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, 2016  
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, 2016 19,948,534 shares of common stock, no par value were outstanding.




Table of Contents



AdCare Health Systems, Inc.
 
Form 10-Q
 
Table of Contents
 
 
 
Page
  Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents



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 (the "Exchange Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Act"). 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, the operating results of the Company's tenants, the overall industry environment 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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Table of Contents



Part I.  Financial Information  
Item 1.  Financial Statements 
ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s)
 
 
March 31, 
 2016
 
December 31, 
 2015
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,264

 
$
2,720

Restricted cash
 
5,403

 
9,169

Accounts receivable, net of allowance of $11,276 and $12,487
 
8,558

 
8,805

Prepaid expenses and other
 
3,425

 
3,214

Assets of disposal group held for sale
 
1,237

 
1,249

Total current assets
 
20,887

 
25,157

Restricted cash and investments
 
3,485

 
3,558

Property and equipment, net
 
124,835

 
126,676

Intangible assets - bed licenses
 
2,471

 
2,471

Intangible assets - lease rights, net
 
3,254

 
3,420

Goodwill
 
4,183

 
4,183

Lease deposits
 
1,414

 
1,812

Other assets
 
2,714

 
1,996

Total assets
 
$
163,243

 
$
169,273

LIABILITIES AND DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of notes payable and other debt
 
$
46,919

 
$
50,960

Accounts payable
 
7,046

 
8,741

Accrued expenses
 
2,327

 
3,125

Liabilities of disposal group held for sale
 
949

 
958

Total current liabilities
 
57,241

 
63,784

Notes payable and other debt, net of current portion:
 
 

 
 

Senior debt, net
 
54,479

 
54,742

Bonds, net
 
6,618

 
6,600

Convertible debt, net
 
9,010

 
8,968

Other debt, net
 
413

 
531

Other liabilities
 
4,096

 
3,380

Deferred tax liability
 
389

 
389

Total liabilities
 
132,246

 
138,394

Commitments and contingencies (Note 14)
 

 

Preferred stock, no par value; 5,000 shares authorized; 2,614 and 2,427 shares issued and outstanding, redemption amount $65,346 and $60,273 at March 31, 2016 and December 31, 2015, respectively
 
58,391

 
54,714

Stockholders’ equity:
 
 

 
 

Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 19,907 and 19,861 issued and outstanding at March 31, 2016 and December 31, 2015, respectively
 
61,126

 
60,958

Accumulated deficit
 
(88,520
)
 
(84,793
)
Total stockholders’ deficit
 
(27,394
)
 
(23,835
)
Total liabilities and stockholders' deficit
 
$
163,243

 
$
169,273

 See accompanying notes to unaudited consolidated financial statements

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Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000’s, except per share data)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Revenues:
 
 

 
 

Rental revenues
 
$
6,849

 
$
1,340

Management fee and other revenues
 
233

 
218

Total revenues
 
7,082

 
1,558

 
 
 
 
 
Expenses:
 
 

 
 

General and administrative expense
 
2,542

 
3,331

Facility rent expense
 
2,179

 
487

Depreciation and amortization
 
1,713

 
1,675

Other expenses
 
203

 
102

Total expenses
 
6,637

 
5,595

 
 
 
 
 
Income (loss) from operations
 
445

 
(4,037
)
 
 
 
 
 
Other expense:
 
 

 
 

Interest expense, net
 
1,825

 
2,490

Loss on extinguishment of debt
 

 
680

Other expense
 
42

 
288

Total other expense, net
 
1,867

 
3,458

 
 
 
 
 
Loss from continuing operations before income taxes
 
(1,422
)
 
(7,495
)
Income tax expense
 

 
20

Loss from continuing operations
 
(1,422
)
 
(7,515
)
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
 
(528
)
 
2,266

Net loss
 
(1,950
)
 
(5,249
)
 
 
 
 
 
Net loss attributable to noncontrolling interests
 

 
230

Net loss attributable to AdCare Health Systems, Inc.
 
(1,950
)
 
(5,019
)
 
 
 
 
 
Preferred stock dividends
 
(1,777
)
 
(646
)
Net loss attributable to AdCare Health Systems, Inc. Common Stockholders
 
$
(3,727
)
 
$
(5,665
)
 
 
 
 
 
Net loss (income) per share of common stock attributable to AdCare Health Systems, Inc.
 
 

 
 

Basic and diluted:
 
 

 
 

Continuing operations
 
$
(0.16
)
 
$
(0.42
)
Discontinued operations
 
(0.03
)
 
0.13

 
 
$
(0.19
)
 
$
(0.29
)
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 

 
 

Basic and diluted
 
19,885

 
19,218


 See accompanying notes to unaudited consolidated financial statements

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Amounts in 000’s)
(Unaudited)

 
 
Shares of Common Stock
 
Common Stock and Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Balances, December 31, 2015
 
19,861

 
$
60,958

 
$
(84,793
)
 
$
(23,835
)
 
 
 
 
 
 
 
 
 
Stock-based compensation
 

 
480

 

 
480

 
 
 
 
 
 
 
 
 
Common stock repurchase program
 
(150
)
 
(312
)
 

 
(312
)
 
 
 
 
 
 
 
 
 
Issuance of restricted stock
 
196

 

 

 

 
 
 
 
 
 
 
 
 
Preferred stock dividends
 

 

 
(1,777
)
 
(1,777
)
 
 
 
 
 
 
 
 
 
Net loss
 

 

 
(1,950
)
 
(1,950
)
Balances, March 31, 2016
 
19,907

 
$
61,126

 
$
(88,520
)
 
$
(27,394
)
 
See accompanying notes to unaudited consolidated financial statements

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Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in 000's)
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(1,950
)
 
$
(5,249
)
(Income) loss from discontinued operations, net of tax
 
528

 
(2,266
)
Loss from continuing operations
 
(1,422
)
 
(7,515
)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
1,713

 
1,675

Stock-based compensation expense
 
480

 
202

Rent expense in excess of cash paid
 
203

 
43

Rent revenue in excess of cash received
 
(718
)
 
(29
)
Amortization of deferred financing costs
 
216

 
350

Amortization of debt discounts and premiums
 
4

 
4

Loss on debt extinguishment
 

 
680

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(1,219
)
 
140

Prepaid expenses and other
 
(242
)
 
(751
)
Other assets
 
17

 
40

Accounts payable and accrued expenses
 
(590
)
 
(177
)
Other liabilities
 
617

 
90

Net cash used in operating activities - continuing operations
 
(941
)
 
(5,248
)
Net cash (used in) provided by operating activities - discontinued operations
 
(639
)
 
4,645

Net cash used in operating activities
 
(1,580
)
 
(603
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Change in restricted cash
 
3,839

 
705

Proceeds from the sale of property and equipment
 
325

 

Purchase of property and equipment
 
(19
)
 
(374
)
Net cash provided by investing activities - continuing operations
 
4,145

 
331

Net cash used in investing activities - discontinued operations
 
(1
)
 
(44
)
Net cash provided by investing activities
 
4,144

 
287

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from debt
 
203

 
21,714

Proceeds from convertible debt
 

 
1,685

Repayment of notes payable
 
(4,518
)
 
(21,892
)
Proceeds from lines of credit
 

 
13,693

Repayment of lines of credit
 

 
(15,454
)
Debt issuance costs
 
(25
)
 
(511
)
Exercise of warrants and options
 

 
1,688

Proceeds from preferred stock issuances, net
 
3,677

 

Repurchase of common stock
 
(312
)
 

Dividends paid on preferred stock
 
(1,777
)
 
(646
)
Net cash (used in) provided by financing activities - continuing operations
 
(2,752
)
 
277

Net cash used in financing activities - discontinued operations
 
(268
)
 
(16
)
Net cash (used in) provided by financing activities
 
(3,020
)
 
261

Net change in cash and cash equivalents
 
(456
)
 
(55
)
Cash and cash equivalents, beginning
 
2,720

 
10,735

Cash and cash equivalents, ending
 
$
2,264

 
$
10,680

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid during the year for:
 
 
 
 
Interest
 
$
1,630

 
$
2,407


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Table of Contents



Income taxes
 
$

 
$
20

Supplemental disclosure of non-cash activities:
 
 
 
 
Notes issued in conjunction with financing of exit fees
 
$

 
$
680

  See accompanying notes to unaudited consolidated financial statements

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Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 2016
 
NOTE 1.                           ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES  

See Part II, Item 8, Notes to Consolidated Financial Statements , Note 1 - Organization and Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 , filed with the Securities and Exchange Commission (the "SEC") on March 30, 2016 (the "Annual Report"), for a description of all significant accounting policies. 
Description of Business
 
AdCare Health Systems, Inc. (“AdCare”), through its subsidiaries (together, the “Company” or “we”), is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. The Company's business primarily consists of leasing and subleasing such facilities to third-party tenants, which operate the facilities. As of March 31, 2016, the Company owned, leased, or managed for third parties 38 facilities primarily in the Southeast. The operators of the Company's facilities provide a range of health care services, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.

