 ” ), BENTON NURSING, LLC ( “ Borrower 14 ” ), VALLEY RIVER NURSING, LLC ( “ Borrower 15 ” ), PARK HERITAGE NURSING, LLC ( “ Borrower 16 ” ), HOMESTEAD NURSING, LLC ( “ Borrower 17 ” ), MOUNTAIN VIEW NURSING, LLC ( “ Borrower 19 ” ), LITTLE ROCK HC&R NURSING, LLC ( “ Borrower 21 ” ), COOSA NURSING ADK, LLC ( “ Borrower 25 ” ), and QC NURSING, LLC ( “ Borrower 26 ” ), each a Georgia limited liability company except as hereinabove set forth (the “ Borrowers ” ), ADCARE HEALTH SYSTEMS, INC., a Georgia corporation (the “ Guarantor ” ) (the Borrowers and the Guarantor being sometimes referred to herein collectively as the “ Borrower/Guarantor Parties ” ), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( “ Lender ” ).

RECITALS

A. The Borrower/Guarantor Parties and the Lender heretofore entered into the following documents (collectively, the “ Documents ” ):

(i) Loan and Security Agreement dated as of September 20, 2012 (the “ Loan Agreement ” ), by and among the Borrowers named therein and the Lender.

(ii) Promissory Note dated September 20, 2012 (the “ Note ” ), from the Borrowers named therein to the Lender in the principal amount as amended effective April 1, 2015, of $6,000,000, and in the principal amount as amended effective August 1, 2015, of $5,750,000.

(iii) Guaranty of Payment and Performance dated as of September 20, 2012, by the Guarantor to and for the benefit of the Lender.

B. The parties previously entered into following documents (the “ Previous Modifications ” ) which modified and amended or contained additional agreements concerning the Documents (all of which modifications, amendments and additional agreements are referred to herein as “ Amending ” the Documents): (i) the Modification Agreement dated as of October 26, 2012; (ii) the Memorandum of Agreement dated January 25, 2013 (the “ Second Modification ” ); (iii) the Third Modification Agreement dated as of September 30, 2013 (the “ Third Modification ” ); (iv) the Fourth Modification Agreement dated as of November 26, 2013; (v) the Fifth Modification Agreement dated as of July 22, 2014; (vi) the Sixth Modification Agreement dated as of September 24, 2014 (the “ Sixth Modification ” ); (vii) the Seventh Modification Agreement dated as of

December 17, 2014 (the “ Seventh Modification ” ); (viii) the Pledge Agreement dated as of April 16, 2015, by the Guarantor to the Lender; and (ix) the Eighth Modification Agreement dated as of April 1, 2015 (the “ Eighth Modification ” ).

C. Borrower 20, Borrower 22 and Borrower 23 (as defined in the Second Modification) were released from their respective obligations under the Documents pursuant to the Second Modification.

D. Borrower 3, Borrower 6 and Borrower 8 (as defined in the Third Modification) were released from their respective obligations under the Documents pursuant to the Third Modification.

E. Borrower 1, Borrower 18 and Borrower 24 (as defined in the Sixth Modification) were released from their respective obligations under the Documents pursuant to the Sixth Modification.

F. Borrower 11 (as defined in the Seventh Modification) was released from its obligations under the Documents pursuant to the Seventh Modification.

G. Borrowers 2, 5, 7, 9, 10, 12 and 25 transferred operations of their facilities with the consent of the Lender granted in the Eighth Modification.

H. The parties desire to make certain modifications and amendments to the Documents, as Amended by the Previous Modifications, as more fully provided for herein, all as modifications, amendments and continuations of, but not as novations of, the Documents.

AGREEMENTS

In consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

Section 1 . Recitals Part of Agreement; Defined Terms; References to Documents; New Defined Terms Added to Loan Agreement; Post-Closing Requirements .

(a) The foregoing Recitals are hereby incorporated into and made a part of this Agreement.

(b) All capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the Loan Agreement.

(c) Except as otherwise stated herein, all references in this Agreement to any one or more of the Documents shall be deemed to include the Previous Modifications and amendments to the Documents provided for in the Previous Modifications, whether or not express reference is made to such previous modifications and amendments.

(d) The defined terms “ Transferred Facility ” , “ Transferring Borrower ” , “ New Operator ” , “ Transfer Date ” and “ Transfer Documents ” which were added to Section 1.1 of the

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Loan Agreement in the Eighth Modification are hereby modified and amended by adding to each of them the new information which appears in Section 2 of this Agreement.

(e) Not later than May 15, 2015, the Borrower shall deliver to the Lender (i) entity certificates for the Borrowers and the Guarantor in substantially the same form as the entity certificates for the Borrowers and the Guarantor delivered to the Lender in connection with the Eighth Modification, and (ii) legal opinions relating to this Agreement from attorneys in the States of Arkansas, Alabama, North Carolina, Ohio and Oklahoma, in substantially the same form as the legal opinions delivered by such attorneys with respect to the Eighth Modification.

Section 2 . Lender Consent to Transfer of Operations to Additional New Operators . In addition to the consents to transfers of operations of Facilities contained in the Eighth Modification, the Borrowers and the Guarantor hereby request that the Lender consent to the transfer of operations of each Facility listed below (each of which shall be a “ Transferred Facility ” ) by the Borrower which is the operator of such Facility (each of which shall be a “ Transferring Borrower ” ), to the New Operator listed opposite the name of such Facility below (each of which shall be a “ New Operator ” ), effective as of the Transfer Date listed opposite the name of such Facility below (each of which shall be a “ Transfer Date ” ), pursuant to the Transfer Documents described opposite the name of such Facility below (each of which shall be “ Transfer Documents ” ), and the Lender hereby grants such consent.



Facility and Borrower Number	Facility Name	Borrower	Owner or Original Sublessor Leasing to Borrower	New Operator	Transfer Date	Transfer Documents
4	LaGrange Nursing and Rehabilitation Center	Borrower 4 ADK LaGrange Operator, LLC	Owner, Master Lease Lessor - William Foster Sublessor - ADK Georgia, LLC	C.R. of LaGrange, L.C., a Georgia limited liability company Affiliate of C. Ross Management, LLC (New Sponsor of Facility 13)	April 1, 2015	Direct Sublease Agreement by ADK Georgia, LLC dated April 1, 2015 Operations Transfer Agreement dated March 17, 2015
13	College Park Healthcare Center	Borrower 13 CP Nursing, LLC	Owner, CP Property Holdings, LLC	Healthcare at College Park, LLC, a Georgia limited liability company Affiliate of C. Ross Management, LLC (New Sponsor of Facility 4)	April 1, 2015	Sublease Agreement by CP Nursing, LLC, to C.R. of College Park, LLC, a Georgia limited liability company, dated February 18, 2015 Sub-Sublease Agreement by C.R. of College Park, LLC, to Healthcare at College Park, LLC, dated April 1, 2015 Operations Transfer Agreement dated March 31, 2015

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16	Heritage Park Nursing Center	Borrower 17 ADK Thunderbolt Operator, LLC	Park Heritage Nursing, LLC	Highlands of Rogers Dixieland, LLC, a Delaware limited liability company Affiliate of Aria Healthcare (New Sponsor of Facilities 17, 19 and 21)	May 1, 2015	Sublease Agreement by Borrower 16 dated January 15, 2015, as amended by Amendments dated February 27, 2015, March 31, 2015, and April 30, 2015 Operations Transfer Agreement dated January 16, 2015
17	Homestead Manor Nursing Home	Borrower 17 Homestead Nursing, LLC	Owner, Homestead Property Holdings, LLC	Highlands Of Stamps, LLC, a Delaware limited liability company Affiliate of Aria Healthcare (New Sponsor of Facilities 16, 19 and 21)	May 1, 2015	Sublease Agreement by Borrower 17 dated January 15, 2015, as amended by Amendments dated February 27, 2015, March 31, 2015, and April 30, 2015 Operations Transfer Agreement dated January 16, 2015
19	Stone County Nursing and Rehabilitation Center	Borrower 19 Mountain View Nursing, LLC	Owner, Mount V Property Holdings, LLC	Highlands Of Little Rock South Cumberland, LLC, a Delaware limited liability company Affiliate of Aria Healthcare (New Sponsor of Facilities 16, 17 and 19)	May 1, 2015	Sublease Agreement by Borrower 19 dated January 15, 2015, as amended by Amendments dated February 27, 2015, March 31, 2015, and April 30, 2015 Operations Transfer Agreement dated January 16, 2015
21	Little Rock HC&R Nursing	Borrower 21 Little Rock HC&R Nursing, LLC	Owner, Little Rock HC&R Property Holdings, LLC	Highlands of Little Rock West Markham, LLC, , a Delaware limited liability company Affiliate of Aria Healthcare (New Sponsor of Facilities 16, 17 and 19)	May 1, 2015	Sublease Agreement by Borrower 21 dated January 15, 2015, as amended by Amendments dated February 27, 2015, March 31, 2015, and April 30, 2015 Operations Transfer Agreement dated January 16, 2015

Section 7.11 of the Loan Agreement shall be deemed to be modified and amended to permit the transfer of operations of the aforesaid Transferred Facilities to the aforesaid New Operators under the aforesaid Transfer Documents, and to permit the operation of the aforesaid Transferred Facilities by the aforesaid New Operators from and after their respective aforesaid Transfer Dates.

Section 3 . Reductions of Loan Amount .

(a) Pursuant to the Eighth Modification, the amount of the Loan and the Note and the Loan Amount were reduced from $8,815,000 to $6,000,000, effective as of the date of April 1, 2015, date of the Eighth Modification.

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(b) Pursuant to the Eighth Modification, the amount of the Loan and the Note and the Loan Amount were further reduced from $6,000,000 to $5,750,000, effective as of August 1, 2015.

(c) The amount of the Loan and the Note and the Loan Amount are hereby further reduced from $5,750,000 to $3,750,000, effective as of September 1, 2015, and all of the Documents, as Amended by the Previous Modifications, are hereby modified and amended accordingly.

(d) Without limitation on the generality of the foregoing provisions of this Section, the dollar amounts that appear in the Documents, as Amended by the Previous Modifications, in reference to the amount of the Loan and the Note are hereby modified and amended to be the respective reduced amounts set forth above in this Section effective as of the respective reduction dates set forth above in this Section, including, without limitation, in the defined term “Loan Amount” in Section 1.1 of the Loan Agreement, in the upper left corner of page 1 of the Note, in the definition of the term “Loan” in Section 1 of the Note, and in Recital paragraph A of the Guaranty, each as Amended by the Previous Modifications.

(e) If any reduction of the Loan Amount which is provided for in this Section results in a reduction of the Availability that causes the outstanding principal balance of the Loan together with the combined face amount of all outstanding Letters of Credit, to exceed the reduced Availability, the Borrowers shall make such repayments of the Loan as shall be necessary to eliminate such excess, as required by the Loan Agreement, including, without limitation, Sections 3.4(b) and 7.4 thereof. In the event that at the time of any such reduction of the Availability there is no principal balance outstanding on the Loan, or if a payment made as described above in this paragraph causes no principal balance to be outstanding on the Loan, and if the combined face amount of all outstanding Letters of Credit exceeds the reduced Availability, then the Borrowers shall immediately deposit the amount of such excess in a cash collateral account as security for the Loan in the name of one or more of the Borrowers with the Lender, and shall maintain such amount on deposit in such cash collateral account so long as and to the extent that the face amount of the combined face amount of all outstanding Letters of Credit exceeds the Availability, as required by the Loan Agreement, including, without limitation, Section 3.4(b) thereof.

Section 4 . Eighth Modification Provisions to Apply; Additional Change Relating to Certain Eligible Accounts .

(a) All of the provisions of Sections 4 through 8 of the Eighth Modification shall apply not only to and with respect to the Transferred Facilities, Transferring Borrowers, New Operators, Transfer Dates and Transfer Documents which are identified in the Eighth Modification, but also to the Transferred Facilities, Transferring Borrowers, New Operators, Transfer Dates and Transfer Documents which are identified in this Agreement.

(b) In addition to the provisions of Section 4 of the Eighth Modification, the Accounts of Borrowers 16, 17, 19 and 21 shall cease to be Eligible Accounts on the date of this Agreement,

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for the reason that the New Operators of Facilities 16, 17, 19 and 21 declined to deliver estoppel agreements relating to their Transfer Documents in a form acceptable to the Lender.

Section 5 . Attachment to Note . The Lender may, and prior to any transfer by it of the Note shall, attach a copy of this Agreement to the original Note and place an endorsement on the original Note making reference to the fact that such attachment has been made.

Section 6 . Representations and Warranties . The term “ Signing Entity ” as used in this Section means any entity (other than a Borrower/Guarantor Party itself) that appears in the signature block of any Borrower/Guarantor Party in this Agreement, any of the Documents or any of the Previous Modifications, if any. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby represent and warrant to the Lender as follows as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement:

(a) Each Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of which is stated in the Preambles to this Agreement, and if such State is not the State in which its Facility is located, such Borrower is duly registered or qualified to transact business and in good standing in the State in which its Facility is located. Each Borrower has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(b) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(c) Each Signing Entity is duly organized, validly existing and in good standing under the laws of the State in which it is organized, has all necessary power and authority to carry on its present business, and has full right, power and authority to execute this Agreement, the Documents and the Previous Modifications in the capacity shown in each signature block contained in this Agreement, the Documents and the Previous Modifications in which its name appears, and such execution has been duly authorized by all necessary legal action applicable to such Signing Entity.

(d) This Agreement, the Documents and the Previous Modifications have been duly authorized, executed and delivered by such of the Borrower/Guarantor Parties as are parties thereto, and this Agreement, the Documents and the Previous Modifications constitute valid and legally binding obligations enforceable against such of the Borrower/Guarantor Parties as are parties thereto. The execution and delivery of this Agreement, the Documents and the Previous Modifications and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the organizational documents of any Borrower/Guarantor Party or any Signing Entity, or any agreement or other instrument to which any of the Borrower/Guarantor Parties or any Signing Entity is a party,

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or by which any of them is bound, or to which any of their respective properties are subject, or any existing law, administrative regulation, court order or consent decree to which any of them is subject.

(e) The Borrower/Guarantor Parties are in full compliance with all of the terms and conditions of the Documents to which they are a party and the Previous Modifications, and no Default or Event of Default has occurred and is continuing with respect to any of the Documents or the Previous Modifications.

(f) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement, any of the Documents or the Previous Modifications, or questioning the validity thereof, or in any way contesting the existence or powers of any of the Borrower/Guarantor Parties or any Signing Entity, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement, any of the Documents or the Previous Modifications, or would result in any material adverse change in the financial condition, properties, business or operations of any of the Borrower/Guarantor Parties.

(g) The statements contained in the Recitals to this Agreement are true and correct.

Section 7 . Documents to Remain in Effect; Confirmation of Obligations; References . The Documents shall remain in full force and effect as originally executed and delivered by the parties, except as previously modified and amended by the Previous Modifications and as expressly modified and amended herein. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby (i) confirm and reaffirm all of their obligations under the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents; and (iv) acknowledge and agree that they do not have any defense, setoff or counterclaim to the payment or performance of any of their obligations under, or to the enforcement by the Lender of, the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein, including, without limitation, any defense, setoff or counterclaim based on the covenant of good faith and fair dealing. All references in the Documents to any one or more of the Documents, or to the “Loan Documents,” shall be deemed to refer to such Document, Documents or Loan Documents, as the case may be, as previously modified and amended by the Previous Modifications and as modified and amended by this Agreement. Electronic records of executed documents maintained by the Lender shall be deemed to be originals thereof.

Section 8 . Certifications, Representations and Warranties . In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby certify, represent and warrant to the Lender that all certifications, representations and warranties contained in the Documents and the Previous Modifications and in all certificates heretofore delivered to the Lender are true and correct as of the date of this Agreement and if different, as of the date of the execution

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and delivery of this Agreement, and all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement.

Section 9 . Entire Agreement; No Reliance . This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. The Borrower/Guarantor Parties acknowledge that they are executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein.

Section 10 . Successors . This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives.

Section 11 . Severability . In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof.

Section 12 . Amendments, Changes and Modifications . This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto.

Section 13 . Construction .

(a) The words “hereof,” “herein,” and “hereunder,” and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used.

(b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed.

(d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders.

(e) The Borrower/Guarantor Parties and the Lender, and their respective legal counsel, have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement.

Section 14 . Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same document. Receipt of an executed signature page to this Agreement by

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facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Agreement maintained by the Lender shall be deemed to be an original.

Section 15 . Governing Law . This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement.

Section 16 . Waiver of Trial by Jury . THE PROVISIONS OF THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS RELATING TO WAIVER OF TRIAL BY JURY SHALL APPLY TO THIS AGREEMENT.

[SIGNATURE PAGE(S) AND EXHIBIT(S),

IF ANY, FOLLOW THIS PAGE]

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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.




	ADK LUMBER CITY OPERATOR, LLC
	ADK LAGRANGE OPERATOR, LLC
	ADK POWDER SPRINGS OPERATOR, LLC
	ADK THUNDERBOLT OPERATOR, LLC
	ATTALLA NURSING ADK, LLC
	MOUNTAIN TRACE NURSING ADK, LLC
	ERIN NURSING, LLC
	CP NURSING, LLC
	BENTON NURSING, LLC
	VALLEY RIVER NURSING, LLC
	PARK HERITAGE NURSING, LLC
	HOMESTEAD NURSING, LLC
	MOUNTAIN VIEW NURSING, LLC
	LITTLE ROCK HC&R NURSING, LLC
	COOSA NURSING ADK, LLC
	QC NURSING, LLC


	By	/s/ William McBride
		William McBride III, Manager of Each Borrower


	ADCARE HEALTH SYSTEMS, INC.


	By	/s/ William McBride
		William McBride, Chief Executive Officer


	THE PRIVATEBANK AND TRUST COMPANY


	By	/s/ Amy K. Hallberg
		Amy K. Hallberg, Managing Director

- AdCare Portfolio Operator Loan Ninth Modification Agreement -

- Signature Page -



	Exhibit 10.83

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT (this “ Sublease ”) is entered into as of the 1 ^st day of May, 2015 (the “ Execution Date ”) by and between NW 61 ^ST NURSING, LLC, a Georgia limited liability company (“ Sublessor ”) and SOUTHWEST LTC-NW OKC, LLC, a Texas limited liability company (“ Sublessee ”), for the improved real property described on Exhibit “A-1” (the “ Premises ”), on which Premises is located that certain 100-bed skilled nursing facility located at 2801 Northwest 61 ^st Street, Oklahoma, City, Oklahoma, 73112, including the “ Sublessor Personal Property ” associated therewith described on Exhibit “A-2” (the Sublessor Personal Property together with the Premises, being collectively the “ Facility ”). Certain capitalized terms used in this Sublease are defined on Exhibit “B” .

RECITALS

WHEREAS, Sublessor is the tenant under that certain Facility Lease Agreement dated as of January 1, 2013 (the “ Lease Agreement ”) pursuant to which Sublessor leases the Premises from Northwest Property Holdings, LLC, a Georgia limited liability company (the “ Landlord ”); and

WHEREAS, this Sublease is subject and subordinate to the Lease Agreement. Sublessor shall remain responsible for all obligations under the Lease Agreement not agreed to be performed by Sublessee under this Sublease. Sublessor shall exercise due diligence in attempting to cause the Landlord to perform its obligations under the Lease Agreement for the benefit of the Sublessee.

NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1. Term . The “ Term ” of this Sublease is the Initial Term of ten (10) years plus the Renewal Terms (if any). A “ Sublease Year ” is the twelve (12) month period commencing on the Commencement Date (as defined below) and each anniversary thereof during each year of the Term. The “ Initial Term ” commences on October 1, 2015 (the “ Commencement Date ”) and ends on the last day of the one hundred twentieth (120 ^th ) full calendar month thereafter, and may be extended for two (2) separate renewal terms of five (5) years each (each a “Renewal Term” ) if: (a) at least one hundred eighty (180) days prior to the end of the Initial Term or the first Renewal Term, as applicable, Sublessee delivers to Sublessor the “ Renewal Notice ” indicating that Sublessee desires to exercise its right to extend this Sublease for a Renewal Term and (b) there is no then uncured Event of Default (i) as of the date Sublessor receives the Renewal Notice (the “ Exercise Date ”), or (ii) on the last day of the Initial Term or the first Renewal Term, as applicable, and (c) Tenant and any Affiliate of Tenant that leases any additional facility from Landlord or Landlord’s Affiliates (hereinafter such leases are referred to as “ Related Leases ”) concurrently deliver appropriate Renewal Notice(s) exercising all renewal options for all such facilities. For

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purposes hereof, “ Termination Date ” shall mean the last day of the Initial Term or the applicable Renewal Term (if any) or the earlier date on which this Sublease may be terminated as provided herein.