The Company was incorporated in Ohio on August 14, 1991, under the name Passport Retirement, Inc. In 1995, the Company acquired substantially all of the assets and liabilities of AdCare Health Systems, Inc. and changed its name to AdCare Health Systems, Inc. AdCare completed its initial public offering in November 2006. Initially based in Ohio, the Company expanded its portfolio through a series of strategic acquisitions to include properties in a number of other states, primarily in the Southeast. In 2012, the Company relocated its executive offices and accounting operations to Georgia, and AdCare changed its state of incorporation from Ohio to Georgia on December 12, 2013.

Historically, the Company's business focused on owning and operating skilled nursing and assisted living facilities. The Company also managed facilities on behalf of unaffiliated owners with whom the Company entered into management contracts. In July 2014, the Company's Board of Directors (the “Board”) approved a strategic plan to transition (the “Transition”) the Company to a healthcare property holding and leasing company through a series of leasing and subleasing transactions. The Company completed the Transition through: (i) leasing to third-party operators all of the healthcare properties which it owns and previously operated; (ii) subleasing to third-party operators all of the healthcare properties which it leases (but does not own) and previously operated; and (iii) continuing the one remaining management agreement to manage two skilled nursing facilities and one independent living facility for third parties.

The Company leases its currently-owned healthcare properties, and subleases its currently-leased healthcare properties, 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 costs of operating the properties including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual escalation clauses. As a result of the Transition, the Company now has many of the characteristics of a real estate investment trust ("REIT") and is now focused on the ownership, acquisition and leasing of healthcare related properties. The Board is analyzing and considering: (i) whether and, if so, when, the Company could satisfy the requirements to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”); (ii) the structural and operational complexities which would need to be addressed before the Company could qualify as a REIT, including the disposition of certain assets or the termination of certain operations which may not be REIT compliant; and (iii) if the Company were to qualify as a REIT, whether electing REIT status would be in the best interests of the Company and its shareholders in light of various factors, including our significant consolidated Federal net operating loss carryforwards. There is no assurance that the Company will qualify as a REIT in future taxable years or, if it were to so qualify, that the Board would determine that electing REIT status would be in the best interests of the Company and its shareholders.

On March 29, 2016, the Company announced that given the completion of the Transition, the Board has begun to explore strategic alternatives for the Company.

As of March 31, 2016 , the Company owned, leased, or managed 38 facilities primarily in the Southeast. Of the 38 facilities, the Company: (i) leased 22 owned and subleased 11 leased skilled nursing facilities to third-party operators; (ii) leased two owned assisted living facilities to third-party operators; and (iii) managed on behalf of third-party owners two skilled nursing facilities and one independent living facility (see Part II, Item 8, Notes to Consolidated Financial Statements , Note 7 - Leases in the Annual Report for a full description of the Company's leases).


9




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.  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, 2016 and 2015 , are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2015 , 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 the accompanying unaudited consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2015 , included in the Annual Report. 
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, deferred tax valuation allowance, fair value of employee and nonemployee stock based awards, valuation of goodwill and other long-lived assets, and cash flow projections. 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 and Consolidated Statements of Cash Flows for the three months ended March 31, 2015 , to reflect the same facilities in discontinued operations for both periods presented. In addition, reclassifications were made to the Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015 to reflect the netting of deferred financing costs with the respective debt facility.
Revenue Recognition
Rental Revenues. The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our consolidated balance sheets. Rent revenues for nine facilities in Arkansas and three facilities in Georgia are recorded on a cash basis.

Management Fee Revenues and Other Revenues. The Company recognizes management fee revenues as services are provided. Further, the Company recognizes interest income from lease inducements receivables as other revenues.

Allowances. The Company assesses the collectibility of our rent receivables, including straight-line rent receivables. The Company bases its assessment of the collectibility of rent receivables on several factors, including, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments, the Company provides an allowance against the recognized rent receivable asset for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease, the Company may adjust its reserve to increase or reduce the rental revenue recognized in the period the Company makes such change in its assumptions or estimates. 

As of March 31, 2016 and December 31, 2015 , the Company allowed for approximately $11.3 million and $12.5 million , respectfully, of gross patient care related receivables primarily from our operations before completion of our Transition. Allowance for patient care receivables are estimated based on an aged bucket method incorporating different payor types. Any changes in patient care receivable allowances will be recognized as a component of discontinued operations. All patient care receivables

10




exceeding 365 days are fully allowed at March 31, 2016 and December 31, 2015 . Accounts receivable, net totaled $8.6 million at March 31, 2016 and $8.8 million at December 31, 2015 of which $6.5 million and $8.0 million , respectively, related to patient care receivables from our legacy operations.

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 of a measurement 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, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since 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, the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 Accounting Standards Update ("ASU") interpretations that have effectiveness dates during the periods reported and in future periods.     

In May 2014, the FASB issued ASU 2014-09 guidance which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The new standard 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 new guidance does not affect the recognition of revenue from leases. In August 2015, the FASB delayed the effective date of the new revenue standard by one year. As a result, this new revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the impact on the Company's financial position and results of operations and related disclosures.

In August 2014, the FASB issued ASU 2014-15 , which provides 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 concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures.

In February 2015, the FASB issued ASU 2015-02, which which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. This consolidation guidance is effective for public business entities for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03 , which requires debt issuance costs to 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 standard is to be applied on a retrospective basis and reported as a change in an

11




accounting principle. In August 2015, the FASB released clarifying guidance for debt issuance costs related to line-of-credit arrangements, which permits debt issuance costs to be presented as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Debt issuance costs associated with a line of credit can be amortized ratably over the term of the line-of-credit arrangement. This standard 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 adopted in the first quarter of 2016 and has retroactively applied to the December 31, 2015 balance sheet presentation. This change represents a change in accounting principle. The amount of deferred financing costs reclassified against long-term debt was $2.5 million and $2.7 million for March 31, 2016 and December 31, 2015, respectively. The adoption did not materially impact the Company's results of operations and related disclosures.

In September 2015, the FASB issued ASU 2015-16 , which requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance the acquirer recognizes, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. New disclosures are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recognized in current-period earnings by line item that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At adoption, the new guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In January 2016, the FASB issued ASU 2016-01 which provides revised accounting guidance related to the accounting for and reporting of financial instruments. This guidance significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02 as a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance, ASC 840, Leases . ASU 2016-02 creates a new Topic, ASC 842, Leases . This new Topic retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09 with the intention to simplify aspects of the accounting for share-based payment transactions, including income tax impacts, classification on the statement of cash flows, and forfeitures. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The various amendments within the standard require different approaches to adoption of either retrospective, modified retrospective or prospective. Early adoption is permitted. The company is currently evaluating the potential impact of this standard as well as the as available transition methods.

NOTE 2.                           EARNINGS PER SHARE  

Basic earnings per share is computed by dividing net income or loss attributable to common stockholders 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: (i) net income or loss is adjusted by the impact of the assumed conversion of convertible debt into shares of common stock; and (ii) the weighted-average number of shares of common stock outstanding includes potentially dilutive securities (such as options, warrants and additional shares of common stock issuable under convertible debt outstanding during the period) when such securities are not anti-dilutive. Potentially dilutive securities from options and warrants are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from convertible debt are

12




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, 2016 and 2015 , potentially dilutive securities of 4.6 million and 7.0 million , respectively, were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive for those 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,
 
 
2016
 
2015
(Amounts in 000’s, except per share data)
 
Income
(loss)
 
Shares
 
Per
Share
 
Income
(loss)
 
Shares
 
Per
Share
Continuing operations:
 
 

 
 

 
 

 
 

 
 

 
 

Loss from continuing operations
 
$
(1,422
)
 
 
 
 
 
$
(7,515
)
 
 

 
 

Preferred stock dividends
 
(1,777
)
 
 
 
 
 
(646
)
 
 
 
 
Basic loss from continuing operations
 
$
(3,199
)
 
19,885

 
$
(0.16
)
 
$
(8,161
)
 
19,218

 
$
(0.42
)
Diluted loss from continuing operations (a)
 
$
(3,199
)
 
19,885

 
$
(0.16
)
 
$
(8,161
)
 
19,218

 
$
(0.42
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 

 
 

 
 

 
 

 
 

 
 

(Loss) income from discontinued operations
 
$
(528
)
 
 
 
 
 
$
2,266

 
 
 
 
Net loss attributable to noncontrolling interests
 

 
 
 
 
 
230

 
 
 
 
Basic (loss) income from discontinued operations attributable to the Company
 
$
(528
)
 
19,885

 
$
(0.03
)
 
$
2,496

 
19,218

 
$
0.13

Diluted (loss) income from discontinued operations attributable to the Company (a)
 
$
(528
)
 
19,885

 
$
(0.03
)
 
$
2,496

 
19,218

 
$
0.13

 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to AdCare:
 
 

 
 

 
 

 
 

 
 

 
 

Basic loss
 
$
(3,727
)
 
19,885

 
$
(0.19
)
 
$
(5,665
)
 
19,218

 
$
(0.29
)
Diluted loss (a)
 
$
(3,727
)
 
19,885

 
$
(0.19
)
 
$
(5,665
)
 
19,218

 
$
(0.29
)
(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,
(Share amounts in 000’s)
 
2016
 
2015
Stock options
 
373

 
894

Warrants
 
2,051

 
2,266

Subordinated convertible notes
 
2,165

 
3,804

Total anti-dilutive securities
 
4,589

 
6,964

 
NOTE 3.                           LIQUIDITY AND PROFITABILITY
 
Sources of Liquidity

The Company continues to undertake measures to improve its operations and streamline cost infrastructure in connection with its new business model, including: (i) increasing future minimum lease revenue; (ii) refinancing or repaying current maturities to reduce interest costs and reducing mandatory principal repayments through refinancing transactions with HUD or other lending sources; and (iii) reducing general and administrative expenses.

At March 31, 2016 , the Company had $2.3 million in cash and cash equivalents as well as restricted cash of $8.9 million . Over the next twelve months, the Company anticipates both access to and receipt of several sources of liquidity.

At March 31, 2016, the Company had two office buildings held for sale. The Company completed the sale of one of its office buildings on April 25, 2016 for $0.7 million and expects to complete the sale of its second office building by the end of the second

13




quarter of 2016. The office building sold on April 25, 2016 had debt of approximately $0.9 million and the remaining office building, which is unencumbered, is contracted to sell at $0.2 million . The Company anticipates that the sale of the two office buildings combined will approximate the related debt obligations.

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

On July 21, 2015, the Company entered into separate At Market Issuance Sales Agreements (together, the “Sales Agreements”) with each of MLV & Co. LLC and JMP Securities LLC (each, an “Agent” and together, the “Agents”), pursuant to which the Company may offer and sell, from time to time, up to 800,000 shares of the Company’s 10.875% Series A Cumulative Redeemable Preferred Stock, no par value per share and liquidation preference of $25.00 per share (the "Series A Preferred Stock"), through an “at-the-market” offering program ("ATM"). As of March 31, 2016, the Company sold 500,600 shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately $10.4 million (see Note 11 - Common and Preferred Stock ).

On March 24, 2016 , the Company received a commitment to refinance the Bentonville, Heritage Park and River Valley Credit Facility, the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of $25.4 million of debt, subject to definitive documentation and certain closing conditions. On March 24, 2016 , the Company also obtained a lender commitment to extend the maturity date of the Georgetown and Sumter Credit Facility totaling $9.1 million from September 2016 to June 2017 subject to definitive documentation and certain closing conditions. On March 29, 2016 , the Company obtained a lender commitment to extend the maturity date of the Quail Creek Credit Facility totaling $5.0 million from September 2016 to September 2018 subject to definitive documentation and certain closing conditions.

On May 10, 2016, the Company executed a purchase and sale agreement to sell nine of its facilities in Arkansas for a total sales price of $55.0 million . At March 31, 2016, total outstanding debt on those facilities was approximately $30.2 million , net of restricted cash deposits. All such debt and restricted cash was current at March 31, 2016. The Company anticipates cash inflows associated with the sale of such facilities to exceed related obligations by approximately $21.8 million , less routine closing costs and a seller note of $3.0 million .

Cash Requirements

At March 31, 2016 , the Company had $118.4 million in indebtedness of which the current portion is $47.9 million . This current portion is comprised of the following components: (i) debt of held for sale entities of approximately $0.9 million , primarily senior debt - bond and mortgage indebtedness; and (ii) remaining debt of approximately $46.9 million which includes senior debt - mortgage indebtedness (for a complete debt listing see Note 9 - Notes Payable and Other Debt ). 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 with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs.

The Company anticipates, for the next twelve months, net principal disbursements of approximately $42.9 million (including approximately $1.7 million of payments on shorter term vendor notes, $2.7 million of routine debt service amortization, $0.9 million of the sale of two office buildings, and $0.7 million payment of other debt) which is inclusive of anticipated proceeds on refinancing of approximately $36.9 million . On March 24, 2016, the Company received a lender commitment to refinance approximately $25.4 million and to extend $9.1 million of current maturities, subject to definitive documentation and certain closing conditions. On March 29, 2016, the Company received a lender commitment to extend approximately $5.0 million of current maturities, subject to definitive documentation and certain closing conditions. The Company anticipates operating cash requirements for the next twelve months as being substantially less than previous twelve months due to the Transition. Based on the described sources of liquidity, the Company expects sufficient funds for its operations and scheduled debt service, at least through the next twelve months. On a longer term basis, at March 31, 2016 , the Company has approximately $60.4 million of debt maturities due over the next two year period ending March 31, 2018. These debt maturities include $9.2 million of convertible promissory notes, which are convertible into shares of the 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 for raising capital in the future. The Company believes its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

The Company has absorbed negative cash flows from operations in the past, including the three months ended March 31, 2016, but anticipates a reversal to a positive cash flow from operations during the remainder of 2016. In order to satisfy the Company's capital needs, the Company seeks to: (i) continue improving operating results through its leasing and subleasing transactions

14




executed 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; (iv) potential sale of certain facilities; and (v) 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 of the Transition. If the Company is unable to expand existing borrowing agreements, refinance current debt, or raise capital through the issuance of securities, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives or sell assets.

The Board has agreed to explore strategic alternatives for the Company which may affect the sources of liquidity and cash requirements of the Company.

NOTE 4.                           RESTRICTED CASH
 
The following table sets forth the Company’s various restricted cash, escrow deposits and related financial instruments:
 
(Amounts in 000’s)
 
March 31, 2016
 
December 31, 2015
Cash collateral and certificates of deposit, current
 
$
3,823

 
$
7,687

Current replacement reserves
 
1,036

 
950

Escrow deposits
 
544

 
532

Total current portion
 
5,403

 
9,169

 
 
 
 
 
Restricted investments for other debt obligations
 
1,940

 
2,264

HUD replacement reserves
 
1,167

 
1,174

Reserves for capital improvements
 
378

 
120

Total noncurrent portion
 
3,485

 
3,558

Total restricted cash
 
$
8,888

 
$
12,727

 
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, 2016
 
December 31, 2015
Buildings and improvements

5-40
 
$
129,062

 
$
128,912

Equipment

2-10
 
13,484

 
13,470

Land

 
6,810

 
7,128

Computer related

2-10
 
3,000

 
2,999

Construction in process
 
 
186

 
390

 
 
 
 
152,542

 
152,899

Less: accumulated depreciation and amortization
 
 
 
(27,707
)
 
(26,223
)
Property and equipment, net
 
 
 
$
124,835

 
$
126,676

 
Buildings and improvements includes the capitalization of costs incurred for the respective certificates of need (the "CON"). For additional information on the CON amortization, see Note 6 - Intangible Assets and Goodwill .

For the three months ended March 31, 2016 and 2015 , total depreciation and amortization expense was $1.7 million and $1.7 million , respectively. Total depreciation and amortization expense excludes $0.1 million in the three months ended March 31, 2015 that is recognized in Loss from Discontinued Operations, net of tax. No amount was excluded for the three months ended March 31, 2016.


15




NOTE 6.                           INTANGIBLE ASSETS AND GOODWILL
    
Intangible assets consist of the following: 
(Amounts in 000’s)
 
CON (included in property and equipment)
 
Bed Licenses - Separable
 
Lease Rights
 
Total
Balances, December 31, 2015
 
 

 
 

 
 

 
 

Gross
 
$
35,690

 
$
2,471

 
$
6,881

 
$
45,042

Accumulated amortization
 
(4,760
)
 

 
(3,461
)
 
(8,221
)
Net carrying amount
 
$
30,930

 
$
2,471

 
$
3,420

 
$
36,821

 
 
 
 
 
 
 
 
 
Amortization expense
 
(293
)
 

 
(167
)
 
(460
)
 
 
 
 
 
 
 
 
 
Balances, March 31, 2016
 
 
 
 
 
 
 
 
Gross
 
35,690

 
2,471

 
6,881

 
45,042

Accumulated amortization
 
(5,053
)
 

 
(3,628
)
 
(8,681
)
Net carrying amount
 
$
30,637

 
$
2,471

 
$
3,253

 
$
36,361

 
Amortization expense for the CON included in property and equipment was approximately $0.3 million and $0.3 million for the three months ended March 31, 2016 and 2015 , respectively.
Amortization expense for lease rights was approximately $0.2 million and $0.2 million for the three months ended March 31, 2016 and 2015 , respectively.
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
2016 (a)
 
$
880

 
$
500

2017
 
1,173

 
667

2018
 
1,173

 
667

2019
 
1,173

 
667

2020
 
1,173

 
482

Thereafter
 
25,065

 
270

Total expected amortization expense
 
$
30,637

 
$
3,253

  (a)  Estimated amortization expense for the year ending December 31, 2016 , includes only amortization to be recorded after March 31, 2016 .

The following table summarizes the carrying amount of goodwill:
(Amounts in 000’s)
 
March 31, 2016
 
December 31, 2015
Goodwill
 
$
5,023

 
$
5,023

Accumulated impairment losses
 
(840
)
 
(840
)
Net carrying amount
 
$
4,183

 
$
4,183

 
The Company does not amortize indefinite lived intangibles, which consist of separable bed licenses, or goodwill.
 