2. Rent . During the Term, Sublessee shall pay in advance to Sublessor on or before the 1 ^st day of each month the following amounts as Rent (as defined below):

2.1 Initial Term Rent . During the Initial Term, “Rent” shall be as follows:



Time Period	Rent Per Month
10/01/2015 through 03/31/2016	$25,000.00
04/01/2016 through 12/31/2016	$27,000.00
01/01/2017 through 12/31/2017	$29,000.00
01/01/2018 through 12/31/2018	$31,000.00

Commencing on January 1, 2019 and continuing on January 1 of each subsequent calendar year during the Initial Term, Rent shall increase by two percent (2%) over the Rent paid during the preceding calendar year.

2.2 Renewal Term Rent . To establish a fair market Rent for the Premises during each Renewal Term, the Rent for the applicable Renewal Term shall be reset and expressed as an annual amount equal to the greater of (a) the Fair Market Rental of the Premises as established pursuant to Exhibit C-1 , or (b) one hundred and 5/10 percent (100.5%) of the Rent due for the immediately preceding month. Commencing with the second (2 ^nd ) Sublease Year of a Renewal Term, the Rent due each Sublease Year shall equal the amount of the Rent payable for the immediately preceding Sublease Year as increased by one percent (1%).

2.3 Absolute Net Sublease. All Rent payments shall be absolutely net to Sublessor, free or any and all Taxes (as defined below in Section 5 ), Other Charges (as defined below in Section 5 ), and operating or other expenses of any kind whatsoever, all of which shall be paid by Sublessee. Sublessee shall at all times during the Term remain obligated under this Sublease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind. Sublessee’s sole right to recover damages against Sublessor under this Sublease shall be to prove such damages in a separate action.

2.4 Payment Terms . All Rent and other payments to Sublessor hereunder shall be paid by wire transfer in accordance with Sublessor’s wire transfer instructions attached hereto as Exhibit C-2 , or as otherwise directed by Sublessor from time to time.

3. Security Deposit. Sublessee shall deposit with Sublessor and maintain during the Term the cash sum of Twenty-five Thousand and 00/100 Dollars ($25,000.00) as a security deposit (the “ Security Deposit ”) which Sublessor shall hold as security for the full and faithful performance by Sublessee of every term, provision, obligation and covenant under this Sublease and subject to the terms and conditions of this Sublease. The Security Deposit shall be paid to Sublessor as follows:

HNZW/505063_5.doc/3583- 1

(i) $8,000.00 on the Commencement Date, (ii) $8,000.00 on the 30 ^th day after the Commencement Date and (iii) $9,000.00 on the 60 ^th day after the Commencement Date. The Security Deposit may be deposited by Sublessor into an interest-bearing account, which interest shall accrue for the sole benefit of Sublessor and not Sublessee. The Security Deposit shall not be considered an advance payment of Rent (or of any other sum payable by Sublessee under this Sublease) or a measure of Sublessor’s damages in case of a default by Sublessee. Sublessor shall have no obligation to maintain the Security Deposit separate and apart from Sublessor’s general and/or other funds. If Sublessee defaults in respect of any of the terms, provisions, covenants and conditions of this Sublease or if there is a default under any Related Lease, Sublessor may, but shall not be required to, in addition to and not in lieu of any other rights and remedies available to Sublessor, apply all or any part of the Security Deposit to the payment of any sum in default, or any other sum that Sublessor may expend or be required to expend by reason of such default, including but not limited to, any damages or deficiency in reletting the Premises. Whenever, and as often as, Sublessor has applied any portion of the Security Deposit to cure a default hereunder or under any Related Lease, Sublessee shall, within ten (10) days after Notice from Sublessor, deposit additional money with Sublessor sufficient to restore the Security Deposit to the full amount then required to be deposited with Sublessor, and Sublessee’s failure to do so shall constitute an Event of Default without any further Notice. If Sublessor transfers or assigns its interest under this Sublease, Sublessor shall assign the Security Deposit to the new Sublessor and thereafter Sublessor shall have no further liability for the return of the Security Deposit, and Sublessee agrees to look solely to the new Sublessor for the return of the Security Deposit. Sublessee agrees that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that Sublessor, its successors and assigns may return the Security Deposit to the last Sublessee in possession of the Premises at the last address for which Notice has given by such Sublessee and that Sublessor thereafter shall be relieved of any liability therefor, regardless of one or more assignments of this Sublease or any such actual or attempted assignment or encumbrances of the Security Deposit

4. Late Charges . The late payment of Rent or other amounts due under this Sublease will cause Sublessor to lose the use of such money and incur administrative and other expenses not contemplated under this Sublease. While the exact amount of the foregoing is difficult to ascertain, the parties agree that as a reasonable estimate of fair compensation to Sublessor, if Rent or any other amount is not paid within (a) five (5) days after the due date for such payment, then Sublessee shall thereafter pay to Sublessor on demand a late charge equal to five percent (5%) of such delinquent amounts, and (b) ten (10) days after the due date for such payment, such unpaid amount shall accrue interest from such date at the rate of ten percent (10%) per annum (the “ Agreed Rate ”).

HNZW/505063_5.doc/3583- 1

of the Facility or any portion of the Premises and all other charges, obligations or deposits assessed against any portion of the Premises during the Term. Sublessee shall pay the foregoing when due and before any Penalty, but may pay the foregoing in permitted installments (whether or not interest accrues on the unpaid balance). Within ten (10) days of its receipt of Sublessor’s written notice of payment, Sublessee shall pay Sublessor an amount equal to any Taxes or Penalty that Sublessor at any time is assessed or otherwise becomes responsible and for which Sublessee is liable under this Sublease. However, nothing in this Sublease shall obligate Sublessee to pay penalties incurred as a result of Sublessor’s failure to timely forward bills to Sublessee.

5.1 Protests . Sublessee has the right, but not the obligation, in good faith to protest or contest (a “ Protest ”) in whole or in part (a) the amount or payment of any Taxes or Other Charges, and (b) the existence, amount or validity of any Lien (as defined in Section 8.1 ), by appropriate proceedings sufficient to (i) prevent the collection or other realization of such Taxes, Other Charges or Liens, or (ii) prevent the sale, forfeiture or loss of any portion of the Premises, or (iii) prevent the forfeiture of Rent to satisfy such Taxes, Other Charges or Liens (so long as it provides Sublessor with reasonable security to assure the foregoing). Sublessee shall diligently prosecute any such Protest at its sole cost and expense and pay such Taxes, Other Charges or Lien. Sublessor shall cooperate in any Protest that involves an amount assessed against it.

5.2 Impound . If required by the Facility Mortgagee or upon Sublessor’s written notice to Sublessee during the Term, Sublessor may require Sublessee to pay with each Rent payment a deposit of one-twelfth (1/12 ^th ) of the amount required to discharge the annual amount of real property Taxes secured by a Lien encumbering any portion of the Premises as and when they become due. The deposits shall not bear interest nor be held by Sublessor in trust or as an agent of Sublessee, but rather shall be applied to the payment of the related obligations. If at any time within thirty (30) days prior to the due date the deposits shall be insufficient for the payment of the obligation in full, Sublessee shall within ten (10) days after demand deposit the deficiency with Sublessor. If deposits are in excess of the actual obligation, the required monthly deposits for the ensuing Sublease Year shall be reduced proportionately and any such excess at the end of the final Sublease Year shall be refunded to Sublessee within thirty calendar (30) days. Sublessee shall forward to Sublessor or its designee all Tax bills, bond and assessment statements as soon as they are received. If Sublessor transfers this Sublease, it shall transfer all such deposits to the transferee, and Sublessor shall thereafter have no liability of any kind with respect thereto.

5.3 Tax Treatment; Reporting . Sublessor and Sublessee each acknowledges that each shall treat this transaction as a true Sublease for state law purposes and shall report this transaction as a Sublease for Federal income tax purposes. For Federal income tax purposes each shall report this Sublease as a true Sublease with Sublessor as the owner of the Premises and Sublessee as the lessee of such Premises including: (a) treating Sublessor as the owner of the property eligible to claim depreciation deductions under Section 167 or 168 of the Internal Revenue Code of 1986 (the “ Code ”) with respect to the Premises, (b) Sublessee reporting its Rent payments as rent expense under Section 162 of the Code, and (c) Sublessor reporting the Rent payments as rental income. For the avoidance of doubt, nothing in this Sublease shall be deemed to constitute a guaranty, warranty or representation by either Sublessor or Sublessee as to the actual treatment of this transaction for state law purposes and for federal income tax purposes.

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6. Insurance . All insurance provided for in this Sublease shall (i) be maintained under valid and enforceable policies issued by insurers licensed and approved to do business in the state where the Facility is located, (ii) name Sublessor as an additional insured and, for the property insurance policies, as the owner, (iii) be on an “occurrence” basis, or if claims made, include a provision whereby tail coverage costs are specified upon policy inception, (iv) cover all of Sublessee’s operations at the Facility, (v) provide that the policy may not be canceled except upon not less than thirty (30) days’ prior written notice to Sublessor and (vi) be primary and provide that any insurance with respect to any portion of the Premises maintained by Sublessor is excess and noncontributing with Sublessee’s insurance. The property policy(ies) shall also name the Sublessor and Facility Mortgagee as loss payee. The parties hereby waive as to each other all rights of subrogation which any insurance carrier, or either of them, may have by reason of any provision in any policy issued to them, provided such waiver does not thereby invalidate such policy. Original policies or satisfactory insurer certificates evidencing the existence of the insurance required by this Sublease and showing the interest of Sublessor and Facility Mortgagee shall be provided to Sublessor prior to the commencement of the Term or, for a renewal policy, not less than five (5) days prior to the expiration date of the insurance policy being renewed. If Sublessor is provided with a certificate, it may demand that Sublessee provide a complete copy of the related policy within ten (10) days. Sublessee may satisfy the insurance requirements hereunder through coverage under so-called blanket policy(ies) of insurance carried and maintained by Sublessee regarding other operations or facilities; provided, however, that the coverage afforded Sublessor will not be reduced or diminished or otherwise be different from that which would exist under a separate policies of insurance meeting all other requirements of this Sublease by reason of the use of such blanket policies of insurance. During the Term, Sublessee shall maintain the following insurance and any claims thereunder shall be adjudicated by and at the expense of it or its insurance carrier:

(a) Property Insurance with respect to the Facility against loss or damage from all causes under standard “all risk” property insurance coverage with an agreed amount endorsement (such that the insurance carrier has accepted the amount of coverage and has agreed that there will be no co-insurance penalty), without exclusion for fire, lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake, malicious mischief and any other risks normally covered under an extended coverage endorsement, in amounts that are not less than the actual replacement value of the Facility and all Sublessor and Sublessee Personal Property associated therewith (including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction). Additionally, if the Facility contains steam boilers, steam pipes, steam engines, steam turbines or other high pressure vessels, insurance with an agreed amount endorsement (such that the insurance carrier has accepted the amount of coverage and has agreed that there will be no co-insurance penalty), covering the major components of the central heating, air conditioning and ventilating systems, boilers, other pressure vessels, high pressure piping and machinery, elevators and escalators, if any, and other similar equipment installed in the Facility, in an amount equal to one hundred percent (100%) of the full replacement cost of the Facility, which policies shall insure against physical damage to and loss of occupancy and use of the Facility arising out of an accident or breakdown covered thereunder;

(b) Business Interruption and Extra Expense Coverage with respect to the Facility for loss of rental value for a period not less than twelve (12) months, covering perils

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consistent with the requirements of Section 6(a) , and including either an agreed amount endorsement or a waiver of any co-insurance provisions, so as to prevent Sublessee, Sublessor and any other insured thereunder from being a co-insurer, and providing that any covered loss thereunder shall be payable to the Sublessor;

(c) Commercial General Public Liability Coverage with respect to the Facility (including products liability and broad form coverage) against claims for bodily injury, death or property damage occurring on, in or about the Facility, affording the parties protection of not less than $300,000.00 per occurrence/$600,000.00 per location in the aggregate, naming Sublessor as additional insured; provided, however, if requested by Sublessor and if commercially available, Sublessee shall provide coverage with limits of not less than $1,000,000.00 per occurrence/$3,000,000.00 per location with the increased premium cost (above that previously paid by Sublessee) to be borne by Sublessor either directly or through a reduction in Base Rent;

(d) Professional Liability Coverage with respect to the Facility, providing for claims specifically relating to patient care and services provided by the Facility staff, its’ contractors and all related parties, to include coverage or medical directors with regard to their administrative duties provided to the facility, with limits of not less than $300,000.00 per occurrence/$600,000.00 per location in the aggregate, naming Sublessor as additional insured; provided, however, if requested by Sublessor and if commercially available, Sublessee shall provide coverage with limits of not less than $1,000,000.00 per occurrence/$3,000,000.00 per location with the increased premium cost (above that previously paid by Sublessee) to be borne by Sublessor either directly or through a reduction in Base Rent. If such coverage is purchased on a claims made basis, Sublessee must show proof of the ability to purchase tail coverage to last through the statute of limitations, upon the end of the Sublease Term;

(e) Worker’s Compensation and Employers Liability Insurance with respect to the Facility for losses sustained by Sublessee’s employees in the course and scope of their employment, as well as volunteers, and otherwise consistent with all applicable state law and meeting all other legal requirements;

(f) Business Interruption and Extra Expense Coverage with respect to the Facility for loss of rental value for a period not less than one (1) year, covering perils consistent with the requirements of Section 4(a) , and including either an agreed amount endorsement or a waiver of any co-insurance provisions, so as to prevent Sublessee, Sublessor and any other insured thereunder from being a co-insurer, and providing that any covered loss thereunder shall be payable to the Sublessor; and

(g) Deductibles/Self-Insured Retentions for the above policies shall not be greater than One Hundred Thousand Dollars ($100,000), and Sublessor shall have the right at any time to require a lower amount or set higher policy limits, to the extent commercially available and reasonable and customary for similar operations and properties to those of the Facility.

7. Use, Regulatory Compliance and Preservation of Business .

7.1 Permitted Use; Qualified Care . Sublessee shall continuously use and occupy the Facility during the Term as a skilled nursing facility with not less than 100 beds and

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for ancillary services relating thereto, but for no other purpose. Sublessee shall provide care, treatment and services to all residents of the Facility in a manner consistent with all applicable laws. Notwithstanding any common law or statutory right, Sublessee agrees not to transfer, move or otherwise take action that reduces licensed bed complement of the Facility and Sublessee agrees not to take any of the licensed beds out of service or move the beds to a different location.

7.2 Regulatory Compliance . Sublessee, the Facility and the Premises shall comply in all material respects with all licensing and other laws and all covenants, conditions, restrictions and other use or maintenance requirements applicable to the Facility and, to the extent applicable, all Medicare, Medicaid and other third-party payor certification requirements, including timely filing properly completed cost and other required reports, timely paying all expenses shown thereon, and ensuring that the Facility continues to be fully certified for participation in Medicare and Medicaid (if applicable) throughout the Term and when they are returned to Sublessor, all without any suspension, revocation, decertification or other material limitation of such certification. Further, Sublessee shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Facility, result in closure of the Facility or result in the sale or transfer of all or any portion of any related certificate of need (if applicable), bed rights or other similar certificate or license at any of the Facility. All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Sublessor.

7.3 Preservation of Business . Sublessee acknowledges that a fair return to Sublessor on and protection of its investment in the Premises depends, in part, on Sublessee’s dedication to the Business and the concentration of similar businesses of Sublessee and its Affiliates in the geographical area of each Facility. Sublessee further acknowledges that the diversion of residents or patient care activities (except as is necessary to provide residents or patients with an alternative level of care) from any Facility to other facilities owned or operated by Sublessee or its Affiliates at any time during the Term will have a material adverse effect on the value and utility of such Facility. Therefore, Sublessee agrees that during the Term and for a period of two (2) years thereafter, neither Sublessee nor any of its Affiliates shall, without the prior written consent of Sublessor: (i) operate, own, participate in or otherwise receive revenues from any other business providing services similar to those of the business of the Facility within a two (2)-mile geographical radius of the Facility, (ii) except as is necessary to provide residents or patients with an alternative level of care, recommend or solicit the removal or transfer of any resident or patient from any Facility to any other nursing, health care, senior housing or retirement housing facility or divert actual or potential residents, patients or care activities of the business conducted at the Facility to any other facilities owned or operated by Sublessee or its Affiliates or from which they receive any type of referral fees or other compensation for transfers, or (iii) employ for other businesses any management or supervisory personnel working on or in connection with any portion of the business or the Facility; provided, however, that if Sublessee or an Affiliate Subleases additional facilities from Sublessor or Sublessor’s Affiliates, the parties agree that Sublessee may move employees among those Affiliated Facilities.

8. Acceptance, Maintenance, Upgrade, Alteration and Environmental .

8.1 Acceptance “AS IS”; No Liens .

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(a) Sublessee acknowledges that it is presently engaged in operations similar to those to be conducted at the Facility and has expertise in such industry and, in deciding to enter into this Sublease, has not relied on any representations or warranties, express or implied, of any kind from Sublessor. Sublessee has investigated the Premises, has selected the Premises to its own specifications, has concluded that no improvements or modifications to them are required in order to operate the Facility, and accepts the Facility and the Premises on an “ AS IS ” basis and assumes all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. Notwithstanding its right to Protest set forth in Section 5.1 , Sublessee shall not cause or permit any lien, levy or attachment to be placed or assessed against any portion of the Premises or the operation thereof (a “ Lien ”) for any reason, provided that nothing in this Sublease shall require Sublessee to keep the Premises free of liens that may be filed as a result of Sublessor’s action or omissions.

8.2 Sublessee’s Maintenance Obligations . Sublessee shall (a) keep and maintain the Premises and the Facility in good appearance, repair and condition and maintain proper housekeeping, (b) promptly make all repairs (interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen) necessary to keep the Facility in good and working order and condition and in substantial compliance with all applicable requirements and laws relating to the business conducted thereon, including if applicable, certification for participation in Medicare and Medicaid, and (c) keep and maintain all Sublessor and Sublessee Personal Property in good condition, ordinary wear and tear excepted, and repair and replace such property consistent with prudent industry practice as required under this Sublease.

8.3 Alterations by Sublessee . Sublessee may alter, improve, exchange, replace, modify or expand (collectively, “ Alterations ”) the Facility, equipment or appliances on the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises; provided, that any Alterations in excess of One Hundred Thousand Dollars ($100,000) with respect to the Facility in any rolling twelve (12) month period shall require Sublessor’s prior written consent, which shall not be unreasonably withheld, delayed, or conditioned. All Alterations shall immediately become a part of the Premises and the property of Sublessor subject to this Sublease, and the cost of all Alterations or other purchases, whether undertaken as an on-going licensing, Medicare, Medicaid or other regulatory requirement, or otherwise, shall be borne solely by Sublessee. All Alterations shall be constructed in a good and workmanlike manner in compliance with all applicable laws and the insurance required under this Sublease.

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portion of the Premises; (c) any remedial action taken by Sublessee in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about any portion of the Premises in violation of any Hazardous Materials Laws; (d) Sublessee’s discovery of any occurrence or condition on or in the vicinity of any portion of the Premises that materially increase the risk that any portion of the Premises will be exposed to Hazardous Materials; and (e) all communications to or from Sublessee, any governmental authority or any other Person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to any portion of the Premises, including copies thereof. Sublessor shall have the right, at Sublessee’s sole cost and expense (including, without limitation, Sublessor’s reasonable attorneys’ fees and costs) and with counsel chosen by Sublessor, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. Sublessor represents and warrants to Sublessee that to Sublessor’s knowledge, there are not pending claims or causes of action arising out or relating to the Facility or the Premises as of the commencement of the Term.