NOTE 7. LEASES
Operating Leases
The Company leases a total of  eleven skilled nursing facilities from unaffiliated owners under non-cancelable leases, most of which have rent escalation clauses and provisions for payments of real estate taxes, insurance and maintenance costs. Each of the

16




skilled nursing facilities that are leased by the Company are subleased to and operated by third-party operators. The Company also leases certain office space located in Atlanta, Georgia. The Company has also entered into lease agreements for various equipment previously used in the facilities. These leases are included in future minimum lease payments below.

As of March 31, 2016 , the Company is in compliance with all operating lease financial and administrative covenants.
Future Minimum Lease Payments
Future minimum lease payments for each of the next five years ending December 31, are as follows:
 
 
(Amounts in
000's)
2016 (a)
 
$
6,006

2017
 
8,158

2018
 
8,340

2019
 
8,526

2020
 
8,697

Thereafter
 
55,320

Total
 
$
95,047

(a) Estimated minimum lease payments for the year ending December 31, 2016 , include only payments to be recorded after March 31, 2016 .
Leased and Subleased Facilities to Third-Party Operators
As a result of the completion of the Transition, the Company leases or subleases to third-party operators 35 facilities ( 24 owned by us and 11 leased to us) 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 costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Termination of Arkansas Leases . Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”) nine facilities located in Arkansas (the “Arkansas Facilities”) to affiliates (the “Aria Sublessees”) of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated the applicable Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease. The term of each Aria Sublease was approximately fifteen (15) years, and the annual aggregate base and special rent payable to the Company under the Aria Subleases was approximately $5.1 million in the first year of such subleases and the base rent was subject to specified annual rent escalators.

On July 17, 2015, the Company made a short-term loan to Highlands Arkansas Holdings, LLC, an affiliate of Aria (“HAH”), for working capital purposes, and, in connection therewith, HAH executed a promissory note (the “Note”) in favor of the Company. Since July 17, 2015, the Note has been amended from time to time and currently has an outstanding principal amount of $1.75 million and had a maturity date of December 31, 2015. The Company is currently seeking the repayment of the Note in accordance with its terms and expects full repayment.


17




Lease of Arkansas Facilities. On February 5, 2016, nine wholly-owned subsidiaries of the Company (each, a “Skyline Lessor”) entered into a Master Lease Agreement (the “Skyline Lease”) pursuant to which each Skyline Lessor leases to Skyline Healthcare LLC (“Skyline”), or any affiliate of Skyline (the “Skyline Lessee”), one of the Arkansas Facilities. The term of the Skyline Lease commenced on April 1, 2016. The initial lease term of the Skyline Lease is fifteen (15) years with two (2) separate renewal terms of five (5) years each. The annual rent under the Skyline Lease in the first year will be $5.4 million , and such rent shall escalate at 2.5% each year during the initial term and any subsequent renewal terms. Skyline has guaranteed the obligations of its affiliates.

In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million , which the Purchaser could exercise in accordance with such agreement until May 1, 2016. The purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to be evidenced by a promissory note executed by the Purchaser. The closing of such purchase and sale shall take place on or before August 1, 2016 on a date designated by the Purchaser to the Skyline Lessors in writing. The Purchaser has delivered notice of its intent to exercise the purchase option and a definitive agreement with respect to such purchase has been executed (see Note 16 - Subsequent Events ) .

New Beginnings. On January 22, 2016, New Beginnings Care, LLC and its affiliated debtors (collectively, “New Beginnings”) filed petitions to reorganize their finances under the Bankruptcy Code. New Beginnings operates the Savannah Beach, Oceanside and Jeffersonville facilities pursuant to a master lease dated November 3, 2015 with the Company. The Jeffersonville facility was decertified by the Center for Medicare Services (“CMS”) in February 2016 for deficiencies related to its operations and maintenance of the facility. Since that time, New Beginnings has been paying partial rent for the Oceanside and Savannah Beach facilities but not for the Jeffersonville Facility. On March 4, 2016, due to defaults by New Beginnings, the Company petitioned the Bankruptcy Court to lift the automatic stay to enable the Company to regain possession of the three facilities. Prior to the court ruling on the motion, the Company entered into a consent order (the “Consent Order”) with New Beginnings, the debtors’ creditors’ committee, which represents the unsecured creditors in the proceedings, and Gemino Financial (the debtors’ secured lender), in which the Company agreed to give the creditors’ committee until June 4, 2016 to sell all of New Beginnings’ assets including the leasehold interest and personal property for the Company’s three facilities. The Consent Order further provides that if the creditors’ committee is unable to sell the assets by such date, the automatic stay will be lifted and the Company will be allowed to reclaim possession of the three facilities. The court signed the Consent Order on May 9, 2016, and it was entered on the docket on May 10, 2016.
 
The Oceanside facility was cited for deficiencies during a State survey on November 6, 2015 and had six months, or until May 5, 2016, to meet the pertinent provisions of Section 1819 and 1919 of the Social Security Act and be deemed in substantial compliance with each of the requirements for long term care facilities established by the Secretary of Health and Human Services in 42 CFR section 483.1 et seq. (collectively, “CMS Requirements”) with regard to the facility. As of May 3, 2016, out of concern that decertification of Oceanside was imminent, New Beginnings obtained a preliminary injunction against the Georgia Department of Community Health and the United States Department of Health and Human Services Center for Medicare and Medicaid Services and their officers, agents, servants, employees and attorneys prohibiting the termination of the facility’s Medicare and Medicaid provider agreements until the earlier of (i) July 1, 2016, or (ii) the completion of the administrative review process pursuant to 42 U.S.C. § 405(g), or (iii) the full administration of the bankruptcy estate pursuant to Title 11 of the United States Code, in part in order to give New Beginnings time to market its leasehold interests and assets to potential buyers pursuant to the Consent Order.
 
On May 9, 2016, a Notice of Involuntary Termination from CMS was issued to New Beginnings indicating that its operations at the Oceanside facility were not in substantial compliance with CMS Requirements and that its provider agreements with CMS were terminated as of such date. The letter noted that the effectuation of the involuntary termination is stayed by the terms of the Bankruptcy Court’s order.
 
The Company is providing support to New Beginnings in an effort to clear the deficiencies raised by CMS and to persuade CMS to rescind its decertification of the Oceanside facility.

To date, New Beginnings has neither affirmed nor rejected the Master Lease entered into on November 3, 2015 with respect to the Jeffersonville, Oceanside, and Savannah Beach facilities. The Company is in discussions with New Beginnings and other potential operators about renting such facilities.

Future minimum lease receivables from the Company’s facilities leased and subleased to third party operators for each of the next five years ending December 31, are as follows:

18




 
 
(Amounts in
000's)
2016 (a)
 
$
19,725

2017
 
26,845

2018
 
27,474

2019
 
28,082

2020
 
27,634

Thereafter
 
204,913

Total
 
$
334,673

(a) Estimated minimum lease receivables for the year ending December 31, 2016 , include only payments to be received after March 31, 2016 .

For further details regarding the Company's leased and subleased facilities to third-party operators, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases included in the Annual Report.

NOTE 8.                           ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
(Amounts in 000’s)
 
March 31, 2016
 
December 31, 2015
Payroll related
 
$
395

 
$
684

Employee benefits
 
306

 
648

Real estate and other taxes
 
295

 
411

Self-insured reserve
 
248

 
221

Accrued interest
 
474

 
484

Other accrued expenses
 
609

 
677

Total accrued expenses
 
$
2,327

 
$
3,125


NOTE 9.                               NOTES PAYABLE AND OTHER DEBT
 
See Part II, Item 8, Notes to Consolidated Financial Statements, Note 9 - Notes Payable and Other Debt included in the Annual Report for a detailed description of all the Company's debt facilities. 
Notes payable and other debt consists of the following (a) :
Amounts in (000's)
 
March 31, 2016
 
December 31, 2015
Senior debt—guaranteed by HUD
 
$
25,323

 
$
25,469

Senior debt—guaranteed by USDA
 
26,286

 
26,463

Senior debt—guaranteed by SBA
 
3,508

 
3,548

Senior debt—bonds, net of discount
 
7,028

 
7,025

Senior debt—other mortgage indebtedness
 
46,985

 
51,128

Other debt
 
2,562

 
2,638

Convertible debt
 
9,200

 
9,200

Deferred financing costs
 
$
(2,504
)
 
$
(2,712
)
Total debt
 
$
118,388

 
$
122,759

Current debt
 
46,919

 
50,960

Debt included in liabilities of disposal group held for sale
 
949

 
958

Notes payable and other debt, net of current portion
 
$
70,520

 
$
70,841

(a)
United States ("U.S.") Department of Housing and Urban Development ("HUD"), U.S. Department of Agriculture("USDA"), U.S. Small Business Administration ("SBA").


19




The following is a detailed listing of the debt facilities that comprise each of the above categories:

Amounts in (000's)
 
 
 
 
 
 
 
 
March 31,
 
December 31,
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
2016
 
2015
Senior debt - guaranteed by HUD
 
 
 
 
 
 
 
 
 
 
The Pavilion Care Center
 
Red Mortgage
 
12/01/2027
 
 Fixed
 
4.16%
 
$
1,510

 
$
1,534

Hearth and Care of Greenfield
 
Red Mortgage
 
08/01/2038
 
 Fixed
 
4.20%
 
2,236

 
2,251

Woodland Manor
 
Heartland Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
5,529

 
5,556

Glenvue
 
Heartland Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
8,585

 
8,628

Autumn Breeze
 
KeyBank
 
01/01/2045
 
 Fixed
 
3.65%
 
7,463

 
7,500

 
Total
 
 
 
 
 
 
 
 
 
$
25,323

 
$
25,469

Senior debt - guaranteed by USDA




 
 
 
 
Attalla

Metro City

09/30/2035

Prime + 1.50%

5.50%
 
$
7,348

 
$
7,400

Coosa

Metro City

09/30/2035

Prime + 1.50%

5.50%
 
6,625

 
6,671

Mountain Trace

Community B&T

01/24/2036

Prime + 1.75%

5.75%
 
4,476

 
4,507

Southland

Bank of Atlanta

07/27/2036

Prime + 1.50%

6.00%
 
4,548

 
4,576

Homestead

Square 1

10/14/2036

Prime + 1.00%

5.75%
 
3,289

 
3,309


Total








 
$
26,286

 
$
26,463

Senior debt - guaranteed by SBA




 
 
 
 
College Park

CDC

10/01/2031

Fixed

2.81%
 
$
1,676

 
$
1,697

Stone County

CDC

07/01/2032

Fixed

2.42%
 
1,109

 
1,123

Southland

Bank of Atlanta

07/27/2036

Prime + 2.25%
5.75%
 
723

 
728

 
Total
 
 
 
 
 
 
 
 
 
$
3,508

 
$
3,548

(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
Amounts in (000's)

 
 
 
 
 
March 31,
 
December 31,
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
2016
 
2015
Senior debt - bonds, net of discount

 
 
 
 
 
 
 
 
 
 
Eaglewood Bonds Series A
 
City of Springfield, Ohio
 
05/01/2042
 
 Fixed
 
7.65%
 
$
6,449

 
$
6,449

Eaglewood Bonds Series B
 
City of Springfield, Ohio
 
05/01/2021
 
 Fixed
 
8.50%
 
579

 
576

 
Total
 
 
 
 
 
 
 
 
 
$
7,028

 
$
7,025

(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.


20




Amounts in (000's)

 
 
 
 
March 31,
 
December 31,
Facility
Lender
Maturity

Interest Rate (a)
2016
 
2015
Senior debt - other mortgage indebtedness




 
 
 
Sumter Valley (c)
Private Bank (d)
09/01/2016

LIBOR + 4.25%

4.63%
$
5,098

 
$
5,123

Georgetown (c)
Private Bank (d)
09/01/2016

LIBOR + 4.25%

4.63%
4,006

 
4,026

Northridge (b)
Private Bank (d)
09/01/2016

LIBOR + 4.25%

5.50%
3,667

 
4,230

Woodland Hills (b)
Private Bank (d)
09/01/2016

LIBOR + 4.25%

5.50%
3,083

 
3,557

Abington/Cumberland (b)
Private Bank (d)
09/01/2016

LIBOR + 4.25%

5.50%
3,493

 
4,029

Heritage Park (b)
Private Bank (d)
09/01/2016

LIBOR + 3.50%

6.00%
2,886

 
3,370

River Valley (b)
Private Bank (d)
09/01/2016

LIBOR + 3.50%

6.00%
3,505

 
3,989

Quail Creek (e)
Congressional Bank
09/27/2016

LIBOR + 4.75%

5.75%
5,000

 
5,000

Little Rock/West Markham (b)
Private Bank (d)
12/31/2016

LIBOR + 4.00%

6.00%
9,901

 
11,399

Northwest
First Commercial
12/31/2017

Prime

5.00%
1,268

 
1,285

Stone County
Metro City
06/08/2022

Prime + 2.25%

6.25%
1,688

 
1,697

College Park
Bank of Las Vegas
05/01/2031

Prime + 2.00%

6.25%
2,441

 
2,465

Hembree Rd. Building
Fidelity Bank
12/01/2017

 Fixed

5.50%
949

 
958

 
Total
 
 
 
 
 
 
$
46,985

 
$
51,128

(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
(b)  
On March 24, 2016, the Company received a commitment from a lender to refinance the Bentonville, Heritage Park and River Valley Credit Facility (under which only two facilities remain financed upon the sale of the Bentonville facility in 2015), the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of $25.4 million of debt subject to definitive documentation and certain closing conditions.

(c)  
On March 24, 2016, the Company obtained a lender commitment to extend the maturity date of the Georgetown and Sumter Credit Facility from September 2016 to June 2017 subject to definitive documentation and certain closing conditions.

(d)  
On March 24, 2016, the Company obtained the release of approximately $3.9 million of restricted cash funds and applied the amounts as additional principal payments related to certain of the above debt facilities with Private Bank.

(e)  
On March 29, 2016, the Company obtained a lender commitment to extend the maturity date of the Quail Creek Credit facility from September 2016 to September 2018 subject to definitive documentation and certain closing conditions.
Amounts in (000's)
 
 
 
 
 
 
 
 
 
 
Lender
 
Maturity
 
Interest Rate (a)
 
March 31, 2016
 
December 31, 2015
Other debt
 
 
 
 
 
 
 
 
 
 
First Insurance Funding
 
02/29/2017
 
 Fixed
 
3.99%
 
$
206

 
$
14

Key Bank
 
08/25/2016
 
 Fixed
 
 
680

 
680

Reliant Rehabilitation
 
11/15/2016
 
 Fixed
 
7.00%
 
758

 
944

Pharmacy Care of Arkansas
 
02/08/2018
 
 Fixed
 
2.00%
 
918

 
1,000

Total
 
 
 
 
 
 
 
$
2,562

 
$
2,638

(a)
Represents cash interest rates as of March 31, 2016 in accordance with the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.


21




Amounts in (000's)
 
 
 
 
 
 
 
 
 
 
Facility
 
Maturity
 
Interest Rate (a)
 
March 31, 2016
 
December 31, 2015
Convertible debt
 
 
 
 
 
 
 
 
 
 
Issued July 2012
 
10/31/2017
 
 Fixed
 
10.00%
 
$
1,500

 
$
1,500

Issued March 2015
 
04/30/2017
 
 Fixed
 
10.00%
 
7,700

 
7,700

 
Total
 
 
 
 
 
 
 
$
9,200

 
$
9,200

(a)
Represents cash interest rates as of March 31, 2016 in accordance with the lender agreements.The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
The Company was in compliance with all applicable debt covenants as of March 31, 2016 .  
Scheduled Maturities
The schedule below summarizes the scheduled maturities for the twelve months ended March 31 of the respective year (not adjusted for commitments to refinance or extend the maturities of debt as noted above). The 2017 maturities include $1.0 million related to the outstanding loan of one of the two office buildings located in Roswell, Georgia which is classified in liabilities of disposal group held for sale. In April 2016, the office building was sold and the related outstanding debt was repaid in full (see Note 16 - Subsequent Events ).
 
(Amounts in 000’s)
2017
$
47,867

2018
12,502

2019
1,778

2020
1,866

2021
1,969

Thereafter
55,112

Subtotal
$
121,094

Less: unamortized discounts
(202
)
Less: deferred financing costs
$
(2,504
)
Total notes and other debt
$
118,388



NOTE 10.                        DISCONTINUED OPERATIONS

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. For a historical listing and description of the Company's discontinued entities, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 11 - Discontinued Operations included in the Annual Report.
The following table summarizes certain activity of discontinued operations for the three months ended March 31, 2016 and 2015 :
 
 
Three Months Ended March 31,
(Amounts in 000’s)
 
2016
 
2015
Total revenues
 
$

 
$
46,862

Cost of services
 
519

 
42,930

Net income (loss)
 
(528
)
 
2,266

Interest expense, net
 
8

 
313


At March 31, 2016 , the Company had two office buildings held for sale. The Company completed the sale of one of these buildings on April 25, 2016 for $0.7 million . Debt obligations on the transaction exceeded proceeds by $0.2 million . The other office building is unencumbered and under contract for a sales price of $0.2 million . The Company expects to complete the sale of the second office building in the second quarter of 2016 .

22




On February 9, 2016 , the Company sold an office building in Arkansas for $0.3 million . The office space was unencumbered.
Assets and liabilities of the disposal group held for sale at March 31, 2016 and December 31, 2015 , are as follows: 
(Amounts in 000’s)
 
March 31, 2016
 
December 31, 2015
Property and equipment, net
 
$
1,237

 
$
1,249

Assets of disposal groups held for sale
 
$
1,237

 
$
1,249

 
 
 
 
 
Notes payable
 
$
949

 
$
958

Liabilities of disposal group held for sale
 
$
949

 
$
958


NOTE 11.                        COMMON AND PREFERRED STOCK

Common Stock Repurchase Activity

In the three months ended March 31, 2016 , the Company repurchased 150,000 shares of common stock pursuant to the share repurchase program announced on November 12, 2015 (the “Repurchase Program”) at an average purchase price of approximately $2.05 per share, exclusive of commissions and related fees. Pursuant to the Repurchase Program, the Company is authorized to repurchase up to 500,000 shares of its outstanding common stock during a twelve -month period. Share repurchases may be made from time to time through open market transactions, block trades or privately negotiated transactions and are subject to market conditions, as well as corporate, regulatory and other considerations. The Repurchase Program may be suspended or discontinued at any time. As of March 31, 2016 , a maximum 350,000 shares may yet be purchased under the Repurchase Program.