9. Sublessee Property . Sublessee shall obtain and install all items of furniture, fixtures, supplies and equipment not included as Sublessor Personal Property as shall be necessary or reasonably appropriate to operate the Facility in compliance with this Sublease (“ Sublessee Personal Property ”, which collectively with the “ Sublessee Intangible Property ” shall be referred to herein as “ Sublessee Property ”.) As used herein, “ Sublessee Intangible Property ” means all the following at any time owned by Sublessee in connection with its use of any portion of the Premises: Medicare, Medicaid and other accounts and proceeds thereof; rents, profits, income or revenue derived from such operation or use; all documents, chattel paper, instruments, contract rights (including contracts with residents, employees and third-party payors), deposit accounts, general intangibles and chooses in action; refunds of any Taxes or Other Charges for periods of time during the Term; and licenses and permits necessary or desirable for Sublessee’s use of any portion of the Premises, including licensed Medicaid beds (if applicable). Except as may be allowed under common law, Sublessor shall have no lien or security interest in or to the Sublessee Intangible Property, and any such common law lien or security interest of Sublessor shall be subordinate to the lien and security interest of any third party lender providing to Sublessee a working capital line of credit, whether such working capital line of credit exists as of the Commencement Date or future working capital lines of credit, and no further instrument of subordination shall be required.

10. Financial, Management and Regulatory Reports . Sublessee shall provide Sublessor with the reports listed in Exhibit “D” at the time described therein, and such other information about it or the operations of the Facility as Sublessor may reasonably request from time to time, including such information requested in connection with any financing of the Premises sought by Sublessor. All financial information provided by Sublessee shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be submitted electronically in the form of unrestricted, unlocked “.xls” spreadsheets created using Microsoft Excel (2003 or newer editions). If Sublessee or any Affiliate becomes subject to any reporting requirements of the Securities and Exchange Commission (“SEC”) during the Term, it shall concurrently deliver to Sublessor such reports as are delivered pursuant to applicable securities laws. Similarly, should Sublessor or its parent, AdCare Health Systems, Inc., be subject to any particular reporting requirements of the SEC during the Term for which it needs reports, documentation or other information from Sublessee, Sublessee agrees to deliver such reports, documentation and information within ten (10) days after Sublessor’s request for the same.

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11. Representations and Warranties . Each party represents and warrants to the other that: (a) this Sublease and all other documents executed or to be executed by it in connection herewith have been duly authorized and shall be binding upon it; (b) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform this Sublease within the state where the Premises is located; and (c) neither this Sublease nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party.

12. Events of Default . So long as there is no Event of Default, Sublessee shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Sublessee or pursuant to Sections 16 or 17 . The occurrence of any of the following events will constitute an “ Event of Default ” on the part of Sublessee, and there shall be no cure period therefor except as otherwise expressly provided:

(a) Sublessee’s failure to pay within five (5) business days of when due any Rent, Taxes, Other Charges or other required payments;

(b) (i) The revocation, suspension or material limitation of any license required for the operation of the Facility or the certification of the Facility for provider status under Medicare or Medicaid, if applicable; (ii) the closure of the Facility; (iii) the sale or transfer of all or any portion of any certificate of need, bed rights or other similar certificate or license relating to the Facility; (iv) the use of any portion of the Facility other than for a skilled nursing facility and for ancillary services relating thereto; or (v) any act or omission of Sublessee that in the judgment of Sublessor will more likely than not result in any of the foregoing;

(c) Any other material suspension, termination or restriction placed upon Sublessee, the Facility or the ability to admit residents or patients (e.g., an admissions ban or non-payment for new admissions by Medicare or Medicaid resulting from an inspection survey, if applicable);

(d) An material default under any Related Lease which is not cured within any applicable cure period specified therein;

(e) Any misrepresentation by Sublessee under this Sublease or material misstatement or omission of fact in any written report, notice or communication from Sublessee to Sublessor;

(f) The failure to perform or comply with the provisions of Sections 6 or 15 ;

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appointment to be discharged or such discharge is not diligently prosecuted to completion within sixty (60) days after the date of such appointment; (iii) the filing by Sublessee of a voluntary petition under any federal bankruptcy or state law to be adjudicated as bankrupt or for any arrangement or other debtor’s relief; or (iv) the involuntary filing of such a petition against Sublessee by any other party, unless Sublessee within three (3) business days of such filing informs Sublessor in writing of its intent to cause such petition to be dismissed, such dismissal is diligently prosecuted and such petition is dismissed within one hundred twenty (120) days after filing; or

(h) The failure to perform or comply with any provision of this Sublease not requiring the payment of money unless (i) within three (3) business days of Sublessee’s receipt of a notice of default from Sublessor, Sublessee gives Sublessor notice of its intent to cure such default; and (ii) Sublessee cures it either (x) within thirty (30) days after such notice from Sublessor or (y) if such default cannot with due diligence be so cured because of the nature of the default or delays beyond the control of Sublessee and cure after such period will not have a materially adverse effect upon the Facility, then such default shall not constitute an Event of Default if Sublessee uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof and cures it within ninety (90) days after such notice from Sublessor.

13. Remedies . Upon the occurrence of an Event of Default, Sublessor may exercise all rights and remedies under this Sublease and the laws of the state where the Premises is located that are available to a Sublessor of real and personal property in the event of a default by its Sublessee, and as to the Sublessee Property, all remedies granted under the laws of such state(s) to a secured party under its Uniform Commercial Code. Sublessor shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet the Premises or to collect any rent due upon any such reletting. Sublessee shall pay Sublessor, promptly upon demand, all expenses incurred by it in obtaining possession and reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers.

13.1 General . Without limiting the foregoing, Sublessor shall have the right (but not the obligation) to do any of the following upon an Event of Default: (a) sue for the specific performance of any covenant of Sublessee as to which it is in breach; (b) enter upon any portion of the Premises, terminate this Sublease, dispossess Sublessee from the Premises through appropriate legal procedures and/or collect money damages by reason of Sublessee’s breach, including the acceleration of all Rent which would have accrued after such termination and all obligations and liabilities of Sublessee under this Sublease which survive the termination of the Term; (c) elect to leave this Sublease in place and sue for Rent and other money damages as the same come due; and (d) (before or after repossession of the Premises pursuant to clause (b) above and whether or not this Sublease has been terminated) relet any portion of the Premises to such Sublessee(s), for such term(s) (which may be greater or less than the remaining balance of the Term), rent, conditions (which may include concessions or free rent) and uses as it may determine in its sole discretion and collect and receive any rents payable by reason of such reletting.

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shall run concurrently with any provided by applicable law. No failure of Sublessor to insist at any time upon the strict performance of any provision of this Sublease or to exercise any option, right, power or remedy contained herein shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Sublessee. Sublessor’s receipt of and Sublessee’s payment of any rent or other sum due hereunder (including any late charge) with knowledge of any breach shall not be deemed a waiver of such breach, and no waiver by Sublessor of any provision of this Sublease shall be effective unless expressed in a writing signed by it.

13.3 Performance of Sublessee’s Obligations . If Sublessee at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Sublease, then Sublessor may, without waiving or releasing Sublessee from any obligations or default hereunder, make such payment or perform such act for the account and at the expense of Sublessee after delivering Sublessee thirty (30) days’ notice with an opportunity to cure, and enter upon any portion of the Premises for the purpose of taking all such action as may be reasonably necessary. No such entry shall be deemed an eviction of Sublessee. All sums so paid by Sublessor and all necessary and reasonable incidental costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the performance of any such act by it, together with interest at the Agreed Rate (as defined in Section 3 hereof) from the date of the making of such payment or the incurring of such costs and expenses, shall be payable by Sublessee to Sublessor upon Sublessor’s written demand therefor.

14. Provisions on Termination .

14.1 Surrender of Possession . On the expiration of the Term or earlier termination or cancellation of this Sublease (the “ Termination Date ”), Sublessee shall deliver to Sublessor or its designee possession of (a) the Facility and associated Sublessor Personal Property in a neat and clean condition and in as good a condition as existed at the date of Sublessee’s possession and occupancy pursuant to this Sublease, ordinary wear and tear excepted, (b) a fully operational, licensed and certified (if applicable) business at the Facility including, at Sublessee’s sole cost, any Alterations necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of any portion of the Premises to Sublessor or its designee, and (c) all patient charts and resident records along with appropriate resident consents if necessary and copies of all of its books and records relating to the Facility and the Premises. Accordingly, Sublessee shall not at any time during or after the Term seek to transfer, surrender, allow to lapse, or grant any security interest or any other interest in and to the licenses, permits or certifications relating to the Facility or the Premises, nor shall Sublessee commit or omit any act that would jeopardize the Facility or any licensure or certification of the Facility. Sublessee shall cooperate fully with Sublessor or its designee in transferring or obtaining all necessary licenses and certifications for Sublessor or its designee, and Sublessee shall comply with all requests for an orderly transfer of the Facility licenses, and Medicare and Medicaid certifications and possession at the time of its surrender of the Premises to Sublessor or its designee to operate the Facility. Subject to all applicable laws, Sublessee hereby assigns, effective upon the Termination Date, all rights to operate the Facility to Sublessor or its designee, including all required licenses and permits and all rights to apply for or otherwise obtain them, and all other nonproprietary Sublessee Intangible Property relating to any portion of the Premises.

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14.2 Removal of Sublessee Personal Property . Provided that no Event of Default then exists, in connection with the surrender of the Premises, Sublessee may upon at least five (5) business days’ prior notice to Sublessor remove from the Premises in a workmanlike manner all Sublessee Personal Property, leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal; provided that Sublessor shall have the right and option to purchase the Sublessee Personal Property for its then net book value during such five (5) business day notice period, in which case Sublessee shall so convey the Sublessee Personal Property to Sublessor by executing a bill of sale in a form reasonably required by Sublessor. If there is any Event of Default then existing, Sublessee may not remove any Sublessee Personal Property from the Premises and instead will, on demand from Sublessor, convey it to Sublessor for no additional consideration by executing a bill of sale in a form reasonably required by Sublessor. Title to any Sublessee Personal Property which is not removed by Sublessee as permitted above upon the expiration of the Term shall, at Sublessor’s election, vest in Sublessor; provided, however, that Sublessor may remove and store or dispose any or all of such Sublessee Personal Property which is not so removed by Sublessee without obligation or accounting to Sublessee.

14.3 Management of Premises . Commencing on the Termination Date, Sublessor or its designee, upon written notice to Sublessee, may elect to assume the responsibilities and obligations for the management and operation of the Facility and Sublessee agrees to cooperate fully to accomplish the transfer of such management and operation without interrupting the operation of the Facility. Sublessee agrees that Sublessor or its designee may operate the Facility under Sublessee’s licenses and certifications pending the issuance of new licenses and certifications to Sublessor or its designee. Sublessee shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of the Facility, and Sublessee shall comply with all requests for an orderly transfer of any and all Facility and other licenses, Medicare and Medicaid certifications and possession of the Premises at the time of any such surrender.

14.4 Holding Over . If Sublessee shall for any reason remain in possession of the Premises after the Termination Date, such possession shall be a month-to-month tenancy during which time Sublessee shall pay as rental on the first (1 ^st ) business day of each month one hundred fifteen percent (115%) of the monthly Rent payable with respect to the last Sublease Year, all additional charges accruing during the month and all other sums, if any, payable by Sublessee pursuant to this Sublease. Nothing contained herein shall constitute the consent, express or implied, of Sublessor to the holding over of Sublessee after the Termination Date, nor shall anything contained herein be deemed to limit Sublessor’s remedies.

14.5 Survival . All representations, warranties, covenants and other obligations of Sublessee under this Sublease shall survive the Termination Date.

15. Certain Sublessor Rights .

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mortgaging, or for any other reason; provided that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanics’ or materialmans’ lien law. No such entry shall unreasonably interfere with residents, patients, patient care or the Sublessee’s operations of the Facility. During normal business hours, Sublessee will permit Sublessor and its representatives, inspectors and consultants to examine all contracts, books and financial and other records (wherever kept) relating to Sublessee’s operations of the Facility.

15.2 Grant Liens . This Sublease shall be subordinate to the right, title, and interest of any lender or other party holding a security interest in or a lien upon the Premises under any and all mortgage instruments or deeds to secure debt presently encumbering the Premises or the Building and to any and all other deeds to secure debt or mortgage instruments hereafter encumbering the Premises or the Building. Sublessee shall at any time hereafter, on demand of Sublessor or the holder of any such deed to secure debt or mortgage instrument, execute any instruments which may reasonably be required by such party for the purpose of evidencing the subordination of this Sublease to the lien or security of such party. Sublessee shall, upon demand, at any time or times, execute, acknowledge, and deliver to Sublessor or the holder of any such instruments or deeds to secure debt, without expense, any and all documents that may be necessary to make this Sublease superior to the lien of any of the same. If the holder of any of said instruments or deeds to secure debt shall hereafter succeed to the rights of Sublessor under this Sublease, Sublessee shall, at the option of such holder or a purchaser at any foreclosure or sale under power, attorn to and recognize such successor as Sublessee’s Sublessor under this Sublease. Sublessee shall promptly execute, acknowledge, and deliver any instrument that may be necessary to evidence such attornment. Sublessor will use commercially reasonably efforts to obtain from any lender holding a lien on the Premises, a subordination, non-disturbance and attornment agreement for the benefit of Sublessee.

15.3 Estoppel Certificates . Sublessor and Sublessee shall, at any time upon not less than ten (10) business days’ prior written request by the other party, have an authorized representative execute, acknowledge and deliver to Sublessor or Sublessee, as the case may be, or their designee a written statement certifying (a) that this Sublease, together with any specified modifications, is in full force and effect, (b) the dates to which Rent and additional charges have been paid, (c) that no default by either party exists or specifying any such default, and (d) as to such other matters as Sublessor or Sublessee, as the case may be, may reasonably request.

15.4 Conveyance Release . If Sublessor or any successor owner shall sell or transfer any portion of the Premises in accordance with this Sublease, they shall thereafter be released from all future liabilities and obligations hereunder arising or accruing from and after the date of such conveyance or other transfer, which instead shall thereupon be binding upon the new owner.

16. Assignment and Subletting .

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combination by Sublessee or a sale of all or substantially all of Sublessee’s assets in lieu thereof shall be deemed an assignment or other transfer of this Sublease. Notwithstanding any provision hereof, Sublessee may assign this Sublease to an entity in which Ronald R. Payne, Jr. owns a majority equity interest.

17. Damage by Fire or Other Casualty .

17.1 Damage by Fire or Other Casualty . Sublessee shall promptly notify Sublessor of any damage or destruction of any portion of the Premises and diligently repair or reconstruct such portion of the Premises to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be paid directly to Sublessor and, if an Event of Default has not occurred hereunder, may be used for the repair or reconstruction of the applicable portion of the Premises pursuant to Sublessor's reasonable disbursement requirements and subject to the provisions of the Facility Mortgage Documents and the release of insurance proceeds by the Facility Mortgagee, if any. If such proceeds are insufficient, Sublessee shall provide the required additional funds; if they are more than sufficient, the surplus shall belong and be paid to Sublessee. Sublessee shall not have any right under this Sublease, and hereby waives all rights under applicable law, to abate, reduce or offset rent by reason of any damage or destruction of any portion of the Premises by reason of an insured or uninsured casualty.

18. Condemnation . Except as provided to the contrary in this Section 18 , this Sublease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and Sublessee hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. If during the Term all or substantially all (a “ Complete Taking ”) or a smaller portion (a “ Partial Taking ”) of the Premises is taken or condemned by any competent public or quasi-public authority, then (a) in the case of a Complete Taking, Sublessee may at its election made within thirty (30) days of the effective date of such Taking, terminate this Sublease and the current Rent shall be equitably abated as of the effective date of such termination, or (b) in the case of a Partial Taking, the Rent shall be abated to the same extent as the resulting diminution in Fair Market Value of the applicable portion of the Premises. The resulting diminution in Fair Market Value on the effective date of a Partial Taking shall be as established pursuant to Exhibit “E” . Sublessor alone shall be entitled to receive and retain any award for a taking or condemnation other than a temporary taking; provided, however, Sublessee shall be entitled to submit its own claim in the event of any such taking or condemnation with respect to the value of Sublessee’s Subleasehold interest in any portion of the Premises and/or the relocation costs incurred by Sublessee as a result thereof. In the event of a temporary taking of less than all or substantially all of the Premises, Sublessee shall be entitled to receive and retain any and all awards for the temporary taking and the Rent due under this Sublease shall be not be abated during the period of such temporary taking.

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matter or thing, action or failure to act arising out of or in connection with this Sublease, the Premises or the operations of Sublessee on any portion of the Premises, including, without limitation, (a) the breach by Sublessee or any of its representations, warranties, covenants or other obligations hereunder, (b) any Protest, (c) all known and unknown Environmental Activities on any portion of the Premises, Hazardous Materials Claims or violations by Sublessee of a Hazardous Materials Law with respect to any portion of the Premises, and (d) upon or following the Termination Date, the correction of all deficiencies of a physical matter identified by, and any liability assessed or asserted by, any governmental agency or Medicare or Medicaid providers as a result of or arising out of or in connection with this Sublease or the related change in ownership inspection and audit (including any overpayment to any Medicare, Medicaid or other third party payor). Upon receiving knowledge of any suit, claim or demand asserted by a third party that Sublessor believes is covered by this indemnity, it shall give Sublessee notice of this matter. If Sublessor does not elect to defend the matter with its own counsel at Sublessee’s expense, Sublessee shall then defend Sublessor at Sublessee’s expense (including Sublessor’s reasonable attorneys’ fees and costs) with legal counsel satisfactory to Sublessor.

20. Disputes . If any party brings any action to interpret or enforce this Sublease, or for damages for any alleged breach, the prevailing party shall be entitled to reasonable attorneys’ fees and costs as awarded by the court in addition to all other recovery, damages and costs.

EACH PARTY HEREBY WAIVES ANY RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER IN CONNECTION WITH ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS SUBLEASE, INCLUDING RELATIONSHIP OF THE PARTIES, SUBLESSEE’S USE AND OCCUPANCY OF ANY PORTION OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE RELATING TO THE FOREGOING OR THE ENFORCEMENT OF ANY REMEDY.

21. Notices . All notices and demands, certificates, requests, consents, approvals and other similar instruments under this Sublease shall be in writing and sent by personal delivery, U. S. certified or registered mail (return receipt requested, postage prepaid) or FedEx or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows:

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	If to Sublessee:		If to Sublessor:

	Southwest LTC-NW OKC, LLC		AdCare Health Systems, Inc.
	1518 Legacy Drive, Suite 110		Two Buckhead Plaza
	Frisco, Texas 75034		3050 Peachtree Road NW, Suite 355
	Attention: Ron Payne		Atlanta, Georgia 30305
			Attention: CEO

	With a copy to:

	Hesse & Hesse, P.C.
	1518 Legacy Drive, Suite 250
	Frisco, Texas 75034
	Attention: J. Marc Hesse

A party may designate a different address by notice as provided above. Any notice or other instrument so delivered (whether accepted or refused) shall be deemed to have been given and received on the date of delivery established by U.S. Post Office return receipt or the carrier’s proof of delivery or, if not so delivered, upon its receipt. Delivery to any officer, general partner or principal of a party shall be deemed delivery to such party. Notice to any one co-Sublessee shall be deemed notice to all co-Sublessees.

22. Compliance with Facility Mortgage Documents

(a) If the Facility is refinanced with a loan that is insured by the United States Department of Housing and Urban Development (“ HUD ”; such loan being a “ HUD Loan ”), Sublessee acknowledges that it shall deliver to Sublessor, lender and HUD any and all documentation required to obtain the approval of lender and HUD of this Sublease. Sublessee further acknowledges and agrees that if (i) the entering into of this Sublease results in the Facility Mortgagee giving notice of default or (ii) lender or HUD shall withhold its consent to and approval of this Sublease, then in either such event Sublessor shall have the right to terminate this Sublease immediately.

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benefit of Sublessor, to operate the applicable Facility in strict compliance with the terms and conditions of the Facility Mortgage Documents (other than payment of any indebtedness evidenced or secured thereby) and to timely perform all of the obligations of Sublessor relating thereto, or to the extent that any of such duties and obligations may not properly be performed by Sublessee, Sublessee shall cooperate with and assist Sublessor in the performance thereof (other than payment of any indebtedness evidenced or secured thereby); provided, however, this Section 22(a) shall not ( i) increase Sublessee’s monetary obligations under this Sublease, (ii) increase Sublessee’s non-monetary obligations under this Sublease or (iii) diminish Sublessee’s rights under this Sublease. If any new Facility Mortgage Documents to be executed by Sublessor or any Affiliate of Sublessor would impose on Sublessee any obligations under this Section 22(a) (provided that all such obligations shall comply with the restrictions set forth in the immediately preceding sentence), Sublessor shall provide copies of the same to Sublessee for informational purposes (but not for Sublessee’s approval) prior to the execution and delivery thereof by Sublessor or any Affiliate of Sublessor.