Preferred Stock

The liquidation preference of the Company's Series A Preferred Stock is $25 per share. Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25 liquidation preference per share. The dividend rate may increase under certain circumstances.

Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a "Change of Control," as defined in the Company's Articles of Incorporation. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25 per share, plus any accrued and unpaid dividends to the redemption date.

The change-in-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities , requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are outside of the issuer's control. The assessment of whether the redemption of an equity security could occur outside of the issuer's control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable.

Preferred Stock Offerings and Dividends

The following table summarizes the shares of preferred stock issued by the Company and net proceeds received from issuance and dividends paid on the Company's preferred stock for the three months ended March 31, 2016 :


23




 
 
Shares Issued & Outstanding
Net Proceeds from Issuance (in 000's)
Dividends Paid (in 000's)
Balances, December 31, 2015
 
2,426,930

$
54,714

 
 
 
 
 
 
At-The-Market offering
 
186,905

$
3,677

 
Dividends paid during 2016
 
 
 
$
1,777

 
 
 
 
 
Balances, March 31, 2016
 
2,613,835

$
58,391

 

NOTE 12.                        STOCK BASED COMPENSATION

For the three months ended March 31, 2016 and 2015 , the Company recognized stock-based compensation expense as follows: 
 
 
Three Months Ended March 31,
(Amounts in 000’s)
 
2016
 
2015
Employee compensation:
 
 

 
 

Restricted stock
 
$
111

 
$
63

Stock options
 
85

 
44

Warrants
 
246

 
33

Total employee stock-based compensation expense
 
$
442

 
$
140

Non-employee compensation:
 
 

 
 
Board restricted stock
 
$
26

 
$
51

Board stock options
 
12

 
12

Total non-employee stock-based compensation expense
 
$
38

 
$
63

Total stock-based compensation expense
$
480

 
$
203


Stock Incentive Plan
The Company has one active employee stock option plan:
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.
The 2011 Stock Incentive Plan permits the granting of incentive or nonqualified stock options and the granting of restricted stock. The plan is 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 number of securities remaining available for future issuance is 634,384
In addition to the Company's stock option plan, 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 assumptions used in calculating the fair value of employee common stock options and warrants granted during the three months ended March 31, 2016 and March 31, 2015 , using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
 
Three Months Ended March 31,
 
2016
 
2015
Dividend yield
%
 
%
Expected volatility
41
%
 
51
%
Risk-free interest rate
1.43
%
 
1.73
%
Expected term
5.0 years

 
5.2 years

Common Stock Options

24




The following table summarizes the Company's common stock option activity for the three months ended March 31, 2016 :
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in 000's)
Outstanding, December 31, 2015
266,514

 
$
3.96

 
 
 
 
 
Granted
141,507

 
$
2.07

 
 
 
 
 
Exercised

 
$

 
 
 
 
 
Forfeited
(8,334
)
 
$
4.06

 
 
 
 
 
Expired
(26,250
)
 
$
3.93

 
 
 
 
Outstanding, March 31, 2016
373,437

 
$
3.24

 
6.0
 
$
37

Vested at March 31, 2016
298,946

 
$
3.07

 
5.4
 
$
37

On January 27, 2016, the Board granted 77,186 and 64,321 common stock options to its Chief Executive Officer and Chief Financial Officer, respectively, as part of their 2015 performance bonuses. The options vested immediately upon grant and are exercisable at $2.07 per share. The weighted-average grant date fair value for the options granted was approximately $0.78 per option.
The following table summarizes the common stock options outstanding and exercisable as of March 31, 2016 :
 
Stock Options Outstanding
 
Options Exercisable
Exercise Price
Number of Shares
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Vested at March 31, 2016
 
Weighted Average Exercise Price
$1.30
1,989

 
0.1
 
$
1.30

 
1,989

 
$
1.30

$1.31 - $3.99
289,337

 
6.0
 
$
3.01

 
220,183

 
$
2.73

$4.00 - $4.30
82,111

 
6.0
 
$
4.11

 
76,774

 
$
4.09

Total
373,437

 
6.0
 
$
3.24

 
298,946

 
$
3.07

For options unvested at March 31, 2016 , $0.1 million in compensation expense will be recognized over the next 1.7 years.
Common Stock Warrants  
The following table summarizes the Company's common stock warrant activity for the three months ended March 31, 2016 :
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in 000's)
Outstanding, December 31, 2015
2,051,475

 
$
3.46

 
 
 
 
 
Granted

 
$

 
 
 
 
 
Exercised

 
$

 
 
 
 
 
Forfeited

 
$

 
 
 
 
 
Expired

 
$

 
 
 
 
Outstanding, March 31, 2016
2,051,475

 
$
3.46

 
4.5
 
$
249

Vested at March 31, 2016
1,576,475

 
$
3.19

 
3.2
 
$
249


25




The following table summarizes the common stock warrants outstanding and exercisable as of March 31, 2016 :
 
Warrants Outstanding
 
Warrants Exercisable
Exercise Price
Number of Shares
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Vested at March 31, 2016
 
Weighted Average Exercise Price
$0 - $1.99
327,664

 
1.6
 
$
1.56

 
327,664

 
$
1.56

$2.00 - $2.99
335,354

 
2.3
 
$
2.58

 
335,354

 
$
2.58

$3.00 - $3.99
500,355

 
3.6
 
$
3.59

 
500,355

 
$
3.59

$4.00 - $4.99
864,769

 
7.0
 
$
4.37

 
389,769

 
$
4.40

$5.00 - $5.90
23,333

 
7.1
 
$
5.90

 
23,333

 
$
5.90

Total
2,051,475

 
4.5
 
$
3.46

 
1,576,475

 
$
3.19

For warrants unvested at March 31, 2016 , $0.4 million in compensation expense will be recognized over the next 1.7 years.
Restricted Stock
The following table summarizes the Company's restricted stock activity for the three months ended March 31, 2016 :
 
 
Number of Shares
 
Weighted Avg. Grant Date Fair Value
Unvested at December 31, 2015
294,021

 
$
4.19

 
Granted
196,251

 
$
2.14

 
Vested
(53,141
)
 
$
2.07

 
Forfeited

 
$

Unvested at March 31, 2016
437,131

 
$
3.53

On January 1, 2016, the Company granted to its Chief Accounting Officer and certain employees 7,792 and 26,622 shares of restricted stock, respectively, with a weighted average grant-date fair value of $2.49 per share, as part of their 2015 performance bonuses. The restricted shares vest as to one-third of the total shares granted on December 31, 2016, December 31, 2017 and December 31, 2018.
On January 27, 2016, the Board granted to the Company's Chief Executive Officer and Chief Financial Officer 28,986 and 24,155 shares of restricted stock, respectively, with a weighted average grant-date fair value of $2.07 per share, as part of their 2015 performance bonuses. The restricted shares vested immediately upon grant.
On January 27, 2016, three non-management members of the Board were each granted 36,232 shares of restricted stock with a weighted average grant-date fair value of $2.07 per share, as compensation for their services as Directors. The restricted shares vest on the following schedule: (i) 12,077 shares on January 27, 2017; (ii) 12,077 shares of January 27, 2018; and (iii) 12,078 shares on January 27, 2019.
For restricted stock unvested at March 31, 2016 , $1.2 million in compensation expense will be recognized over the next 2.6 years.
NOTE 13.  .                      VARIABLE INTEREST ENTITIES
Non-consolidated Variable Interest Entities
Aria. On April 30, 2015, the Company entered into a lease inducement (the "Aria Lease Inducement") with Aria Health Consulting, LLC with respect to the Aria Subleases. The Aria Lease Inducement provided 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, eight sublease agreements with Aria Sublessees 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 was subtracted from the lease inducement fee paid by the Company under the Aria Lease Inducement).

26




On July 17, 2015, the Company made a short-term loan to HAH, for working capital purposes, and, in connection therewith, HAH executed the Note in favor of the Company. Since July 17, 2015, the Note has been amended from time to time and currently has an outstanding principal amount of $ 1.75 million and had a maturity date of December 31, 2015 . On October 6, 2015, HAH and the Company entered into a security agreement, whereby HAH granted the Company a security interest in all accounts arising from the business of HAH and the Aria Sublessees, and all rights to payment from patients, residents, private insurers and others arising from the business of HAH and the Aria Sublessees (including any proceeds thereof), as security for payment of the Note, as amended, and certain rent and security deposit obligations of the Aria Sublessees under Aria Subleases. The Company is currently seeking the repayment of the Note in accordance with its terms and expects full repayment.

The Aria Lease Inducement and Note entered into by the Company create a variable interest that may absorb some or all of a variable interest entity's ("VIE") expected losses. The Company does not consolidate the operating activities of the Aria Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance.

Effective February 3, 2016, each Aria Sublessor terminated the applicable Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease.