(c) During the Term, Sublessee acknowledges and agrees that, except as expressly provided elsewhere in this Sublease, it shall undertake at its own cost and expense the performance of any and all repairs, replacements, capital improvements, maintenance items and all other requirements relating to the condition of a Facility that are required by any Facility Mortgage Documents, and Sublessee shall be solely responsible and hereby covenants to fund and maintain any and all impound, escrow or other reserve or similar accounts required under any Facility Mortgage Documents as security for or otherwise relating to any operating expenses of a Facility, including any capital repair or replacement reserves and/or impounds or escrow accounts for Taxes or insurance premiums (each a “ Facility Mortgage Reserve Account ”); provided, however, this Section 22(b) shall not (i) increase Sublessee’s monetary obligations under this Sublease, (ii) increase Sublessee’s non-monetary obligations under this Sublease, or (iii) diminish Sublessee’s rights under this Sublease. During the Term of this Sublease and provided that no Event of Default shall have occurred and be continuing hereunder, Sublessee shall, subject to the terms and conditions of such Facility Mortgage Reserve Account and the requirements of the Facility Mortgagee(s) thereunder, have access to and the right to apply or use (including for reimbursement) to the same extent of Sublessor all monies held in each such Facility Mortgage Reserve Account for the purposes and subject to the limitations for which such Facility Mortgage Reserve Account is maintained, and Sublessor agrees to reasonably cooperate with Sublessee in connection therewith.

23. Cooperation . Sublessee agrees that should Sublessor and Sublessor’s Affiliates desire to consolidate all of their Subleases with Sublessee and Sublessee’s Affiliates into one master Sublease, Sublessee shall cooperate with Sublessor and Sublessor’s Affiliates in so documenting such consolidation.

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to Sublessee on the Termination Date. If any part of this Sublease shall be determined to be invalid or unenforceable, the remainder shall nevertheless continue in full force and effect. Time is of the essence, and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a Saturday, Sunday or federal holiday, then such period or date shall be extended until the immediately following business day. Whenever the words “ including ”, “ include ” or “ includes ” are used in this Sublease, they shall be interpreted in a non-exclusive manner as though the words “ without limitation ” immediately followed. Whenever the words day or days are used in this Sublease, they shall mean “ calendar day ” or “ calendar days ” unless expressly provided to the contrary. The titles and headings in this Sublease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision. Unless otherwise expressly provided, references to any “Section” mean a section of this Sublease (including all subsections), to any “ Exhibit ” or “ Schedule ” mean an exhibit or schedule attached hereto or to “ Medicare ” or “ Medicaid ” include any successor program. If more than one Person is Sublessee hereunder, their liability and obligations hereunder shall be joint and several. Promptly upon the request of either party and at its expense, the parties shall prepare, enter into and record a suitable short form memorandum of this Sublease. This Sublease (a) contains the entire agreement of the parties as to the subject matter hereof and supersedes all prior or contemporaneous verbal or written agreements or understandings, (b) may be executed in several counterparts, (including electronically mailed copies in portable document format (PDF)), each of which shall be deemed an original, but all of which shall constitute one and the same document, (c) may only be amended by a writing executed by the parties, (d) shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties, (e) shall be governed by and construed and enforced in accordance with the internal laws of the State of Georgia, and (f) incorporates by this reference any Exhibits and Schedules attached hereto.

25. Non-Disturbance and Attornment . If the Lease Agreement shall expire or terminate during the term of this Sublease for any reason other than condemnation or destruction by fire or other casualty, or if Sublessor shall surrender the Lease Agreement to Landlord during the term of this Sublease, Landlord shall continue this Sublease with the same force and effect as if Landlord as lessor and Sublessee as lessee had entered into a lease as of such effective date for a term equal to the then unexpired term of this Sublease and containing the same provisions as those contained in this Sublease, provided that (i) the Lease Agreement was terminated pursuant to Sublessor’s default under the Lease Agreement, (ii) the default is of such a type that Sublessee can cure, and (iii) Sublessee in fact cures such default within thirty (30) days, where possible, or within a reasonable amount of time. In such event, Sublessor shall promptly transfer the security deposit described in Section 3 of this Sublease to Landlord prior to this Sublease continuing as a direct lease. If Landlord continues this Sublease, Sublessee shall attorn to Landlord and Landlord and Sublessee shall have the same rights, obligations and remedies thereunder as were had by Sublessor and Sublessee hereunder prior to such effective date, respectively, except that in no event shall Landlord be (i) liable for any act or omission by Sublessor, (ii) subject to any offsets or defenses which Sublessee had or might have against Sublessor, or (iii) bound by (A) any previous modification of the Sublease not consented to in writing by Landlord or (B) by any Rent, Taxes, Other Charges and/or additional rent or other payment paid by Sublessee to Sublessor in advance.

26. Lease Agreement . This Sublease is subject and subordinate to the Lease Agreement.

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[Signatures on Following Page]

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IN WITNESS WHEREOF , this Sublease has been executed by Sublessor and Sublessee

as of the date first written above.



	SUBLESSOR :

	NW 61ST NURSING, LLC
	a Georgia limited liability company

	By:	/s/ William McBride III
		William McBride, III, Manager


	SUBLESSEE:

	SOUTHWEST LTC-NW OKC, LLC,
	a Texas limited liability company

	By:	/s/ Ronald R. Payne
	Name:	Ronald R. Payne
	Title:	Manager


THE UNDERSIGNED AGREES TO BE BOUND BY ARTICLE 25 :


	NORTHWEST PROPERTY HOLDINGS, LLC,
	a Georgia limited liability company

	By:	/s/ William McBride III
		William McBride, III, Manager

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EXHIBIT “A-1”



	LOTS ONE (1), TWO (2), THREE (3), FOUR (4) AND “I” PLUS THE WEST 5 FEET OF VACATED ROSS AVENUE ADJACENT ON THE EAST, IN NORTH MAY VIEW ADDITION, TO OKLAHOMA CITY, OKLAHOMA COUNTY, OKLAHOMA, ACCORDING TO THE RECORDED PLAT THEREOF.

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EXHIBIT A-2

SUBLESSOR PERSONAL PROPERTY

“Sublessor Personal Property” means: (i) all personal property used in the operation or management of the Facility, including machinery, equipment, furniture, furnishings, beds, computers, signage, trade fixtures or other personal property and consumable inventory and supplies, including any and all such personal property replaced by Sublessee or required by the state in which the Facility is located or any other governmental entity to operate the Facility, and (ii) all site plans, surveys, soil and substrata studies, architectural drawings, plans and specifications, engineering plans and studies, floor plans, landscape plans, and other plans and studies that relate to the Facilities; provided, however, that Sublessor Personal Property shall not include: (a) any vehicles or computer software used in connection with the operation of the Facilities, or (b) any equipment Subleased by Sublessee from third parties, which equipment is not a replacement of what would otherwise be Sublessor Personal Property.

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EXHIBIT “B”

CERTAIN DEFINITIONS

For purposes of this Sublease, the following terms and words shall have the specified meanings:

“ Affiliate ” shall mean with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“ Control ” shall mean, as applied to any Person, the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise.

“ Environmental Activities ” shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from any portion of the Premises or located on or present on or under any portion of the Premises.

“ Facility Mortgage ” shall mean any mortgage, deed of trust or other security agreement or lien encumbering the Premises or any portion thereof and securing an indebtedness of Sublessor or any Affiliate of Sublessor or any ground, building or similar Sublease or other title retention agreement to which the Premises or any portion thereof is subject from time to time.

“ Facility Mortgagee ” shall mean the holder or beneficiary of a Facility Mortgage and any other rights of the lender, credit party or lessor under the applicable Facility Mortgage Documents.

“ Facility Mortgage Documents ” shall mean with respect to each Facility Mortgage and Facility Mortgagee, the applicable Facility Mortgage, loan or credit agreement, Sublease, note, collateral assignment instruments, guarantees, indemnity agreements and other documents or instruments evidencing, securing or otherwise relating to the loan made, credit extended, Sublease or other financing vehicle pursuant thereto.

“ Hazardous Materials ” shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to any portion of the Premises or to Persons on or about any portion of the Premises or cause any portion of the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards not disposed of in accordance with applicable law; (f) radon gas; and (g) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of any portion of the Premises or the owners and/or occupants of property adjacent to or surrounding any portion of the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time.

“ Hazardous Materials Claims ” shall mean any and all enforcement, clean up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against any portion of the Premises, Sublessor or Sublessee relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

“ Hazardous Materials Laws ” shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters.

“ Person ” shall mean any individual, partnership, association, corporation, limited liability company or other entity.

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EXHIBIT “C-1”

FAIR MARKET RENTAL

“ Fair Market Rental” means, as of the date of determination, the fair market rental of the Premises at its highest and best use, operated as a business consistent with the business to be operated pursuant to the terms of this Sublease, that a willing, comparable, non‑equity Sublessee (excluding release and assignment transactions) would pay, and a willing, comparable Sublessor of a comparable building located in the area in applicable geographical areas would accept, at arm’s length, for buildings of comparable size and quality as the Premises, taking into account the age, quality and layout of the existing improvements in the Premises and taking into account items that professional real estate appraisers customarily consider, including, but not limited to, rental rates, availability of competing facilities, Sublessee size and any Sublease concessions, if any, then being charged or granted by Sublessor or the lessors of such similar facilities. The Fair Market Rental shall be in such amount as agreed to by the parties, or failing such agreement within ten (10) days of such date, as established pursuant to the following appraisal process.

Each party shall within ten (10) days after written demand by the other select one MAI Appraiser to participate in the determination of Fair Market Rental. Within ten (10) days of such selection, the MAI Appraisers so selected by the parties shall select a third (3 ^rd ) MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Fair Market Rental of the Premises or applicable portion thereof within thirty (30) days of the selection of the third appraiser. The fees and expenses of any MAI Appraiser retained pursuant to this Exhibit shall be borne equally between the parties.

If either party fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the Fair Market Rental of the Premises in accordance with the provisions of this Exhibit and the Fair Market Rental so determined shall be binding upon the parties. If the MAI Appraisers selected by the parties are unable to agree upon a third (3 ^rd ) MAI Appraiser within the time period set forth in the foregoing paragraph, either party shall have the right to apply at their own expense to the presiding judge of the court of original trial jurisdiction in the county in which the Premises or applicable portion thereof are located to name the third (3 ^rd ) MAI Appraiser.

Within five (5) days after completion of the third (3 ^rd ) MAI Appraiser’s appraisal, all three (3) MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the Fair Market Rental of the Premises or applicable portion thereof. If a majority are unable to determine the fair market value at such meeting, the three (3) appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Fair Market Rental. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be the Fair Market Rental. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be the Fair Market Rental. In any event, the result of the foregoing appraisal process shall be final and binding.

“ MAI Appraiser ” shall mean an appraiser licensed or otherwise qualified to do business in the state(s) where the Premises or applicable portion thereof are located and who has substantial experience in performing appraisals of facilities similar to the Premises or applicable portion thereof and holds the Appraisal Institute’s MAI designation, or, if such organization no longer exists or certifies appraisers, such successor organization or such other organization as is reasonably agreed upon by Sublessee and Sublessor.

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EXHIBIT C-2

[SUBLESSOR’S WIRE INSTRUCTIONS]

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EXHIBIT “D”

FINANCIAL, MANAGEMENT AND REGULATORY REPORTS



REPORT	DUE DATE
Monthly financial reports concerning the Business at the Facility consisting of: (1) a reasonably detailed income statement showing, among other things, gross revenues; (2) total patient days; (3) occupancy; and (4) payor mix. (All via e-mail to financials@adcarehealth.com)	Thirty (30) days after the end of each calendar month
Quarterly consolidated or combined financial statements of Sublessee and any Guarantor (via e-mail to financials@adcarehealth.com)	Thirty (30) days after the end of each of the first three quarters of the fiscal year of Sublessee and such Guarantor
Annual consolidated or combined financial statements of Sublessee and any Guarantor audited by a reputable certified public accounting firm (via e-mail to financials@adcarehealth.com)	Ninety (90) days after the fiscal year end of Sublessee and such Guarantor
Regulatory reports with respect to the Facility , as follows: (1) all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Sublessee as to any portion of the Premises and any portion of the Business, including state department of health licensing surveys; (2) Medicare and Medicaid certification surveys; and (3) life safety code reports.	Five (5) business days after receipt
Reports of regulatory violations , by written notice of the following: (1) any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including Medicare or Medicaid; (2) any suspension, termination or restriction placed upon Sublessee or any portion of the Premises, the operation of any portion of the Business or the ability to admit residents or patients; or (3) any violation of any other permit, approval or certification in connection with any portion of the Premises or any portion of the Business, by any federal, state or local authority, including Medicare or Medicaid.	Two(2) business days after receipt
Cost Reports	Fifteen (15) days after filing

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EXHIBIT “E”

FAIR MARKET VALUE

“ Fair Market Value ” means the fair market value of the Premises and/or Facility or applicable portion thereof on a specified date as agreed to by the parties, or failing such agreement within ten (10) days of such date, as established pursuant the following appraisal process. Each party shall within ten (10) days after written demand by the other party select one MAI Appraiser to participate in the determination of Fair Market Value. For all purposes under this Sublease, the Fair Market Value shall be the fair market value of the Premises and/or Facility or applicable portion thereof unencumbered by this Sublease. Within ten (10) days of such selection, the MAI Appraisers so selected by the parties shall select a third (3 ^rd ) MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Fair Market Value of the Premises and/or Facility or applicable portion thereof within thirty (30) days of the selection of the third appraiser. To the extent consistent with sound appraisal practices as then existing at the time of any such appraisal, and if requested by Sublessor, such appraisal shall be made on a basis consistent with the basis on which the Premises and/or Facility or applicable portion thereof were appraised at the time of their acquisition by Sublessor. Sublessee shall pay the fees and expenses of any MAI Appraiser it retains pursuant to this Exhibit. Sublessor shall pay the fees and expenses of any MAI Appraiser it retains pursuant to this Exhibit. Each party shall pay half the fees and expenses of the third MAI Appraiser selected by the respective MAI Appraisers selected by each of the parties.

If either party fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the fair market value of the Premises and/or Facility or applicable portion thereof in accordance with the provisions of this Exhibit and the Fair Market Value so determined shall be binding upon the parties. If the MAI Appraisers selected by the parties are unable to agree upon a third (3 ^rd ) MAI Appraiser within the time period set forth in the foregoing paragraph, either party shall have the right to apply to the presiding judge of the court of original trial jurisdiction in the county in which the Premises and/or Facility or applicable portion thereof are located to name the third (3 ^rd ) MAI Appraiser. The cost of such application to the presiding judge shall be equally shared by the parties.

Within five (5) days after completion of the third (3 ^rd ) MAI Appraiser’s appraisal, all three (3) MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the fair market value of the Premises and/or Facility or applicable portion thereof. If a majority are unable to determine the fair market value at such meeting, the three (3) appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Fair Market Value. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be such Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding.

“ MAI Appraiser ” shall mean an appraiser licensed or otherwise qualified to do business in the state(s) where the Premises or applicable portion thereof are located and who has substantial experience in performing appraisals of facilities similar to the Premises or applicable portion thereof and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Sublessor.

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	Exhibit 10.84

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT (this “ Sublease ”) is entered into as of the 1 ^st day of May, 2015 (the “ Execution Date ”) by and between QC NURSING, LLC, a Georgia limited liability company (“ Sublessor ”) and SOUTHWEST LTC-QUAIL CREEK, LLC, a Texas limited liability company (“ Sublessee ”), for the improved real property described on Exhibit “A-1” (the “ Premises ”), on which Premises is located that certain 118-bed skilled nursing facility located at 13500 Brandon Place, Oklahoma City, Oklahoma 73142, including the “ Sublessor Personal Property ” associated therewith described on Exhibit “A-2” (the Sublessor Personal Property together with the Premises, being collectively the “ Facility ”). Certain capitalized terms used in this Sublease are defined on Exhibit “B” .

RECITALS

WHEREAS, Sublessor is the tenant under that certain Facility Lease Agreement dated as of June 25, 2012 (the “ Lease Agreement ”) pursuant to which Sublessor leases the Premises from QC Property Holdings, LLC, a Georgia limited liability company (the “ Landlord ”); and

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2. Rent . During the Term, Sublessee shall pay in advance to Sublessor on or before the 1 ^st day of each month the following amounts as Rent (as defined below):

2.1 Initial Term Rent . During the Initial Term, “Rent” shall be as follows:



Time Period	Rent Per Month
10/01/2015 through 03/31/2016	$55,000.00
04/01/2016 through 12/31/2016	$58,000.00
01/01/2017 through 12/31/2017	$61,000.00
01/01/2018 through 12/31/2018	$64,000.00

2.2 Renewal Term Rent . To establish a fair market Rent for the Premises during each Renewal Term, the Rent for the applicable Renewal Term shall be reset and expressed as an annual amount equal to the greater of (a) the Fair Market Rental of the Premises as established pursuant to Exhibit C-1 , or (b) one hundred 5/10 percent (100.5%) of the Rent due for the immediately preceding month. Commencing with the second (2 ^nd ) Sublease Year of a Renewal Term, the Rent due each Sublease Year shall equal the amount of the Rent payable for the immediately preceding Sublease Year as increased by one percent (1%).

3. Security Deposit. Sublessee shall deposit with Sublessor and maintain during the Term the cash sum of Fifty-five Thousand and 00/100 Dollars ($55,000.00) as a security deposit (the “ Security Deposit ”) which Sublessor shall hold as security for the full and faithful performance by Sublessee of every term, provision, obligation and covenant under this Sublease and subject to the terms and conditions of this Sublease. The Security Deposit shall be paid to Sublessor as follows: (i) $18,000.00 on the Commencement Date, (ii) $18,000.00 on the 30 ^th day after the Commencement Date and (iii) $19,000.00 on the 60 ^th day after the Commencement Date. The Security Deposit may be deposited by Sublessor into an interest-bearing account, which interest shall accrue for the sole benefit of Sublessor and not Sublessee. The Security Deposit shall not be considered an advance payment of Rent (or of any other sum payable by Sublessee under this Sublease) or a measure of

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Sublessor’s damages in case of a default by Sublessee. Sublessor shall have no obligation to maintain the Security Deposit separate and apart from Sublessor’s general and/or other funds. If Sublessee defaults in respect of any of the terms, provisions, covenants and conditions of this Sublease or if there is a default under any Related Lease, Sublessor may, but shall not be required to, in addition to and not in lieu of any other rights and remedies available to Sublessor, apply all or any part of the Security Deposit to the payment of any sum in default, or any other sum that Sublessor may expend or be required to expend by reason of such default, including but not limited to, any damages or deficiency in reletting the Premises. Whenever, and as often as, Sublessor has applied any portion of the Security Deposit to cure a default hereunder or under any Related Lease, Sublessee shall, within ten (10) days after Notice from Sublessor, deposit additional money with Sublessor sufficient to restore the Security Deposit to the full amount then required to be deposited with Sublessor, and Sublessee’s failure to do so shall constitute an Event of Default without any further Notice. If Sublessor transfers or assigns its interest under this Sublease, Sublessor shall assign the Security Deposit to the new Sublessor and thereafter Sublessor shall have no further liability for the return of the Security Deposit, and Sublessee agrees to look solely to the new Sublessor for the return of the Security Deposit. Sublessee agrees that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that Sublessor, its successors and assigns may return the Security Deposit to the last Sublessee in possession of the Premises at the last address for which Notice has given by such Sublessee and that Sublessor thereafter shall be relieved of any liability therefor, regardless of one or more assignments of this Sublease or any such actual or attempted assignment or encumbrances of the Security Deposit

5. Taxes and Other Charges . At the commencement and at the expiration of the Term, all Taxes and Other Charges shall be prorated. Sublessor shall promptly forward to Sublessee copies of all bills and payment receipts for Taxes or Other Charges received by it. Sublessee shall pay and discharge (including the filing of all required returns), prior to delinquency or imposition of any fine, penalty, interest or other cost (“ Penalty ”), (a) “ Taxes ”, consisting of any real property and other taxes and assessments levied or assessed with respect to the Premises (excluding income taxes, franchise taxes, estate taxes, transfer taxes and/or gross receipts taxes that may be imposed upon Sublessor), and (b) “ Other Charges ”, consisting of any utilities and other costs and expenses of the Facility or any portion of the Premises and all other charges, obligations or deposits assessed against any portion of the Premises during the Term. Sublessee shall pay the foregoing when due and before any Penalty, but may pay the foregoing in permitted installments (whether or not interest accrues on the unpaid balance). Within ten (10) days of its receipt of Sublessor’s written notice of payment, Sublessee shall pay Sublessor an amount equal to any Taxes or Penalty that Sublessor at any time is assessed or otherwise becomes responsible and for which Sublessee is liable under

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this Sublease. However, nothing in this Sublease shall obligate Sublessee to pay penalties incurred as a result of Sublessor’s failure to timely forward bills to Sublessee.

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any insurance with respect to any portion of the Premises maintained by Sublessor is excess and noncontributing with Sublessee’s insurance. The property policy(ies) shall also name the Sublessor and Facility Mortgagee as loss payee. The parties hereby waive as to each other all rights of subrogation which any insurance carrier, or either of them, may have by reason of any provision in any policy issued to them, provided such waiver does not thereby invalidate such policy. Original policies or satisfactory insurer certificates evidencing the existence of the insurance required by this Sublease and showing the interest of Sublessor and Facility Mortgagee shall be provided to Sublessor prior to the commencement of the Term or, for a renewal policy, not less than five (5) days prior to the expiration date of the insurance policy being renewed. If Sublessor is provided with a certificate, it may demand that Sublessee provide a complete copy of the related policy within ten (10) days. Sublessee may satisfy the insurance requirements hereunder through coverage under so-called blanket policy(ies) of insurance carried and maintained by Sublessee regarding other operations or facilities; provided, however, that the coverage afforded Sublessor will not be reduced or diminished or otherwise be different from that which would exist under a separate policies of insurance meeting all other requirements of this Sublease by reason of the use of such blanket policies of insurance. During the Term, Sublessee shall maintain the following insurance and any claims thereunder shall be adjudicated by and at the expense of it or its insurance carrier:

(b) Business Interruption and Extra Expense Coverage with respect to the Facility for loss of rental value for a period not less than twelve (12) months, covering perils consistent with the requirements of Section 6(a) , and including either an agreed amount endorsement or a waiver of any co-insurance provisions, so as to prevent Sublessee, Sublessor and any other insured thereunder from being a co-insurer, and providing that any covered loss thereunder shall be payable to the Sublessor;

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Sublessor as additional insured; provided, however, if requested by Sublessor and if commercially available, Sublessee shall provide coverage with limits of not less than $1,000,000.00 per occurrence/$3,000,000.00 per location with the increased premium cost (above that previously paid by Sublessee) to be borne by Sublessor either directly or through a reduction in Base Rent;

7. Use, Regulatory Compliance and Preservation of Business .

7.1 Permitted Use; Qualified Care . Sublessee shall continuously use and occupy the Facility during the Term as a skilled nursing facility with not less than 118 beds and for ancillary services relating thereto, but for no other purpose. Sublessee shall provide care, treatment and services to all residents of the Facility in a manner consistent with all applicable laws. Notwithstanding any common law or statutory right, Sublessee agrees not to transfer, move or otherwise take action that reduces licensed bed complement of the Facility and Sublessee agrees not to take any of the licensed beds out of service or move the beds to a different location.

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applicable, all Medicare, Medicaid and other third-party payor certification requirements, including timely filing properly completed cost and other required reports, timely paying all expenses shown thereon, and ensuring that the Facility continues to be fully certified for participation in Medicare and Medicaid (if applicable) throughout the Term and when they are returned to Sublessor, all without any suspension, revocation, decertification or other material limitation of such certification. Further, Sublessee shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Facility, result in closure of the Facility or result in the sale or transfer of all or any portion of any related certificate of need (if applicable), bed rights or other similar certificate or license at any of the Facility. All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Sublessor.

8. Acceptance, Maintenance, Upgrade, Alteration and Environmental .

8.1 Acceptance “AS IS”; No Liens .

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require Sublessee to keep the Premises free of liens that may be filed as a result of Sublessor’s action or omissions.

8.4 Hazardous Materials . Sublessee’s use of the Premises shall comply with all Hazardous Materials Laws. If any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws by Sublessee during the Term or if Sublessee has received notice of any Hazardous Materials Claim against any portion of the Premises as a result of Sublessee’s acts or omissions during the Term, Sublessee shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Sublessor’s approval of the remediation plan, remedy any such problem to the satisfaction of Sublessor and all applicable governmental authorities, in accordance with all Hazardous Materials Laws and good business practices. During the Term, Sublessee shall promptly advise Sublessor in writing of (a) any Environmental Activities in violation of any Hazardous Materials Laws; (b) any Hazardous Materials Claims against Sublessee or any portion of the Premises; (c) any remedial action taken by Sublessee in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about any portion of the Premises in violation of any Hazardous Materials Laws; (d) Sublessee’s discovery of any occurrence or condition on or in the vicinity of any portion of the Premises that materially increase the risk that any portion of the Premises will be exposed to Hazardous Materials; and (e) all communications to or from Sublessee, any governmental authority or any other Person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to any portion of the Premises, including copies thereof. Sublessor shall have the right, at Sublessee’s sole cost and expense (including, without limitation, Sublessor’s reasonable attorneys’ fees and costs) and with counsel chosen by Sublessor, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. Sublessor represents and warrants to Sublessee that to Sublessor’s

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knowledge, there are not pending claims or causes of action arising out or relating to the Facility or the Premises as of the commencement of the Term.

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(a) Sublessee’s failure to pay within five (5) business days of when due any Rent, Taxes, Other Charges or other required payments;

(d) An material default under any Related Lease which is not cured within any applicable cure period specified therein;

(e) Any misrepresentation by Sublessee under this Sublease or material misstatement or omission of fact in any written report, notice or communication from Sublessee to Sublessor;

(f) The failure to perform or comply with the provisions of Sections 6 or 15 ;

(g) (i) Sublessee shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment of all or substantially all of its property for the benefit of creditors; or (ii) a receiver, trustee or liquidator shall be appointed for either or them or any of their property, if within three (3) business days of such appointment Sublessee does not inform Sublessor in writing that they intend to cause such appointment to be discharged or such discharge is not diligently prosecuted to completion within sixty (60) days after the date of such appointment; (iii) the filing by Sublessee of a voluntary petition under any federal bankruptcy or state law to be adjudicated as bankrupt or for any arrangement or other debtor’s relief; or (iv) the involuntary filing of such a petition against Sublessee by any other party, unless Sublessee within three (3) business days of such filing informs Sublessor in writing of its intent to cause such petition to be dismissed, such dismissal is diligently prosecuted and such petition is dismissed within one hundred twenty (120) days after filing; or

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13.2 Remedies Cumulative; No Waiver . No right or remedy herein conferred upon or reserved to Sublessor is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. Any notice or cure period provided herein shall run concurrently with any provided by applicable law. No failure of Sublessor to insist at any time upon the strict performance of any provision of this Sublease or to exercise any option, right, power or remedy contained herein shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Sublessee. Sublessor’s receipt of and Sublessee’s payment of any rent or other sum due hereunder (including any late charge) with knowledge of any breach shall not be deemed a waiver of such breach, and no waiver by Sublessor of any provision of this Sublease shall be effective unless expressed in a writing signed by it.

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14. Provisions on Termination .

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If there is any Event of Default then existing, Sublessee may not remove any Sublessee Personal Property from the Premises and instead will, on demand from Sublessor, convey it to Sublessor for no additional consideration by executing a bill of sale in a form reasonably required by Sublessor. Title to any Sublessee Personal Property which is not removed by Sublessee as permitted above upon the expiration of the Term shall, at Sublessor’s election, vest in Sublessor; provided, however, that Sublessor may remove and store or dispose any or all of such Sublessee Personal Property which is not so removed by Sublessee without obligation or accounting to Sublessee.

14.5 Survival . All representations, warranties, covenants and other obligations of Sublessee under this Sublease shall survive the Termination Date.

15. Certain Sublessor Rights .

15.1 Entry and Examination of Records . Sublessor and its representatives may enter any portion of the Premises at any reasonable time after at least forty-eight (48) hours’ notice to Sublessee to inspect the Premises for compliance, to exhibit the Premises for sale, Sublease or mortgaging, or for any other reason; provided that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanics’ or materialmans’ lien law. No such entry shall unreasonably interfere with residents, patients, patient care or the Sublessee’s operations of the Facility. During normal business hours, Sublessee will permit Sublessor and its representatives, inspectors and consultants to examine all contracts, books and financial and other records (wherever kept) relating to Sublessee’s operations of the Facility.

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16. Assignment and Subletting .

16.1 Except as otherwise expressly permitted in this Sublease, without Sublessor’s prior written consent, not to be unreasonably withheld or delayed, Sublessee shall not assign this Sublease, or Sublease all or any part of the Premises, or permit the use of the Premises by any party other than Sublessee. This prohibition includes an assignment or subletting to or by a receiver or trustee in any federal or state bankruptcy, insolvency, or other proceeding. For purposes of this Section, a sale or transfer of all or a controlling ownership interest in Sublessee or a merger or other combination by Sublessee or a sale of all or substantially all of Sublessee’s assets in lieu thereof shall be deemed an assignment or other transfer of this Sublease. Notwithstanding any provision hereof, Sublessee may assign this Sublease to an entity in which Ronald R. Payne, Jr. owns a majority equity interest.

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17. Damage by Fire or Other Casualty .

19. Indemnification. Sublessee agrees to protect, indemnify, defend and save harmless Sublessor, its members, managers, Affiliates, directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any kind or nature, including reasonable attorneys’ fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Sublease, the Premises or the operations of Sublessee on any portion of the Premises, including, without limitation, (a) the breach by Sublessee or any of its representations, warranties, covenants or other obligations hereunder, (b) any Protest, (c) all known and unknown Environmental Activities on any portion of the Premises, Hazardous Materials Claims or violations by Sublessee of a Hazardous

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Materials Law with respect to any portion of the Premises, and (d) upon or following the Termination Date, the correction of all deficiencies of a physical matter identified by, and any liability assessed or asserted by, any governmental agency or Medicare or Medicaid providers as a result of or arising out of or in connection with this Sublease or the related change in ownership inspection and audit (including any overpayment to any Medicare, Medicaid or other third party payor). Upon receiving knowledge of any suit, claim or demand asserted by a third party that Sublessor believes is covered by this indemnity, it shall give Sublessee notice of this matter. If Sublessor does not elect to defend the matter with its own counsel at Sublessee’s expense, Sublessee shall then defend Sublessor at Sublessee’s expense (including Sublessor’s reasonable attorneys’ fees and costs) with legal counsel satisfactory to Sublessor.



	If to Sublessee:		If to Sublessor:

	Southwest LTC-Quail Creek, LLC		AdCare Health Systems, Inc.
	1518 Legacy Drive, Suite 110		Two Buckhead Plaza
	Frisco, Texas 75034		3050 Peachtree Road NW, Suite 355
	Attention: Ron Payne		Atlanta, Georgia 30305
			Attention: CEO

	With a copy to:

	Hesse & Hesse, P.C.
	1518 Legacy Drive, Suite 250
	Frisco, Texas 75034
	Attention: J. Marc Hesse

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22. Compliance with Facility Mortgage Documents

(b) Sublessee acknowledges that any Facility Mortgage Documents executed by Sublessor or any Affiliate of Sublessor may impose certain obligations on the “borrower” or other counterparty thereunder to comply with or cause the operator and/or lessee of a Facility to comply with all representations, covenants and warranties contained therein relating to such Facility and the operator and/or lessee of such Facility, including, covenants relating to (i) the maintenance and repair of such Facility; ( ii) maintenance and submission of financial records and accounts of the operation of such Facility and related financial and other information regarding the operator and/or lessee of such Facility and such Facility itself; (iii) the procurement of insurance policies with respect to such Facility; (iv) minimum occupancy, fixed coverage ratio or other Facility-related financial and/or performance requirements, and (v) without limiting the foregoing, compliance with all applicable legal requirements relating to such Facility and the operation of the business thereof. For so long as any Facility Mortgages encumber the Premises or any portion thereof or interest therein, Sublessee covenants and agrees, at its sole cost and expense and for the express benefit of Sublessor, to operate the applicable Facility in strict compliance with the terms and conditions of the Facility Mortgage Documents (other than payment of any indebtedness evidenced or secured thereby) and to timely perform all of the obligations of Sublessor relating thereto, or to the extent that any of such duties and obligations may not properly be performed by Sublessee, Sublessee shall cooperate with and assist Sublessor in the performance thereof (other than payment of any indebtedness evidenced or secured thereby); provided, however, this Section 22(a) shall not ( i) increase Sublessee’s monetary obligations under this Sublease, (ii) increase Sublessee’s non-monetary obligations under this Sublease or (iii) diminish Sublessee’s rights under this Sublease. If any new Facility Mortgage Documents to be executed by Sublessor or any Affiliate of Sublessor would impose on Sublessee any obligations under this Section 22(a) (provided that all such obligations shall comply with the restrictions set forth in the immediately preceding sentence), Sublessor shall provide copies of the same to Sublessee for informational purposes (but not for Sublessee’s approval) prior to the execution and delivery thereof by Sublessor or any Affiliate of Sublessor.

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24. Miscellaneous . This Sublease has been freely and fairly negotiated, and all provisions shall be interpreted according to their fair meaning and shall not be strictly construed against any party. While nothing contained in this Sublease should be deemed or construed to constitute an extension of credit by Sublessor to Sublessee, if a portion of any payment made to Sublessor is deemed to violate any applicable laws regarding usury, such portion shall be held by Sublessor to pay the future obligations of Sublessee as such obligations arise and if Sublessee discharges and performs all obligations hereunder, such funds will be reimbursed (without interest) to Sublessee on the Termination Date. If any part of this Sublease shall be determined to be invalid or unenforceable, the remainder shall nevertheless continue in full force and effect. Time is of the essence, and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a Saturday, Sunday or federal holiday, then such period or date shall be extended until the immediately following business day. Whenever the words “ including ”, “ include ” or “ includes ” are used in this Sublease, they shall be interpreted in a non-exclusive manner as though the words “ without limitation ” immediately followed. Whenever the words day or days are used in this Sublease, they shall mean “ calendar day ” or “ calendar days ” unless expressly provided to the contrary. The titles and headings in this Sublease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision. Unless otherwise expressly provided, references to any “Section” mean a section of this Sublease (including all subsections), to any “ Exhibit ” or “ Schedule ” mean an exhibit or schedule attached hereto or to “ Medicare ” or “ Medicaid ” include any successor program. If more than one Person is Sublessee hereunder, their liability and obligations hereunder shall be joint and several. Promptly upon the request of either

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party and at its expense, the parties shall prepare, enter into and record a suitable short form memorandum of this Sublease. This Sublease (a) contains the entire agreement of the parties as to the subject matter hereof and supersedes all prior or contemporaneous verbal or written agreements or understandings, (b) may be executed in several counterparts, (including electronically mailed copies in portable document format (PDF)), each of which shall be deemed an original, but all of which shall constitute one and the same document, (c) may only be amended by a writing executed by the parties, (d) shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties, (e) shall be governed by and construed and enforced in accordance with the internal laws of the State of Georgia, and (f) incorporates by this reference any Exhibits and Schedules attached hereto.

26. Lease Agreement . This Sublease is subject and subordinate to the Lease Agreement.

[Signatures on Following Page]

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IN WITNESS WHEREOF , this Sublease has been executed by Sublessor and Sublessee as of the date first written above.



	SUBLESSOR :

	QC NURSING, LLC
	a Georgia limited liability company

	By:	/s/ William McBride III
		William McBride, III, Manager


	SUBLESSEE:

	SOUTHWEST LTC-QUAIL CREEK, LLC,
	a Texas limited liability company

	By:	/s/ Ronald R. Payne
	Name:	Ronald R. Payne
	Title:	Manager


THE UNDERSIGNED AGREES TO BE BOUND BY ARTICLE 25 :


	QC PROPERTY HOLDINGS, LLC,
	a Georgia limited liability company

	By:	/s/ William McBride III
		William McBride, III, Manager

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EXHIBIT “A-1”



	A part of the Northeast Quarter (NE/4) of Section Sixteen (16), Township Thirteen (13) North, Range Four (4) West of the Indian Meridian in the City of Oklahoma City, Oklahoma County, Oklahoma, said part being more particularly described as follows: Beginning at a point located South 00°28’33” East a distance of 503.87 feet and North 89°31’27” East a distance of 30.00 feet from the Northwest Corner of said Northeast Quarter (NE/4); Thence from said Point of Beginning South 00°28’33” East a distance of 293.65 feet to a point on a curve to the right, said curve having a central angle of 15°52’38” and a radius of 205.65 feet; Thence along the arc of said curve in a Southwesterly direction a distance of 56.99 feet; Thence South 89°51’09” East a distance of 722.34 feet; Thence North 00°28’33” West a distance of 350.00 feet; Thence North 89°51’09” West a distance of 714.50 feet to the Point of Beginning.

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EXHIBIT A-2

SUBLESSOR PERSONAL PROPERTY

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EXHIBIT “B”

CERTAIN DEFINITIONS

For purposes of this Sublease, the following terms and words shall have the specified meanings:

“ Affiliate ” shall mean with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“ Facility Mortgagee ” shall mean the holder or beneficiary of a Facility Mortgage and any other rights of the lender, credit party or lessor under the applicable Facility Mortgage Documents.

“ Person ” shall mean any individual, partnership, association, corporation, limited liability company or other entity.

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EXHIBIT “C-1”

FAIR MARKET RENTAL

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EXHIBIT C-2

[SUBLESSOR’S WIRE INSTRUCTIONS]

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EXHIBIT “D”

FINANCIAL, MANAGEMENT AND REGULATORY REPORTS



REPORT	DUE DATE
Monthly financial reports concerning the Business at the Facility consisting of: (1) a reasonably detailed income statement showing, among other things, gross revenues; (2) total patient days; (3) occupancy; and (4) payor mix. (All via e-mail to financials@adcarehealth.com)	Thirty (30) days after the end of each calendar month
Quarterly consolidated or combined financial statements of Sublessee and any Guarantor (via e-mail to financials@adcarehealth.com)	Thirty (30) days after the end of each of the first three quarters of the fiscal year of Sublessee and such Guarantor
Annual consolidated or combined financial statements of Sublessee and any Guarantor audited by a reputable certified public accounting firm (via e-mail to financials@adcarehealth.com)	Ninety (90) days after the fiscal year end of Sublessee and such Guarantor
Regulatory reports with respect to the Facility , as follows: (1) all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Sublessee as to any portion of the Premises and any portion of the Business, including state department of health licensing surveys; (2) Medicare and Medicaid certification surveys; and (3) life safety code reports.	Five (5) business days after receipt
Reports of regulatory violations , by written notice of the following: (1) any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including Medicare or Medicaid; (2) any suspension, termination or restriction placed upon Sublessee or any portion of the Premises, the operation of any portion of the Business or the ability to admit residents or patients; or (3) any violation of any other permit, approval or certification in connection with any portion of the Premises or any portion of the Business, by any federal, state or local authority, including Medicare or Medicaid.	Two(2) business days after receipt
Cost Reports	Fifteen (15) days after filing

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EXHIBIT “E”

FAIR MARKET VALUE

If either party fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the fair market value of the Premises and/or Facility or applicable portion thereof in accordance with the provisions of this Exhibit and the Fair Market Value so determined shall be binding upon the parties. If the MAI Appraisers selected by the parties are unable to agree upon a third (3 ^rd ) MAI Appraiser within the time period set forth in the foregoing paragraph, either party shall have the right to apply to the presiding judge of the court of original trial jurisdiction in the county in which the Premises and/or Facility or applicable portion thereof are located to name the third (3 ^rd ) MAI Appraiser. The cost of such application to the presiding judge shall be equally shared by the parties.

Within five (5) days after completion of the third (3 ^rd ) MAI Appraiser’s appraisal, all three (3) MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the fair market value of the Premises and/or Facility or applicable portion thereof. If a majority are unable to determine the fair market value at such meeting, the three (3) appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Fair Market Value. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be such Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding.

“ MAI Appraiser ” shall mean an appraiser licensed or otherwise qualified to do business in the state(s) where the Premises or applicable portion thereof are located and who has substantial experience in performing appraisals of facilities similar to the Premises or applicable portion thereof and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Sublessor.