Beacon. On August 1, 2015, the Company entered into a Lease Inducement Fee Agreement with certain affiliates of Beacon Health Management, LLC ("Beacon"), pursuant to which the Company paid a fee of $0.6 million as a lease inducement for certain affiliates of Beacon (the "Beacon Sublessees") to enter into sublease agreements and to commence such subleases and transfer operations thereunder. The inducement fee was paid net of certain other fees and costs owed by the affiliates of, including the first month of base rent for all of the Beacon facilities and the first month of special rent pertaining to the four of such facilities.

On August 1, 2015, the Company made a short-term loan to certain affiliates of Beacon (collectively, the "Beacon Affiliates") and, in connection therewith, Beacon Affiliates executed a promissory note maturing on May 31, 2016 in the amount $0.6 million (the "Beacon Note"), as amended, in favor of the Company. Interest accrues on the unpaid principal balance of the note at a rate of 18% per annum. Until all amounts due and owing under the note have been paid, the Beacon Sublessees will not pledge, as security, any of the accounts receivable relating to the respective facilities that such entities sublease from affiliates of the Company. As of March 31, 2016 , the principal amount outstanding on the Beacon Note was $0.6 million .

The Beacon Lease Inducement and Beacon Note entered into by the Company create a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the Beacon Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance.

NOTE 14.                        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. In March 2016, the Centers for Medicare and Medicaid Services ("CMS") decertified the Jeffersonville facility meaning the facility can no longer accept Medicare or Medicaid patients. The operator is considering appealing the decision by CMS.

The Company believes that it is in compliance in all material respects with all applicable laws and regulations.

Legal Matters

The Company is party to various legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of business, including claims that the services the Company provided during the time it operated skilled nursing facilities resulted in injury or death to the residents of the Company's facilities and claims related to employment, staffing requirements and commercial matters. Although the Company intends to vigorously defend itself in these matters, there is no assurance that the outcomes of these matters will not have a material adverse effect on the Company's business, results of operations and financial condition.

The Company previously operated, and the Company's tenants now operate, in an industry that is extremely regulated. As such, in the ordinary course of business, the Company's tenants are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition, we believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an

27




increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations against or involving the Company, for the Company's prior operations, or the Company's tenants, whether currently asserted or arising in the future, could have a material adverse effect on the Company's business, results of operations and financial condition.

The Company is a defendant in a purported class action lawsuit captioned Amy Cleveland et. al. v. APHR&R Nursing, LLC et al filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit. On December 16, 2015, the Company's insurance carrier reached a settlement with each of the individual plaintiffs on behalf of the Company and all other defendants pursuant to which separate payments are to be made by the Company's carrier to the plaintiffs. The individual settlements are contingent on approval by the probate courts having jurisdiction over the deceased plaintiffs' respective estates, if applicable. As of March 31, 2016, all but two of the individual settlement agreements had been approved and the settlement consideration paid to the plaintiffs.

NOTE 15.                        RELATED PARTY TRANSACTIONS
Personal Guarantor on Loan Agreements

Christopher Brogdon, a former director of the Company and a greater than 5% beneficial owner of the common stock, serves as personal guarantor on certain loan agreements, entered into by the Company prior to 2015, related to the following properties: (i) one of the two office buildings located in Roswell, Georgia; (ii) College Park, a 95 -bed skilled nursing facility located in College Park, Georgia; (iii) Attalla, a 182 -bed skilled nursing facility located in Attalla, Alabama; and (iv) Coosa Valley, 122 -bed skilled nursing facility located in Glencoe, Alabama. At March 31, 2016 , the total outstanding principal owed under the loans was approximately $17.5 million .

Consulting Agreements

The Company had a Consulting Agreement (as amended, the "Consulting Agreement") with Mr. Brogdon pursuant to which Mr. Brogdon was compensated by the Company for providing consulting services related to the acquisition and financing of skilled nursing facilities. On March 21, 2016, the Company and Mr. Brogdon entered into a letter agreement whereby the Company and Mr. Brogdon agreed that the Consulting Agreement was terminated as of November 20, 2015. As of March 31, 2016 , the Company had an outstanding balance of $0.3 million receivable from Mr. Brogdon for a prior promissory note. For further details, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 18 - Related Party Transactions included in the Annual Report.

NOTE 16.                        SUBSEQUENT EVENTS

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

Office Building Sale
On April 25, 2016, the Company completed the sale of one of its office buildings located in Roswell, Georgia for $0.7 million . The Company’s debt obligations with respect to the building exceeded the proceeds of the sale by $0.2 million (see Note 15 - Related Party Transactions ).

Arkansas Facilities Sale Agreement
As described previously, on April 1, 2016, the Skyline Lessors entered into the Skyline Lease pursuant to which each Skyline Lessor leases one of the Arkansas Facilities to the Skyline Lessee (see Note 7 - Leases ). In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which the Purchaser had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million , which the Purchaser could exercise in accordance with such agreement until May 1, 2016. Pursuant to such purchase option, the purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to evidenced by a promissory note executed by the Purchaser.

On April 22, 2016, the Purchaser delivered notice to the Company of its intent to exercise its option to purchase the Arkansas Facilities.

Pursuant to such purchase option, on May 10, 2016, the Skyline Lessors and the Purchaser entered into a Purchase and Sale Agreement (the “Purchase Agreement”) whereby the Skyline Lessors agreed to sell, and the Purchaser agreed to buy, the Arkansas

28


Facilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the nursing home business at such facilities, for an aggregate purchase price of $55.0 million , subject to the terms and conditions set forth in the Purchase Agreement The purchase price consists of: (i) a deposit of $1.0 million deposited by the Purchaser with an escrow agent at the time of the Purchaser’s exercise of the purchase option; (ii) cash consideration of $51.0 million ; and (iii) a promissory note from the Purchaser in favor of the Skyline Lessors with a principal amount of $3,000,000 , to be executed and delivered at closing (the “Skyline Note”). The Skyline Note shall be paid in twenty-four (24) equal monthly installments of interest only at the rate of ten percent ( 10% ) per annum, with the principal balance to be due and payable in full on August 1, 2018. The Skyline Note shall be personally guaranteed by Joseph Schwartz.

The sale of the Arkansas Facilities is subject to customary conditions and termination rights for transactions of this type. The closing of the transaction is required to occur on or before August 1, 2016. The Skyline Lease shall remain in full force and effect through the closing date and, upon the closing, the Skyline Lease shall either terminate or be assigned to the Purchaser’s entities, at the Purchaser’s option. If the closing does not occur, the Skyline Lease shall remain in full force and effect in accordance with its terms.

Notice of Non-Compliance from NYSE MKT

On April 18, 2016, the Company received notice from NYSE Regulation, Inc. that it is not in compliance with certain NYSE MKT (the “NYSE MKT”) continued listing standards relating to stockholders’ equity. Specifically, the Company is not in compliance with Section 1003(a)(i) (requiring stockholders’ equity of $2.0 million or more if an issuer has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring stockholders’ equity of $4.0 million or more if an issuer has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years) and Section 1003(a)(iii) (requiring stockholders’ equity of $6.0 million or more if an issuer has reported losses from continuing operations and/or net losses in its five most recent fiscal years) of the NYSE MKT Company Guide (the “Company Guide”) because the Company reported a stockholders’ deficit of $23.8 million as of December 31, 2015 and net losses for the last five (5) fiscal years. As a result, the Company has become subject to the procedures and requirements of Section 1009 of the Company Guide and is required to submit a plan by May 18, 2016 advising the NYSE MKT of the actions the Company has taken or will take to regain compliance with the NYSE MKT’s continued listing standards by October 18, 2017.

The Company intends to submit a plan by the May 18, 2016 deadline. The Company’s common stock and Series A Preferred Stock will continue to be listed on the NYSE MKT while the Company seeks to regain compliance with the listing standards noted, subject to the Company’s compliance with other continued listing requirements. If the Company fails to submit a plan or if the Company’s plan is not accepted, then the NYSE MKT may commence delisting procedures. Furthermore, the NYSE MKT may commence delisting procedures, if it deems appropriate, if the Company does not regain compliance by October 18, 2017 or if the Company does not make progress consistent with its plan during the plan period.

Decertification of Oceanside Facility

On May 9, 2016, New Beginnings received a Notice of Involuntary Termination from CMS indicating that its operations at the Oceanside facility were not in substantial compliance with CMS Requirements and that its provider agreements with CMS are terminated as of such date. The letter noted that any decertification or further remedial action would be subject to the stays issued in the Bankruptcy Court’s order (see Note 7 - Leases, New Beginnings).


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

Overview
The Company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. Our business primarily consists of leasing and subleasing such facilities to third-party tenants. As of March 31, 2016 , the Company owned, leased, or managed for third parties 38 facilities primarily in the Southeast. The operators of the Company's facilities provide a range of health care and related services to 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 and short-stay patients and residents.