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	Exhibit 10.85

FIFTH MODIFICATION AGREEMENT

THIS FIFTH MODIFICATION AGREEMENT dated as of May 1, 2015 (this “ Agreement ” ), is entered into by and among LITTLE ROCK HC&R PROPERTY HOLDINGS, LLC , a Georgia limited liability company (the “ Borrower ” ), ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “ AdCare ” ), LITTLE ROCK HC&R NURSING, LLC , a Georgia limited liability company (the “ Operator ” ) (AdCare and the Operator being sometimes referred to herein collectively as the “ Guarantors ” ) (the Borrower and the Guarantors being sometimes referred to herein collectively as the “ Borrower/Guarantor Parties ” ), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( “ Lender ” ).

RECITALS

A. The Borrower/Guarantor Parties and Lender heretofore entered into the following documents:

(i) Loan Agreement dated as of March 30, 2012 (the “ Loan Agreement ” ), by and among the Borrower, Northridge HC&R Property Holdings, LLC, a Georgia limited liability company ( “ Northridge ” ), Woodland Hills HC Property Holdings, LLC, a Georgia limited liability company ( “ Woodland ” ) and the Lender. Northridge and Woodland were released from their respective obligations under the Loan Agreement and the other Documents pursuant to the “ Second Modification ” (as defined below).

(ii) Promissory Note A dated March 30, 2012 (the “ Note ” ), from the Borrower to the Lender in the principal amount of $13,664,956, which, along with Note B and Note C described below, replaced the Promissory Note dated March 30, 2012 (the “ Original Note ” ), from the Borrower, Northridge and Woodland to the Lender in the principal amount of $21,800,000.

(iii) Promissory Note B dated March 30, 2012 ( “ Note B ” ), from Northridge to the Lender in the principal amount of $4,507,038, which, along with the Note and Note C described below, replaced the Original Note, and which Note B was repaid in full pursuant to the Second Modification.

(iv) Promissory Note C dated March 30, 2012 ( “ Note C ” ), from Woodlands to the Lender in the principal amount of $3,628,006, which, along with the Note and Note B, replaced the Original Note, and which Note C was repaid in full pursuant to the Second Modification.

(v) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of April 1, 2012 (the “ Mortgage ” ), by the Borrower to and for the benefit

of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019925.

(vi) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of April 1, 2012 ( “ Mortgage 2 ” ), by Northridge to and for the benefit of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019978, and which Mortgage 2 was released pursuant to the Second Modification.

(vii) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of April 1, 2012 ( “ Mortgage 3 ” ), by Woodlands to and for the benefit of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019971, and which Mortgage 3 was released pursuant to the Second Modification.

(viii) Absolute Assignment of Rents and Leases dated as of April 1, 2012 (the “ Assignment of Rents ” ), by the Borrower to and for the benefit of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019926.

(ix) Absolute Assignment of Rents and Leases dated as of April 1, 2012 ( “ Assignment of Rents 2 ” ), by Northridge to and for the benefit of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019979, and which Assignment of Rents 2 was released pursuant to the Second Modification.

(x) Absolute Assignment of Rents and Leases dated as of April 1, 2012 ( “ Assignment of Rents 3 ” ), by Woodlands to and for the benefit of the Lender, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on April 5, 2012, as Document No. 2012019972, and which Assignment of Rents 3 was released pursuant to the Second Modification.

(xi) Environmental Indemnity Agreement dated as of March 30, 2012 (the “ Indemnity Agreement ” ), by the Borrower, AdCare, Northridge, Woodlands, the Guarantors, Northridge HC&R Nursing, LLC, a Georgia limited liability company (the “ Northridge Operator ” ), and Woodland Hills HC Nursing, LLC, a Georgia limited liability company (the “ Woodland Operator ” ), to and for the benefit of the Lender, with the Northridge, Woodland, the Northridge Operator and the Woodland Operator being released from their respective obligations under the Indemnity Agreement pursuant to the Second Modification.

(xii) Guaranty of Payment and Performance dated as of March 30, 2012 (the “ Guaranty ” ), by the Guarantors, the Northridge Operator and the Woodlands Operator to and for the benefit of the Lender, with the Northridge Operator and the Woodland Operator being released from their respective obligations under the Guaranty pursuant to the Second Modification.

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B. The Loan Agreement, the Note, the Mortgage, the Assignment of Rents, the Indemnity Agreement and the Guaranty are referred to herein as the “ Documents ” .

C. The Documents were previously modified and amended by the following documents (the “ Previous Modifications ” ): (i) the Modification Agreement dated as of June 15, 2012, but effective as of March 30, 2012, by and among the Borrower/Guarantor Parties, the Lender and other parties, recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on June 22, 2012, as Document No. 2012038003, (ii) the Second Modification Agreement dated as of December 28, 2012 (the “ Second Modification ” ), by and among the Borrower/Guarantor Parties and the Lender, a Memorandum of which Second Modification Agreement was recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on January 4, 2013, as Document No. 2013001265, (iii) the Third Modification Agreement dated as of June 26, 2013, by and among the Borrower/Guarantor Parties and the Lender, and (iv) the Fourth Modification Agreement dated as of November 8, 2013 (the “ Fourth Modification ” ), by and among the Borrower/Guarantor Parties and the Lender, a Memorandum of which Fourth Modification Agreement was recorded in the Official Records of Larry Crane, Pulaski County Circuit/County Clerk, on November 12, 2013, as Document No. 2013081444.

D. The Documents, as modified and amended by the Previous Modifications, encumber the real estate described in Exhibit A attached hereto and the personal property located thereon.

E. The parties desire to make certain modifications and amendments to the Documents, as modified and amended by the Previous Modifications, as more fully provided for herein, all as modifications, amendments and continuations of, but not as novations of, the Documents.

AGREEMENTS

Section 1 . Recitals Part of Agreement; Defined Terms; References to Documents .

(a) The foregoing Recitals are hereby incorporated into and made a part of this Agreement.

(b) All capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the Loan Agreement.

(c) Except as otherwise stated herein, all references in this Agreement to any one or more of the Documents shall be deemed to include the previous modifications and amendments to the Documents provided for in the Previous Modifications, whether or not express reference is made to such previous modifications and amendments.

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Section 2 . Lender Consent to Sublease to New Operator and Amendment of Lease to Operator . The Lender hereby consents to the sublease of the Facility by the Operator to Highlands of Little Rock West Markham, LLC, a Delaware limited liability company (the “ New Operator ” ), effective as of May 1, 2015, pursuant to the Sublease Agreement dated as of January 16, 2015, by and among the Borrower, the Operator and the New Operator, as amended by Amendments dated as of February 27, 2015, March 31, 2015, and April 30, 2015. The Lender also hereby consents to the First Amendment to Facility Lease dated as of January 1, 2015, which is referred to in Section 3(b) of this Agreement. In order to induce the Lender to grant such consents, the Borrower and the Guarantors are entering into the agreements with the Lender which are provided for in this Agreement.

Section 3 . Amendments to Loan Agreement Relating to Sublease and New Operator .

(a) For the avoidance of doubt, all references in the Loan Agreement, as modified and amended by the Previous Modifications, to “Projects” shall be deemed to be a reference to the Project owned by the Borrower.

(b) From and after the date of this Agreement, all references in the Loan Agreement and the other Documents, each as modified and amended by the Previous Modifications, to the “Lease” of the Project shall be deemed to be a reference to the Facility Lease dated as of April 1, 2012, by and between the Borrower, as Landlord, and the Operator, as Tenant, as amended by Amendments dated as of February 27, 2015, March 31, 2015, and April 30, 2015.

(c) The following new defined terms are hereby added to Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications:

New Operator : Highlands of Little Rock West Markham, LLC, a Delaware limited liability company.

New Operations Transfer Agreement : The Operations Transfer Agreement dated as of January 16, 2015, by and among Operator, New Operator and Borrower.

Sublease : The Sublease Agreement dated as of January 16, 2015, by and among Borrower, Operator and New Operator, as amended by Amendments dated as of February 27, 2015, March 31, 2015, and April 30, 2015, by which Operator subleased the Project to New Operator effective as of May 1, 2015.

(d) Paragraphs (q), (v), (w), (z) and (aa) in Section 2.1 of the Loan Agreement, as modified and amended by the Previous Modifications, are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing paragraphs (q), (v), (w), (z) and (aa) in Section 2.1 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

(q) Subject to the provisions of Section 7.9(b) of this Agreement, all governmental permits and licenses required by applicable law in order for Borrower

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to own and lease the Project to Operator, for Operator to sublease the Project to New Operator, and for New Operator to operate the Facility, have been validly issued and are in full force.

(v) There are no leases or subleases for use or occupancy of the Project other than the Lease and the Sublease, with the exception of agreements entered into with residents and occupants in the ordinary course of business of operating the Facility.

(w) Each of the Lease and the Sublease is in full force and effect; no Defaults or Events of Default on the part of Borrower or Operator, respectively, have occurred and are continuing thereunder; the tenant and subtenant, respectively, thereunder have no right of set-off against payment of rent due thereunder; and enforcement of the Lease and the Sublease by Borrower and Operator, respectively, or by Lender pursuant to an exercise of Lender’s rights under the Assignment of Rents, would be subject to no defenses of any kind. All of the conditions precedent for both the Landlord and the Tenant in the Sublease, as amended, have either been satisfied or waived, and neither the Landlord nor the Tenant under the Sublease has any remaining right to terminate the Sublease, as amended, for failure of any condition precedent to be satisfied. The New Operations Transfer Agreement is in full force and effect and no Defaults or Events of Default on the part of Operator or New Operator have occurred and are continuing thereunder.

(z) Subject to the provisions of Section 7.9(b) of this Agreement, the Facility has all necessary licenses, permits and certifications required by any applicable governmental authority to operate and maintain a skilled nursing facility therein with its current number of beds in service, and participates in the Medicare and Medicaid programs. Subject to the provisions of Section 7.9(b) of this Agreement, Operator and New Operator have complied with all applicable requirements of the United States of America, the State of Arkansas and all applicable local governments, and of its agencies and instrumentalities, necessary to operate and maintain the Facility as such a facility. All utilities necessary for use, operation and occupancy of the Project and the Facility are available to the Project and the Facility. All requirements for unrestricted use of the Project and the Facility as a skilled nursing facility under the rules and regulations of the State of Arkansas Department of Human Services and of any other department or agency of the State of Arkansas having jurisdiction over the Project and the Facility have been fulfilled. All building, zoning, safety, health, fire, water district, sewerage and environmental protection agency and any other permits or licenses which are required by any governmental authority for use, occupancy and operation of the Project and the Facility as a skilled nursing facility have been obtained and are in full force and effect. Neither Borrower, Operator, any Guarantor, New Operator, the Project or the Facility is subject to any corporate integrity agreement, compliance agreement or other agreement governing the operation of the Project or the Facility or the operations of Borrower, Operator, any Guarantor or New Operator.

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(aa) Each of Borrower, Operator and New Operator is in compliance in all material respects with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities binding upon or affecting the business, operation or assets of Borrower, Operator and New Operator. Neither Borrower, Operator nor New Operator: (i) has had a civil monetary penalty assessed against it under the Social Security Act (the “ SSA ” ) Section 1128(a), other than nominal amounts for violations which were not of a material nature, (ii) has been excluded from participation under the Medicare program or under a State health care program as defined in the SSA Section 1128(h) ( “ State Health Care Program ” ), or (iii) has been convicted (as that term is defined in 42 C.F.R. Section 1001.2) of any of the following categories of offenses as described in the SSA Section 1127(a) and (b)(l), (2), (3): (A) criminal offenses relating to the delivery of an item or service under Medicare or any State Health Care Program; (B) criminal offenses under federal or state law relating to patient neglect or abuse in connection with the delivery of a health care item or service; (C) criminal offenses under federal or state law relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service or with respect to any act or omission in a program operated by or financed in whole or in part by any federal, state or local government agency; (D) federal or state laws relating to the interference with or obstruction of any investigations into any criminal offense described in (A) through (C) above; or (E) criminal offenses under federal or state law relating to the unlawful manufacture, distribution, prescription or dispensing of a controlled substance. Without limiting the generality of the foregoing, neither Borrower, Operator nor New Operator is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Medicare or Medicaid Provider Agreement or other agreement or instrument to which Borrower, Operator or New Operator is a party, which default has resulted in, or if not remedied within any applicable grace period could result in, the revocation, termination, cancellation or suspension of the Medicare or Medicaid Certification of Borrower, Operator or New Operator.

(e) Section 7.2 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.2 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

7.2 Fixtures and Personal Property . Except for security interests granted to Lender, Borrower agrees that all of the personal property, fixtures, attachments, furnishings and equipment delivered in connection with the construction, equipping or operation of the Project will be kept free and clear of all chattel mortgages, vendor’s liens, and all other liens, claims, encumbrances and security interests whatsoever, and that Borrower will be the absolute owners of said personal property, fixtures, attachments and equipment, subject to the rights of Operator under the Lease and the rights of New Operator under the Sublease.

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Borrower, on request, shall furnish Lender with satisfactory evidence of such ownership, and of the terms of purchase and payment therefor.

(f) Sections 7.7(a), 7.7(b) and 7.8 of the Loan Agreement, as modified and amended by the Previous Modifications, are hereby modified and amended by changing the references therein to “Operators” to be references to “Operator and New Operator” effective as of May 1, 2015, with the existing Sections 7.7(a), 7.7(b) and 7.8 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015.

(g) Section 7.9 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.9 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

7.9 Licensure; Notices of Agency Actions . The following are conditions of this Agreement and the Loan:

(a) Subject to the provisions of paragraph (b) of this Section, New Operator shall be fully qualified by all necessary permits, licenses, certifications, accreditations and qualifications and shall be in compliance with all annual filing requirements of all regulatory authorities.

(b) The State of Arkansas license for the operation of Facility is held by New Operator in its own name. The Medicare and Medicaid certifications for the Facility are currently held by Operator. It is a condition of this Agreement and the Loan that by July 1, 2015, New Operator shall have obtained Medicare and Medicaid certifications for the Facility in its own name. Pending the receipt of such Medicare and Medicaid certifications by New Operator, (i) Operator shall retain the existing Medicare and Medicaid certifications for the Facility, and (ii) New Operator shall operate the Facility under the Medicare and Medicaid certifications of Operator under the New Operations Transfer Agreement. Upon the issuance of the Medicare and Medicaid certifications for the Facility to New Operator, the arrangements described above under the Operations Transfer Agreement for the Facility shall terminate and New Operator shall thereafter operate the Facility under its own Medicare and Medicaid certifications.

(c) Borrower, Operator and New Operator shall within five days after receipt, furnish to Lender copies of all adverse notices from any licensing, certifying, regulatory, reimbursing or other agency which has jurisdiction over the Project or the Facility or over any license, permit or approval under which the Project or the Facility operates, and if Borrower, Operator or New Operator becomes aware that any such notice is to be forthcoming before receipt thereof, it shall promptly inform Lender thereof.

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(h) Section 7.13 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.13 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

7.13 Leasing, Operation and Management of Projects .

(a) The Project shall at all times be owned by Borrower, leased to Operator under the Lease, and subleased by Operator to New Operator under the Sublease (with the result that Borrower shall not operate the Facility). Borrower shall not agree or consent to or suffer or permit any modification, amendment, termination or assignment of, or sublease under, the Lease (other than the Sublease), and shall not suffer or permit any Event of Default on the part of Borrower to exist at any time under the Lease. It is a condition of this Agreement and the Loan that Operator shall not agree or consent to or suffer or permit any modification, amendment, termination or assignment of, or sublease under, the Sublease, and shall not suffer or permit any Event of Default on the part of Operator to exist at any time under the Sublease, including, without limitation, any amendment changing in the rent payable under the Sublease. It is a condition of this Agreement and the Loan that Borrower, Operator and New Operator shall enter into an agreement in a form acceptable to Lender which shall require (i) New Operator to pay all rental under the Sublease directly to an account of Borrower at Lender, and (ii) Operator to pay any rent udner Lease in addition to the amount of the rent payable under the Sublease directly to an account of Borrower at Lender.

(b) The Facility shall at all times be operated as skilled nursing facility under the management of New Operator.

(i) Paragraphs (g) and (n) in Section 10.1 of the Loan Agreement, as modified and amended by the Previous Modifications, are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing paragraphs (g) and (n) in Section 10.1 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

(g) The occurrence of a material adverse change in the financial condition of Borrower, Operator, any Guarantor or New Operator;

(n) The occurrence of an Event of Default (i) on the part of Borrower or Operator under the Lease, (ii) on the part of Operator or New Operator under the Sublease, or (iii) on the part of Operator or New Operator under the New Operations Transfer Agreement;

Section 4 . Changes in Financial Reporting Requirements .

(a) Subparagraphs (i), (iv) and (vii) in Section 7.4(a) of the Loan Agreement, as modified and amended by the Previous Modifications, are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing subparagraphs (i), (iv) and (vii) in

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Section 7.4(a) of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods prior to May 1, 2015:

(i) Without necessity of any request by Lender, the following with respect to Borrower:

(A) As soon as available and in no event later than 45 days after the end of each fiscal quarter commencing with the fiscal quarter ending March 31, 2015, quarterly financial statements of Borrower showing the results of operations of the Project and consisting of a balance sheet, statement of income and expense and a statement of cash flows, prepared in accordance with GAAP, and certified by an officer of Borrower.

(B) As soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, annual financial statements of Borrower showing the results of operations of the Project and consisting of a balance sheet, statement of income and expense and a statement of cash flows, prepared in accordance with GAAP, and certified by an officer of Borrower, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

(iv) Without necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, annual financial statements of Operator showing the results of operations of the Facility and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, certified by an officer of Operator, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

(vii) Without necessity of any request by Lender, with each financial statement of Borrower, Operator, New Operator and AdCare required to be furnished hereunder, a duly completed compliance certificate, dated the date of such financial statements and certified as true and correct by appropriate officers of Borrower, Operator, New Operator and AdCare, containing a computation of each of the financial covenants set forth in Sections 7.14, 7.15, 7.16, 7.17 and 7.18 hereof which is required to be tested for or during the period covered by such financial statement, and stating that Borrowers have not become aware of any Default or Event of Default under this Agreement or any of the other Loan Documents that has occurred and is continuing or, if there is any such Default or Event of Default describing it and the steps, if any, being taken to cure it.

(b) The following new subparagraphs (viii) and (ix) are hereby added to 7.4(a) of the Loan Agreement, as modified and amended by the Previous Modifications:

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(viii) Without necessity of any request by Lender, as soon as available and in no event later than 45 days after the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, financial statements of New Operator showing the results of operations of the Facility and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, and certified by an officer of New Operator.

(ix) Without necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2015, annual financial statements of New Operator showing the results of operations of the Facility and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, certified by an officer of New Operator, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

Section 5 . Change of Borrower Debt Service Coverage Ratio to Borrower Fixed Charge Coverage Ratio .

(a) The present Section 7.14 of the Loan Agreement, as modified and amended by the Previous Modifications, shall apply with respect to the fiscal years ended December 31, 2012, 2013 and 2014, and shall not apply with respect to any fiscal years ending after December 31, 2014.

(b) Section 7.14 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows effective for the fiscal quarter ending June 30, 2015, and each subsequent fiscal quarter:

7.14 Minimum Fixed Charge Coverage Ratio of Borrower . It is a condition of this Agreement and the Loan that as of the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, that the ratio of --

(i) the amount of EBITDA for Borrower for the 12-month period ending on the last day of such quarter, to

(ii) the sum of the amounts of the following for Borrower for the 12‑month period ending on the last day of such quarter: (A) principal and interest required to be paid on the Loan, plus (B) Distributions, other than any amounts which were treated as an expense for accounting purposes,

shall be not less than 1.05 to 1.00.

Section 6 . Elimination of Minimum Fixed Charge Coverage Ratio of Operators Covenant . From and after the date of this Agreement, the requirement contained in Section 7.15 of the Loan Agreement, as modified and amended by the Previous Modifications, shall no longer be in effect.

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Section 7 . Change in Definition of EBITDAR/Management Fee Adjusted . The defined term “EBITDAR/Management Fee Adjusted” in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows:

EBITDAR/Management Fee Adjusted : With respect to any Operator or New Operator, for any period, an amount equal to EBITDAR for such Operator or New Operator for such period, except that notwithstanding the definition of the term Net Income in this Section 1.1, the Net Income for such Operator or New Operator used in calculating EBITDAR/Management Fee Adjusted for such Operator or New Operator for any period, shall be computed by taking into account management fees equal to the greater of such Operator’s or New Operator’s actual management fees for such period or imputed management fees equal to 5% of such Operator’s or New Operator’s gross income for such period as determined in accordance with GAAP.

Section 8 . Change in Minimum EBITDAR of Operator to Minimum EBITDAR of New Operator . Section 7.16 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby modified and amended in its entirety to read as follows effective for the fiscal quarter ending June 30, 2015, and subsequent fiscal quarters, with the existing Section 7.16 of the Loan Agreement, as modified and amended by the Previous Modifications, to continue to be effective for periods ended and ending prior to the fiscal quarter ending June 30, 2015:

7.16 Minimum EBITDAR of New Operator . It is a condition of this Agreement and the Loan that for each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, the EBITDAR/Management Fee Adjusted for New Operator shall be not less than 450,000.

Section 9 . Change in Debt Service Reserve Account Release Provisions . Sections 3.7(b) and 3.7(c) of the Loan Agreement, which were added to the Loan Agreement by the Fourth Modification, are hereby modified and amended in their entirety to read as follows:

(b) When both of the following conditions have been satisfied, the amount on deposit in the Debt Service Reserve Account shall be reduced to $471,000, and Borrower shall be entitled to withdraw from the Debt Service Reserve Account any amount on deposit therein in excess of $471,000. The conditions referred to above are as follows:

(i) No Default or Event of Default under this Agreement or any of the other Loan Documents has occurred and is continuing.

(ii) For each of two consecutive fiscal quarters ending on or after June 30, 2015, EBITDAR/Management Fee Adjusted for New Operator shall be not less than $450,000, determined based on financial statements of New Operator delivered to Lender in accordance with Section 7.4 of this

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Agreement, and compliance certificates delivered to Lender in accordance with Section 7.4 of this Agreement containing a correct computation of such EBITDAR/Management Fee Adjusted for New Operator.

(c) When both of the following conditions have been satisfied, the Debt Service Reserve Account shall no longer be required, and Borrower shall be entitled to withdraw from the Debt Service Reserve Account the entire remainder of the funds on deposit therein. The conditions referred to above are as follows:

(i) No Default or Event of Default under this Agreement or any of the other Loan Documents has occurred and is continuing.

(ii) For each of two consecutive fiscal quarters ending after the fiscal quarters for which the condition set forth in Section 3.7(b)(ii) above is satisfied, EBITDAR/Management Fee Adjusted for New Operator shall be not less than $450,000, determined based on financial statements of New Operator delivered to Lender in accordance with Section 7.4 of this Agreement, and compliance certificates delivered to Lender in accordance with Section 7.4 of this Agreement containing a correct computation of such EBITDAR/Management Fee Adjusted for New Operator.

Section 10 . Representations and Warranties . The term “ Signing Entity ” as used in this Section means any entity (other than a Borrower/Guarantor Party itself) that appears in the signature block of any Borrower/Guarantor Party in this Agreement, any of the Documents or the Previous Modifications, if any. In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby represent and warrant to Lender as follows as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement:

(a) Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia and duly registered to transact business and in good standing in the state of Arkansas, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(b) AdCare is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(c) Operator is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia and duly registered to transact business and in good standing in the state of Arkansas. Operator has full power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement and each of the

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Documents to which it is a party and to perform and consummate the transactions contemplated hereby and thereby.

(d) Each Signing Entity is duly organized, validly existing and in good standing under the laws of the State in which it is organized, has all necessary power and authority to carry on its present business, and has full right, power and authority to execute this Agreement, the Documents and the Previous Modifications in the capacity shown in each signature block contained in this Agreement, the Documents and the Previous Modifications in which its name appears, and such execution has been duly authorized by all necessary legal action applicable to such Signing Entity.

(e) This Agreement, each of the Documents and the Previous Modifications have been duly authorized, executed and delivered by such of the Borrower/Guarantor Parties as are parties thereto, and this Agreement, each of the Documents and the Previous Modifications constitute a valid and legally binding obligation enforceable against such of the Borrower/Guarantor Parties as are parties thereto. The execution and delivery of this Agreement, the Documents and the Previous Modifications and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the organizational documents of any Borrower/Guarantor Party or any Signing Entity, or any agreement or other instrument to which any of the Borrower/Guarantor Parties or any Signing Entity is a party, or by which any of them is bound, or to which any of their respective properties are subject, or any existing law, administrative regulation, court order or consent decree to which any of them is subject.

(f) The Borrower/Guarantor Parties are in full compliance with all of the terms and conditions of the Documents to which they are a party and the Previous Modifications, and no Default or Event of Default has occurred and is continuing with respect to any of the Documents or the Previous Modifications.

(g) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or any of the Documents or the Previous Modifications, or questioning the validity thereof, or in any way contesting the existence or powers of any of the Borrower/Guarantor Parties or any Signing Entity, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or any of the Documents or the Previous Modifications, or would result in any material adverse change in the financial condition, properties, business or operations of any of the Borrower/Guarantor Parties.

(h) The statements contained in the Recitals to this Agreement are true and correct.

Section 11 . Documents to Remain in Effect; Confirmation of Obligations; References . The Documents shall remain in full force and effect as originally executed and delivered by the parties, except as previously modified and amended by the Previous Modifications and as expressly modified and amended herein. In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby (i) confirm and reaffirm all of their obligations under the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein; (ii) acknowledge and agree that Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii)

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acknowledge and agree that Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents; and (iv) acknowledge and agree that they do not have any defense, setoff or counterclaim to the payment or performance of any of their obligations under, or to the enforcement by Lender of, the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein, including, without limitation, any defense, setoff or counterclaim based on the covenant of good faith and fair dealing. All references in the Documents to any one or more of the Documents, or to the “Loan Documents,” shall be deemed to refer to such Document, Documents or Loan Documents, as the case may be, as previously modified and amended by the Previous Modifications and as modified and amended by this Agreement. Electronic records of executed documents maintained by Lender shall be deemed to be originals thereof.

Section 12 . Certifications, Representations and Warranties . In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby certify, represent and warrant to Lender that all certifications, representations and warranties contained in the Documents and the Previous Modifications and in all certificates heretofore delivered to Lender are true and correct as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement, and all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement.

Section 13 . Entire Agreement; No Reliance . This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. The Borrower/Guarantor Parties acknowledge that they are executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein.

Section 14 . Successors . This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives.

Section 15 . Severability . In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof.

Section 16 . Amendments, Changes and Modifications . This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto.

Section 17 . Construction .

(a) The words “hereof,” “herein,” and “hereunder,” and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used.

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(b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed.

(d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders.

(e) The Borrower/Guarantor Parties and Lender, and their respective legal counsel, have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement.

Section 18 . Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same document. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Agreement maintained by Lender shall be deemed to be an original.

Section 19 . Governing Law . This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement, except that insofar as this Agreement relates to a Document which by its terms is governed by the law of the State of Arkansas, this Agreement shall also be governed by the law of the State of Arkansas.

Section 20 . Waiver of Trial by Jury . THE PROVISIONS OF THE LOAN AGREEMENT AND THE OTHER DOCUMENTS RELATING TO WAIVER OF TRIAL BY JURY SHALL APPLY TO THIS AGREEMENT.

[SIGNATURE PAGE(S) AND EXHIBIT(S),

IF ANY, FOLLOW THIS PAGE]

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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.



		LITTLE ROCK HC&R PROPERTY HOLDINGS,
		LLC

		By	/s/ William McBride III
			William McBride III, Manager


		ADCARE HEALTH SYSTEMS, INC.

		By	/s/ William McBride III
			William McBride III, Chief Executive Officer


		LITTLE ROCK HC&R NURSING, LLC

		By	/s/ William McBride III
			William McBride III, Manager


		THE PRIVATEBANK AND TRUST COMPANY

		By	/s/ Amy K. Hallberg
			Amy K. Hallberg, Managing Director

- AdCare Little Rock Owner Loan Fifth Modification Agreement -

- Signature Page -

EXHIBIT A

LEGAL DESCRIPTION

Commonly known as 5720 West Markham Street, Little Rock, Pulaski County, Arkansas, improved with a skilled nursing facility containing 154 beds, and known as Little Rock Healthcare and Rehab a/k/a West Markham Sub Acute and Rehabilitation Center and legally described as follows:

Lot 13, Except the South 25 feet thereof; the West 10 feet of the South 30 feet and the North 20 feet of Lot 9; the West 10 feet of Lots 10, 11 and the North one half of Lot 12, and all of Lots 8, 14, 15, 16, 17 and 18, all in Block 2 of Strong & Waters Addition to the City of Little Rock, Pulaski County, Arkansas. Also a strip of ground formerly platted as an alley being 15 feet wide and lying immediately East of and contiguous to the North one-half of Lots 13 and 14, 15, 16 and 17 and a 7.5 foot strip lying immediately East of and contiguous to Lot 18, all in Block 2, Strong & Waters Addition to the City of Little Rock, Pulaski County, Arkansas, which was closed by Ordinance No. 10,127, a certified copy of which is recorded in Book 600 at page 631 and Ordinance No, 11,645, a certified copy of which is recorded in Book 933 page 557, records of Pulaski County, Arkansas.

A-1



	Exhibit 10.86

MODIFICATION AGREEMENT

THIS MODIFICATION AGREEMENT dated as of May 1, 2015 (this “ Agreement ” ), is entered into by and among BENTON PROPERTY HOLDINGS, LLC , a Georgia limited liability company ( “ Borrower 1 ” ), PARK HERITAGE PROPERTY HOLDINGS, LLC , a Georgia limited liability company ( “ Borrower 2 ” ), and VALLEY RIVER PROPERTY HOLDINGS, LLC , a Georgia limited liability company ( “ Borrower 3 ” ) (collectively, the “ Borrowers ” ), ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation ( “ AdCare ” ), BENTON NURSING, LLC , PARK HERITAGE NURSING, LLC, and VALLEY RIVER NURSING, LLC , each a Georgia limited liability company (the “ Operators ” ) (AdCare and the Operators being sometimes referred to herein collectively as the “ Guarantors ” ) (the Borrower and the Guarantors being sometimes referred to herein collectively as the “ Borrower/Guarantor Parties ” ), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( “ Lender ” ).

RECITALS

A. The Borrower/Guarantor Parties and Lender heretofore entered into the following documents (the “ Documents ” ):

(i) Loan Agreement dated as of September 1, 2011 (the “ Loan Agreement ” ), by and among the Borrowers and the Lender.

(ii) Promissory Note dated September 1, 2011, from the Borrowers to the Lender in the principal amount of $11,800,000.

(iii) Environmental Indemnity Agreement dated as of September 1, 2011, by the Borrowers, AdCare and the Operators to and for the benefit of the Lender.

(iv) Guaranty of Payment and Performance dated as of September 1, 2011, by the Guarantors to and for the benefit of the Lender.

(v) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of September 1, 2011, by Borrower 1 to and for the benefit of the Lender, recorded in the Official Records of Brenda DeShields, Circuit Clerk, Benton County, Arkansas, on September 23, 2011, at Book 2011, Page 127323.

(vi) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of September 1, 2011, by Borrower 2 to and for the benefit of the Lender, recorded in the Official Records of Brenda DeShields, Circuit Clerk, Benton County, Arkansas, on September 23, 2011, at Book 2011 Page 127,459.

(vii) Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing dated as of September 1, 2011, by Borrower 3 to and for the benefit of the Lender,

recorded in the Official Records of Sharon Brooks, County Clerk and Recorder, Sebastian County, Arkansas, on September 23, 2011, as Document No. 2011F-14089.

(viii) Absolute Assignment of Rents and Leases dated as of September 1, 2011, by Borrower 1 to and for the benefit of the Lender, recorded in the Official Records of Brenda DeShields, Circuit Clerk, Benton County, Arkansas, on September 23, 2011, at Book 2011, Page 127354.

(ix) Absolute Assignment of Rents and Leases dated as of September 1, 2011, by Borrower 2 to and for the benefit of the Lender, recorded in the Official Records of Brenda DeShields, Circuit Clerk, Benton County, Arkansas, on September 23, 2011, at Book 2011 , Page 127490.

(x) Absolute Assignment of Rents and Leases dated as of September 1, 2011, by Borrower 3 to and for the benefit of the Lender, recorded in the Official Records of Sharon Brooks, County Clerk and Recorder, Sebastian County, Arkansas, on September 23, 2011, as Document No. 2011F-14090.

B. The Documents encumber the real estate described in Exhibit A attached hereto and the personal property located thereon.

C. The parties desire to make certain modifications and amendments to the Documents as more fully provided for herein, all as modifications, amendments and continuations of, but not as novations of, the Documents.

AGREEMENTS

Section 1 . Recitals Part of Agreement; Defined Terms; References to Documents .

(a) The foregoing Recitals are hereby incorporated into and made a part of this Agreement.

(b) All capitalized terms used and not otherwise defined in this Agreement shall have the meanings set forth in the Loan Agreement.

Section 2 . Lender Consent to Sublease of Project 2 to New Operator 2 . For purposes of this Agreement, the term “ New Operator 2 ” has the same meaning as in the defined terms which are added to the Loan Agreement in Section 3(a) of this Agreement. The Lender hereby consents to the sublease by Operator 2 of its Project to New Operator 2, effective as of May 1, 2015, pursuant to a Sublease Agreement dated as of January 16, 2015, by and among Borrower 2, Operator 2 and New Operator 2, as amended by Amendments dated as of February 27, 2015, March 31, 2015, and

April 30, 2015. In order to induce the Lender to grant such consent, the Borrowers and the Guarantors are entering into the agreements with the Lender which are provided for in this Agreement.

Section 3 . Amendments to Loan Agreement Relating to Sublease of Project 2 and New Operator 2 .

(a) The following new defined terms are hereby added to Section 1.1 of the Loan Agreement:

Facility 2 : The Facility located in Project 2 owned by Borrower 2, and leased by Borrower 2 to Operator 2, and subleased by Operator 2 to New Operator 2 under Sublease 2.

New Operator 2 : Highlands of Rogers Dixieland, LLC, a Delaware limited liability company.

Operations Transfer Agreement 2 : The Operations Transfer Agreement dated as of January 16, 2015, by and among Operator 2, New Operator 2 and Borrower 2.

Sublease 2 : The Sublease Agreement dated as of January 16, 2015, by and among Borrower 2, Operator 2 and New Operator 2, as amended by Amendments dated as of February 27, 2015, March 31, 2015, and April 30, 2015, by which Operator 2 subleased its Project to New Operator 2 effective as of May 1, 2015.

(c) Paragraphs (q), (v), (w), (z) and (aa) in Section 2.1 of the Loan Agreement are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing paragraphs (q), (v), (w), (z) and (aa) in Section 2.1 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

(q) Subject to the provisions of Section 7.9(b) of this Agreement, all governmental permits and licenses required by applicable law in order for each Borrower to own and lease its Project to the applicable Operator, for Operators 1 and 3 to operate their respective Facilities, for Operator 2 to sublease its Project to New Operator 2, and for New Operator 2 to operate its Facility, have been validly issued and are in full force.

(v) There are no leases or subleases for use or occupancy of any Project other than the applicable Lease and in the case of Project 2, Sublease 2, with the exception of agreements entered into with residents and occupants in the ordinary course of business of operating the Facility.

(w) Each of the Leases and Sublease 2 is in full force and effect; no Defaults or Events of Default on the part of applicable Borrower or Operator, respectively, have occurred and are continuing thereunder; the tenant and subtenant, respectively, thereunder have no right of set-off against payment of rent due

thereunder; and enforcement of each of the Leases and Sublease 2 by the applicable Borrower and Operator, respectively, or by Lender pursuant to an exercise of Lender’s rights under the applicable Assignment of Rents, would be subject to no defenses of any kind. All of the conditions precedent for both Operator 2 and New Operator 2 contained in Sublease 2, as amended, have either been satisfied or waived, and neither Operator 2 nor New Operator 2 has any remaining right to terminate Sublease 2, as amended, for failure of any condition precedent to be satisfied. Operations Transfer Agreement 2 is in full force and effect and no Defaults or Events of Default on the part of Operator 2 or New Operator 2 have occurred and are continuing thereunder.

(z) Subject to the provisions of Section 7.9(b) of this Agreement, each Facility has all necessary licenses, permits and certifications required by any applicable governmental authority to operate and maintain a skilled nursing facility therein with its current number of beds in service, and participates in the Medicare and Medicaid programs. Subject to the provisions of Section 7.9(b) of this Agreement, Operators and New Operator 2 have complied with all applicable requirements of the United States of America, the State of Arkansas and all applicable local governments, and of its agencies and instrumentalities, necessary to operate and maintain its Facility as such a facility. All utilities necessary for use, operation and occupancy of each Project and each Facility are available to such Project and such Facility. All requirements for unrestricted use of each Project and each Facility as a skilled nursing facility under the rules and regulations of the State of Arkansas Department of Human Services and of any other department or agency of the State of Arkansas having jurisdiction over each Project and each Facility have been fulfilled. All building, zoning, safety, health, fire, water district, sewerage and environmental protection agency and any other permits or licenses which are required by any governmental authority for use, occupancy and operation of each Project and each Facility as a skilled nursing facility have been obtained and are in full force and effect. Neither any Borrower, any Operator, any Guarantor, New Operator 2, any Project nor any Facility is subject to any corporate integrity agreement, compliance agreement or other agreement governing the operation of any Project or any Facility or the operations of any Borrower, any Operator, any Guarantor or New Operator 2.

(aa) Each Borrower and Operator and New Operator 2 is in compliance in all material respects with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities binding upon or affecting the business, operation or assets of Borrowers, Operators or New Operator 2. Neither any Borrower, any Operator nor New Operator 2: (i) has had a civil monetary penalty assessed against it under the Social Security Act (the “ SSA ” ) Section 1128(a) ), other than nominal amounts for violations which were not of a material nature, (ii) has been excluded from participation under the Medicare program or under a State health care program as defined in the SSA Section 1128(h) ( “ State Health Care Program ” ), or (iii) has been convicted (as that term is defined in 42 C.F.R. Section

1001.2) of any of the following categories of offenses as described in the SSA Section 1127(a) and (b)(l), (2), (3): (A) criminal offenses relating to the delivery of an item or service under Medicare or any State Health Care Program; (B) criminal offenses under federal or state law relating to patient neglect or abuse in connection with the delivery of a health care item or service; (C) criminal offenses under federal or state law relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service or with respect to any act or omission in a program operated by or financed in whole or in part by any federal, state or local government agency; (D) federal or state laws relating to the interference with or obstruction of any investigations into any criminal offense described in (A) through (C) above; or (E) criminal offenses under federal or state law relating to the unlawful manufacture, distribution, prescription or dispensing of a controlled substance. Without limiting the generality of the foregoing, neither any Borrower, any Operator nor New Operator 2 is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Medicare or Medicaid Provider Agreement or other agreement or instrument to which such Borrower or Operator or New Operator 2 is a party, which default has resulted in, or if not remedied within any applicable grace period could result in, the revocation, termination, cancellation or suspension of the Medicare or Medicaid Certification of such Borrower or Operator or New Operator 2.

(d) Section 7.2 of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.2 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

7.2 Except for security interests granted to Lender, Borrowers agree that all of the personal property, fixtures, attachments, furnishings and equipment delivered in connection with the construction, equipping or operation of the Projects will be kept free and clear of all chattel mortgages, vendor’s liens, and all other liens, claims, encumbrances and security interests whatsoever, and that Borrowers will be the absolute owners of said personal property, fixtures, attachments and equipment, subject to the rights of Operators under the Leases and the rights of New Operator 2 under Sublease 2. Borrowers, on request, shall furnish Lender with satisfactory evidence of such ownership, and of the terms of purchase and payment therefor.

(e) Sections 7.7 and 7.8 of the Loan Agreement are hereby modified and amended by changing the references therein to “Operators” to be references to “Operators and New Operator 2” effective as of May 1, 2015, with the existing Sections 7.7 and 7.8 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015.

(f) Section 7.9 of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.9 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

7.9 Licensure; Notices of Agency Actions . The following are conditions of this Agreement and the Loan:

(a) Subject to the provisions of paragraph (b) of this Section, Operators 1 and 3 and New Operator 2 shall be fully qualified by all necessary permits, licenses, certifications, accreditations and qualifications and shall be in compliance with all annual filing requirements of all regulatory authorities.

(b) The State of Arkansas licenses for the operation of Facilities 1 and 3 and the Medicare and Medicaid certifications for Facilities 1 and 3 are held and shall continue to be held by Operators 1 and 3, respectively. The State of Arkansas license for the operation of Facility 2 is held by New Operator 2 in its own name. The Medicare and Medicaid certifications for Facility 2 are currently held by the Operator 2. It is a condition of this Agreement and the Loan that by July 1, 2015, New Operator 2 shall have obtained Medicare and Medicaid certifications for Facility 2 in its own name. Pending the receipt of such Medicare and Medicaid certifications by New Operator 2, (i) Operator 2 shall retain the existing Medicare and Medicaid certifications for Facility 2, and (ii) New Operator 2 shall operate Facility 2 under the Medicare and Medicaid certifications of Operator 2 under Operations Transfer Agreement 2. Upon the issuance of the Medicare and Medicaid certifications for Facility 2 to New Operator 2, the arrangements described above under Operations Transfer Agreement 2 shall terminate and New Operator 2 shall thereafter operate Facility 2 under its own Medicare and Medicaid certifications.

(c) Each Borrower and Operator and New Operator 2 shall within five days after receipt, furnish to Lender copies of all adverse notices from any licensing, certifying, regulatory, reimbursing or other agency which has jurisdiction over its Project or Facility or over any license, permit or approval under which its Project or Facility operates, and if any Borrower or Operator or New Operator 2 becomes aware that any such notice is to be forthcoming before receipt thereof, it shall promptly inform Lender thereof.

(g) Section 7.13 of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective as of May 1, 2015, with the existing Section 7.13 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

7.13 Leasing, Operation and Management of Projects .

(a) Each Project shall at all times be owned by the applicable Borrower, leased to the applicable Operator under the applicable Lease, and in the case of Borrower 2’s Project, subleased by Operator 2 to New Operator 2 under Sublease 2 (with the result that no Borrower shall operate a Facility). Each Borrower shall not agree or consent to or suffer or permit any modification, amendment, termination or assignment of, or sublease under, its Lease (other than Sublease 2), and shall not suffer or permit any Event of Default on the part of such Borrower to exist at any time under its Lease. It is a condition of this Agreement and the Loan that Operator

2 shall not agree or consent to or suffer or permit any modification, amendment, termination or assignment of, or sublease under, Sublease 2, and shall not suffer or permit any Event of Default on the part of Operator 2 to exist at any time under Sublease 2, including, without limitation, any amendment changing in the rent payable under Sublease 2. It is a condition of this Agreement and the Loan that Borrower 2, Operator 2 and New Operator 2 shall enter into an agreement in a form acceptable to Lender which shall require (i) New Operator 2 to pay all rental under Sublease 2 directly to an account of Borrower 2 at Lender, and (ii) Operator 2 to pay any rent under its Lease in addition to the amount of the rent payable under Sublease 2 directly to an account of Borrower 2 at Lender.

(b) Each Facility shall at all times be operated as skilled nursing facility under the management of the applicable Operator or in the case of Facility 2, New Operator 2.

(h) Paragraphs (b), (g) and (n) in Section 10.1 of the Loan Agreement are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing paragraphs (g) and (n) in Section 10.1 of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

(b) If there is any failure to perform, observe or satisfy any obligation, covenant, agreement, term, condition or provision contained in any of the following provisions of this Agreement: Section 7.9(a), 7.10, 7.11, 7.12, 7.13, 7.14, 7.14A, 7.15, 7.16, 7.17, 7.18, 7.19, 7.20 or 7.21;

(g) The occurrence of a material adverse change in the financial condition of any Borrower, Operator or Guarantor or New Operator 2;

(n) The occurrence of an Event of Default (i) on the part of any Borrower or Operator under any Lease, (ii) on the part of Operator 2 or New Operator 2 under Sublease 2, or (iii) on the part of Operator 2 or New Operator 2 under any Operations Transfer Agreement;

Section 4 . Changes in Financial Reporting Requirements .

(a) Subparagraphs (i), (iii) and (vi) in Section 7.4(a) of the Loan Agreement are hereby modified and amended in their entirety to read as follows effective as of May 1, 2015, with the existing subparagraphs (i), (iii) and (vi) in Section 7.4(a) of the Loan Agreement to continue to be effective for periods prior to May 1, 2015:

(i) Without necessity of any request by Lender, the following with respect to Borrowers:

the results of operations of its Project and consisting of a balance sheet, statement of income and expense and a statement of cash flows, prepared in accordance with GAAP, and certified by an officer of such Borrower.

(B) As soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, annual financial statements of each Borrower showing the results of operations of its Project and consisting of a balance sheet, statement of income and expense and a statement of cash flows, prepared in accordance with GAAP, and certified by an officer of such Borrower, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

(iii) Without necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, annual financial statements of each Operator showing the results of operations of its Facility and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, certified by an officer of such Operator, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

(vi) Without necessity of any request by Lender, with each financial statement of each Borrower, each Operator, New Operator 2 and AdCare required to be furnished hereunder, a duly completed compliance certificate, dated the date of such financial statements and certified as true and correct by appropriate officers of each Borrower, each Operator, New Operator 2 and AdCare, containing a computation of each of the financial covenants set forth in Sections 7.14, 7.14A, 7.15, 7.16 and 7.17 hereof which is required to be tested for or during the period covered by such financial statement, and stating that Borrowers have not become aware of any Default or Event of Default under this Agreement or any of the other Loan Documents that has occurred and is continuing or, if there is any such Default or Event of Default describing it and the steps, if any, being taken to cure it.

(b) The following new subparagraphs (vii) and (viii) are hereby added to 7.4(a) of the Loan Agreement:

(vii) Without necessity of any request by Lender, as soon as available and in no event later than 45 days after the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, financial statements of New Operator 2 showing the results of operations of Facility 2 and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, and certified by an officer of New Operator 2.

(viii) Without necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with

the fiscal year ending December 31, 2015, annual financial statements of New Operator 2 showing the results of operations of Facility 2 and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, certified by an officer of New Operator 2, and accompanied by an audit report of a firm of independent certified public accountants acceptable to Lender.

Section 5 . Borrower Debt Service Coverage Ratio . The present Section 7.14 of the Loan Agreement shall continue to apply with respect to the fiscal years ended December 31, 2011, 2012, 2013 and 2014, and to all fiscal years ending after December 31, 2014.

Section 6 . New Borrower Fixed Charge Coverage Ratio . A new Section 7.14A is hereby added to the Loan Agreement, to be effective for the fiscal quarter ending June 30, 2015, and each subsequent fiscal quarter:

7.14A Minimum Fixed Charge Coverage Ratio of Borrowers . It is a condition of this Agreement and the Loan that as of the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, that the ratio of --

(i) the amount of the combined EBITDA for Borrowers for the 12-month period ending on the last day of such quarter, to

(ii) the sum of the combined amounts of the following for Borrowers for the 12‑month period ending on the last day of such quarter: (A) principal and interest required to be paid on the Loan, plus (B) Distributions, other than any amounts which were treated as an expense for accounting purposes,

shall be not less than 1.05 to 1.00.

Section 7 . Elimination of Minimum Fixed Charge Coverage Ratio of Operators Covenant . From and after the date of this Agreement, the requirement contained in Section 7.15 of the Loan Agreement shall no longer be in effect.

Section 8 . New Defined Term EBITDAR/Management Fee Adjusted . The following new defined term “EBITDAR/Management Fee Adjusted” is hereby added to Section 1.1 of the Loan Agreement:

EBITDAR/Management Fee Adjusted : With respect to Operators 1 and 3 and New Operator 2, for any period, an amount equal to EBITDAR for such Operator or New Operator 2 for such period, except that notwithstanding the definition of the term Net Income in this Section 1.1, the Net Income for such Operator or New Operator 2 used in calculating EBITDAR/Management Fee Adjusted for such Operator or New Operator 2 for any period, shall be computed by taking into account management fees equal to the greater of such Operator’s or New Operator 2’s actual management fees for such period or imputed management fees equal to 5% of such Operator’s or New Operator 2’s gross income for such period as determined in accordance with GAAP.

Section 9 . Change in Minimum EBITDAR of Operators to Minimum EBITDAR/Management Fee Adjusted of New Operators . Section 7.16 of the Loan Agreement is hereby modified and amended in its entirety to read as follows effective for the fiscal quarter ending June 30, 2015, and subsequent fiscal quarters, with the existing Section 7.16 of the Loan Agreement to continue to be effective for periods ended and ending prior to the fiscal quarter ending June 30, 2015:

7.16 Minimum EBITDAR/Management Fee Adjusted of Operators 1 and 3 New Operator 2 . It is a condition of this Agreement and the Loan that for each fiscal quarter commencing with the fiscal quarter ending June 30, 2015, the combined EBITDAR/Management Fee Adjusted for Operators 1 and 3 and New Operator 2 shall be not less than $450,000.

Section 10 . Requirement for Shared Collateral Account . The following new Section 3.5 is hereby added to the Loan Agreement effective as of May 1, 2015:

3.5 Shared Collateral Account . Lender has extended a loan in the amount of $12,000,000 to APH&R Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, and Woodland Hills HC Property Holdings, LLC, each a Georgia limited liability company, pursuant to a Loan Agreement dated as of February 25, 2015 (the “ Related Loan Agreement ” ). Pursuant to the terms of Section 3.4 of the Related Loan Agreement, a $2,000,000 Collateral Account (the “ Collateral Account ” ) is established which secures both the loan under the Related Loan Agreement and the Loan under this Agreement. Section 3.4 of the Related Loan Agreement sets forth the conditions under which the Collateral Account is to be released as collateral. The following are conditions of this Agreement and the Loan:

(i) As of May 1, 2015, Section 3.4 of the Related Loan Agreement shall be in effect in the form contained in the original Related Loan Agreement, without any modification or amendment thereto.

(ii) As of May 1, 2015, the Collateral Account shall have been established and shall be in existence and fully funded in the amount of $2,000,000.

(iii) From and after May 1, 2015, the Collateral Account shall be held not only as security for the loan under the Related Loan Agreement but also as security for the Loan under this Agreement.

(iv) The Collateral Account shall be released as collateral only in accordance with the provisions of Section 3.4 of the Related Loan Agreement as in effect on May 1, 2015, except that notwithstanding the definition of the term “Benton Operators” in Section 1.1 of the Related Loan Agreement, for purposes of applying the provisions of Section 3.4 of the Related Loan Agreement, the term “Benton Operators” shall mean Operator 1, New Operator 2 and Operator 3.

Section 11 . Representations and Warranties . The term “ Signing Entity ” as used in this Section means any entity (other than a Borrower/Guarantor Party itself) that appears in the signature block of any Borrower/Guarantor Party in this Agreement or any of the Documents, if any. In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby represent and warrant to Lender as follows as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement:

(a) Each Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia and duly registered to transact business and in good standing in the state of Arkansas, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party, and to perform and consummate the transactions contemplated hereby and thereby.

(b) AdCare is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party, and to perform and consummate the transactions contemplated hereby and thereby.

(c) Each Operator is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia and duly registered to transact business and in good standing in the state of Arkansas. Operator has full power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement and each of the Documents to which it is a party and to perform and consummate the transactions contemplated hereby and thereby.

(d) Each Signing Entity is duly organized, validly existing and in good standing under the laws of the State in which it is organized, has all necessary power and authority to carry on its present business, and has full right, power and authority to execute this Agreement, the Documents in the capacity shown in each signature block contained in this Agreement, the Documents in which its name appears, and such execution has been duly authorized by all necessary legal action applicable to such Signing Entity.

(e) This Agreement, each of the Documents have been duly authorized, executed and delivered by such of the Borrower/Guarantor Parties as are parties thereto, and this Agreement, each of the Documents constitute a valid and legally binding obligation enforceable against such of the Borrower/Guarantor Parties as are parties thereto. The execution and delivery of this Agreement, the Documents and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the organizational documents of any Borrower/Guarantor Party or any Signing Entity, or any agreement or other instrument to which any of the Borrower/Guarantor Parties or any Signing Entity is a party, or by which any of them is bound, or to which any of their respective properties are subject, or any existing law, administrative regulation, court order or consent decree to which any of them is subject.

(f) The Borrower/Guarantor Parties are in full compliance with all of the terms and conditions of the Documents to which they are a party, and no Default or Event of Default has occurred and is continuing with respect to any of the Documents.

(g) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or any of the Documents, or questioning the validity thereof, or in any way contesting the existence or powers of any of the Borrower/Guarantor Parties or any Signing Entity, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or any of the Documents, or would result in any material adverse change in the financial condition, properties, business or operations of any of the Borrower/Guarantor Parties.

(h) The statements contained in the Recitals to this Agreement are true and correct.

Section 12 . Documents to Remain in Effect; Confirmation of Obligations; References . The Documents shall remain in full force and effect as originally executed and delivered by the parties, except as expressly modified and amended herein. In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby (i) confirm and reaffirm all of their obligations under the Documents, as modified and amended herein; (ii) acknowledge and agree that Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents; and (iv) acknowledge and agree that they do not have any defense, setoff or counterclaim to the payment or performance of any of their obligations under, or to the enforcement by Lender of, the Documents, as modified and amended herein, including, without limitation, any defense, setoff or counterclaim based on the covenant of good faith and fair dealing. All references in the Documents to any one or more of the Documents, or to the “Loan Documents,” shall be deemed to refer to such Document, Documents or Loan Documents, as the case may be, as modified and amended by this Agreement. Electronic records of executed documents maintained by Lender shall be deemed to be originals thereof.

Section 13 . Certifications, Representations and Warranties . In order to induce Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby certify, represent and warrant to Lender that all certifications, representations and warranties contained in the Documents and in all certificates heretofore delivered to Lender are true and correct as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement, and all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement.

executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein.

Section 15 . Successors . This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives.

Section 16 . Severability . In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof.

Section 17 . Amendments, Changes and Modifications . This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto.

Section 18 . Construction .

(a) The words “hereof,” “herein,” and “hereunder,” and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used.

(b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed.

(d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders.

Section 19 . Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same document. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Agreement maintained by Lender shall be deemed to be an original.

Section 20 . Governing Law . This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement, except that insofar as this Agreement relates to a Document which by its terms is governed by the law of the State of Arkansas, this Agreement shall also be governed by the law of the State of Arkansas.

Section 21 . Waiver of Trial by Jury . THE PROVISIONS OF THE LOAN AGREEMENT AND THE OTHER DOCUMENTS RELATING TO WAIVER OF TRIAL BY JURY SHALL APPLY TO THIS AGREEMENT.

[SIGNATURE PAGE(S) AND EXHIBIT(S),

IF ANY, FOLLOW THIS PAGE]

IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.



		BENTON PROPERTY HOLDINGS, LLC
		PARK HERITAGE PROPERTY HOLDINGS, LLC
		VALLEY RIVER PROPERTY HOLDINGS, LLC

		By	/s/ William McBride III
			William McBride III, Manager of Each Borrower


		ADCARE HEALTH SYSTEMS, INC.

		By	/s/ William McBride III
			William McBride III, Chief Executive Officer


		BENTON NURSING, LLC
		PARK HERITAGE NURSING, LLC
		VALLEY RIVER NURSING, LLC

		By	/s/ William McBride III
			William McBride III, Manager of Each Operator


		THE PRIVATEBANK AND TRUST COMPANY

		By	/s/ Amy K. Hallberg
			Amy K. Hallberg, Managing Director

EXHIBIT A

LEGAL DESCRIPTION

Parcel 1 Owned by Borrower 1, commonly known as 224 South Main Street Bentonville, Benton County, Arkansas, and legally described as follows:

Lot 1, Rose Care, Inc. Addition, being a replat of Lot 8, Lots 9 & 15 of the Railroad Addition, to the City of Bentonvillle, Benton County, Arkansas, as shown on Plat Record “11”, at Page 159.

A-1

Parcel 2 Owned by Borrower 2, commonly known as 1513 South Dixieland Road, Rogers, Benton County, Arkansas, and legally described as follows:

Real property in the State of Arkansas, described as follows:

A part of Tract 3 of Robert Callaghan's Subdivision of the SW/4 of the NE/4 of Section 14, Township 19 North, Range 30W, Rogers, Arkansas, described as beginning South 89° 18' 12" East 196.06 feet from the SW corner of the said SW/4 of the NE/4, being on the centerline of Olrich Street, thence North 00° 10' 51" West 176.95 feet; thence South 89° 13' 49" East 133.94 feet; thence South 00° 10' 51" East 176.78 feet to said centerline; thence North 89° 18' 19" West 133.93 along said centerline to the place of beginning.

Also, a part of Tract 3 in Robert Callaghan's Subdivision to the City of Rogers, Arkansas, described as follows: Beginning at the SW corner of the SW/4 of the NE/4 of Section 14, Township 19 North, Range 30 West, running thence North 00° 10' 51" West 177.20 feet along the centerline of Dixieland Road; thence South 89° 13' 49" East 196.06 feet; thence South 00° 10' 51" East 176.95 feet to the centerline of Olrich Street; thence North 89° 18' 12" West 196.06 feet along said centerline to the point of Beginning. Both subject to the right of way of said street.

Also, A part of the SW/4 of the NE/4 of Section 14, Township 19 North, Range 30 West, described as follows: From the NW corner of the said SW/4 of the NE/4, thence South 00° 38' East 775 feet along the centerline of Dixieland Road to the point of beginning; thence South 00° 38' East 19 feet along said centerline; thence East 330 feet; thence North 00° 38' West 19 feet to the South right-of-way of Gum Street; thence West 330 feet along said right-of-way to the point of beginning.

Also, a part of the SW-1/4 of the NE-1/4 of Section 14, Township 19 North, Range 30 West, being more particularly described as follows: Beginning at the NW corner of Tract 3, Robert Callaghan's Subdivision to the City of Rogers, Arkansas, thence Southerly along the centerline of Dixieland Road, approximately 356.8 feet to a point which is North 00° 10' 51" West 177.20 feet from the SW corner of the SW-1/4 of the NE-1/4 of said Section 14; thence South 89° 13' 49" East approximately 330 feet to the East line of said Tract 3; thence North 00° 38' West approximately 356.47 feet to a point which is South 00° 38' East from the NW corner of Lot 1, Block 4, Weber's Addition to the City of Rogers, Arkansas; thence Westerly along the North line of said Tract 3, Robert Callaghan's Subdivision to the point of beginning.

Less and Except from the above Legal Descriptions: A Part of tract #3 of Robert Callaghan's Subdivision, located in a part of the SW 1/4 of the NE 1/4 of Section 14, Township 19 North range 30 West in Rogers, Benton County, Arkansas, more precisely described as follows: Starting at the SW corner of the SW 1/4 of the NE 1/4 of Section 14, also known as the SW corner of Tract #3 of Robert Callaghan's Subdivision; Thence South 86 Degrees 48 Minutes 16 Seconds East, 176.37 Feet to the True Point of Beginning; Thence North 2 degrees 38 minutes 31 seconds East, 176.97 Feet, Thence South 86 degrees 43 minutes 45 seconds East, 152.63 Feet, Thence South 02 degrees 19 minutes 12 seconds West, 176.78 feet, Thence North 86 degrees 48 minutes 16 seconds West, 153.62 feet to the True Point of Beginning, subject to the Right of Way of Dixieland Road and West Olrich Streets.

A-2

Parcel 3 Owned by Borrower 3, commonly known as 5301 Wheeler Avenue Fort Smith, Sebastian County, Arkansas, and legally described as follows:

The West Half of the South Half of the North Half of the Northeast Quarter of the Southeast Quarter of Section 32, Township 8 North, Range 32 West, Fort Smith District, Sebastian County, Arkansas and all that part described as beginning at the Southwest corner of the above described tract; thence South 62.00 feet; thence East 630.00 feet; then North 62.00 feet; thence West 630.00 feet to the point of beginning.

A-3

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14(A) AND 15d-14(A)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, William McBride III, certify that:

1. I have reviewed this Form 10-Q for the quarter ended March 31, 2015 , of AdCare Health Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 14, 2015	/s/ William McBride III
		William McBride III
		Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF ACCOUNTING OFFICER

PURSUANT TO RULES 13a-14(A) AND 15d-14(A)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Allan J. Rimland, certify that:

1. I have reviewed this Form 10-Q for the quarter ended March 31, 2015 of AdCare Health Systems, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 14, 2015	/s/ Allan J. Rimland
		Allan J. Rimland
		President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William McBride III, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	May 14, 2015	/s/ William McBride III
		William McBride III
		Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allan J. Rimland, President and Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted by § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	May 14, 2015	/s/ Allan J. Rimland
		Allan J. Rimland
		President and Chief Financial Officer