The following table provides summary information regarding the number of facilities and related beds/units as of March 31, 2016 :
 
 
Owned
 
Leased
 
Managed for Third Parties
 
Total
 
 
Facilities
 
Beds/Units
 
Facilities
 
Beds/Units
 
Facilities
 
Beds/Units
 
Facilities
 
Beds/Units
State
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arkansas
 
9

 
958

 

 

 

 

 
9

 
958

Alabama
 
2

 
304

 

 

 

 

 
2

 
304

Georgia
 
4

 
463

 
10

 
1,168

 

 

 
14

 
1,631

North Carolina
 
1

 
106

 

 

 

 

 
1

 
106

Ohio
 
4

 
279

 
1

 
94

 
3

 
332

 
8

 
705

Oklahoma
 
2

 
197

 

 

 

 

 
2

 
197

South Carolina
 
2

 
180

 

 

 

 

 
2

 
180

Total
 
24

 
2,487

 
11

 
1,262

 
3

 
332

 
38

 
4,081

Facility Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Skilled Nursing
 
22

 
2,375

 
11

 
1,262

 
2

 
249

 
35

 
3,886

Assisted Living
 
2

 
112

 

 

 

 

 
2

 
112

Independent Living
 

 

 

 

 
1

 
83

 
1

 
83

Total
 
24

 
2,487

 
11

 
1,262

 
3

 
332

 
38

 
4,081


The following table provides summary information regarding the number of facilities and related beds/units by operator affiliation as of March 31, 2016 :
Operator Affiliation
 
Number of
Facilities
 
Beds / Units
Aria Health Group / Skyline Healthcare (1)
 
9

 
958

Beacon Health Management
 
7

 
585

C.R. Management
 
7

 
830

Wellington Health Services
 
4

 
641

New Beginnings Care (2)
 
3

 
252

Symmetry Healthcare
 
3

 
286

Southwest LTC
 
2

 
197

Subtotal
 
35

 
3,749

AdCare Managed
 
3

 
332

Total
 
38

 
4,081


(1)
AdCare subleased through its subsidiaries nine facilities located in Arkansas to affiliates of Aria pursuant to separate sublease agreements. Eight of the Aria Subleases commenced on May 1, 2015 and one Aria Sublease commenced on November 1, 2015. Effective February 3, 2016, each Aria Sublease was terminated due to the failure to pay rent pursuant to the terms of such sublease. Subsequently, on February 5, 2016, the Company entered into the Skyline Lease with respect to such facilities,

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which commenced on April 1, 2016 (see Note 7 - Leases , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q) .

(2)
On January 22, 2016, New Beginnings Care ("New Beginnings") filed a petition to reorganize its finances under the Bankruptcy Code. To date, New Beginnings has neither affirmed nor rejected the Master Lease entered into on November 3, 2015 with respect to the Jeffersonville, Oceanside, and Savannah Beach facilities. The Company is in discussions with New Beginnings and other potential operators about renting such facilities. For a more detailed discussion, see Note 7 - Leases , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Liquidity Overview
 
At March 31, 2016 , we had $2.3 million in cash and cash equivalents as well as restricted cash of $8.9 million . Over the next twelve months, we anticipate both access to and receipt of several sources of liquidity, including cash flows from operations, and sales of Series A Preferred Stock pursuant to an At-The-Market shelf registration. 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 2016 and into the first quarter of 2017, we anticipate net proceeds of approximately $9.1 million on the refinancing of existing debt with such government guaranteed lending programs. At March 31, 2016 , we had $118.4 million in indebtedness of which the current portion is $47.9 million . We anticipate our operating cash requirements over the next twelve months as being less than the comparative prior twelve months due to the completion of the Transition. We expect sufficient funds for our operations and scheduled debt service, 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 2016 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.

The Company has absorbed negative cash flows from operations in the past, including the three months ended March 31, 2016, but anticipates a reversal to a positive cash flow from operations during the remainder of 2016. In order to satisfy the Company's capital needs, the Company seeks to: (i) continue improving operating results through its leasing and subleasing transactions executed 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 of the Transition. If the Company is unable to expand existing borrowing agreements, refinance current debt, or raise capital through the issuance of securities, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives or sell assets.

On March 24, 2016, we received a commitment to refinance the Bentonville, Heritage Park and River Valley Credit Facility, the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of $25.4 million of debt, subject to definitive documentation and certain closing conditions. On March 24, 2016, we also obtained a lender commitment to extend the maturity date of the Georgetown and Sumter Credit Facility from September 2016 to June 2017 subject to definitive documentation and certain closing conditions. On March 29, 2016, we obtained a lender commitment to extend the maturity date of the Quail Creek Credit Facility from September 2016 to September 2018 subject to definitive documentation and certain closing conditions.

For a more detailed discussion, see Note 3 - Liquidity and Profitability , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Divestitures
For information regarding the Company's divestitures, please see Note 10 - Discontinued Operations and Note 16 - Subsequent Events , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Critical Accounting Policies
 
We prepare our financial statements in accordance 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. On an ongoing basis we

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review our judgments and estimates, including, but not limited to, those related to doubtful accounts, income taxes, stock compensation, intangible assets and loss contingencies. We base our 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. We believe that the following represents our critical accounting policies.
For a discussion on recent accounting pronouncements not yet adopted by the Company, see Note 1 - Organization and Significant Accounting Policies , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Results of Operations   

Three Months Ended March 31, 2016 and 2015
 
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.

As a result of the Transition, the amounts presented below are not reflective of our ongoing annualized performance due to leasing activity throughout the periods. Revenues and expenses related to facility operations during the three months ended March 31, 2015 were reclassed to discontinued operations.

Certain reclassifications have been made to the 2015 financial information to conform to the 2016 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 three months ended March 31, 2015 to reflect the same facilities in discontinued operations for both periods presented.
 
 
 
Three Months Ended March 31,
 
Increase (Decrease)
(Amounts in 000’s)
 
2016
 
2015
 
Amount
 
Percent
Revenues:
 
 

 
 

 
 

 
 

Rental revenues
 
$
6,849

 
$
1,340

 
$
5,509

 
411.1
 %
Management fee and other revenues
 
233

 
218

 
15

 
6.9
 %
Total revenues
 
7,082

 
1,558

 
5,524

 
354.6
 %
Expenses:
 
 

 
 

 
 

 
 
General and administrative expenses
 
2,542

 
3,331

 
(789
)
 
(23.7
)%
Facility rent expense
 
2,179

 
487

 
1,692

 
347.4
 %
Depreciation and amortization
 
1,713

 
1,675

 
38

 
2.3
 %
Other operating expenses
 
203

 
102

 
101

 
99.0
 %
Total expenses
 
6,637

 
5,595

 
1,042

 
18.6
 %
Income (loss) from operations
 
445

 
(4,037
)
 
4,482

 
111.0
 %
Other expense:
 
 

 
 

 
 

 
 
Interest expense, net
 
1,825

 
2,490

 
(665
)
 
(26.7
)%
Loss on extinguishment of debt
 

 
680

 
(680
)
 
(100.0
)%
Other expense
 
42

 
288

 
(246
)
 
(85.4
)%
Total other expense, net
 
1,867

 
3,458

 
(1,591
)
 
(46.0
)%
Loss from continuing operations before income taxes
 
(1,422
)
 
(7,495
)
 
(6,073
)
 
(81.0
)%
Income tax benefit
 

 
20

 
20

 
(100.0
)%
Loss from continuing operations
 
(1,422
)
 
(7,515
)
 
(6,053
)
 
(80.5
)%
(Loss) income from discontinued operations, net of tax
 
(528
)
 
2,266

 
2,794

 
123.3
 %
Net loss
 
$
(1,950
)
 
$
(5,249
)
 
$
(3,259
)
 
(62.1
)%

Rental Revenues —Total rental revenue increase d by $5.5 million , or 411.1% , to $6.8 million for the three months ended March 31, 2016 , compared with $1.3 million for the same period in 2015 . The increase reflects the completion of the Transition and the

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resulting increase in leasing of facilities to third-party operators. As of March 31, 2016 , we have leased or subleased all of our facilities. As of March 31, 2015 , we had leased three owned and subleased five leased skilled nursing and rehabilitation facilities to third-party operators. The Company recognizes all rental revenues on a straight line rent accrual basis except with respect to the Aria Subleases, for which rental revenue is recognized based on cash amount owed, and the New Beginnings Sublease, for which rental revenue is recognized when cash is received.
Management Fee and Other Revenues —Management revenues increase d by $0.02 million , or 6.9% , to $0.2 million for the three months ended March 31, 2016 , compared with $0.2 million for the same period in 2015 . The increase is primarily due to slight increases to management fee revenue and asset management fee revenues.
General and Administrative —General and administrative costs decrease d by $0.8 million or 23.7% , to $2.5 million for the three months ended March 31, 2016 , compared with $3.3 million for the same period in 2015 . The net decrease is primarily due to the following: (i) a decrease in contract services expense of approximately $0.6 million ; (ii) a decrease in salaries, wages and employee benefits expense of approximately $0.3 million , which is offset by an increase in employee stock-based compensation expense of approximately $0.3 million ; and (iii) a decrease in IT-related expenses of approximately $0.1 million .
Facility Rent Expense —Facility rent expense increase d by $1.7 million or 347.4% , to $2.2 million for the three months ended March 31, 2016 , compared with $0.5 million for the same period in 2015 . The increase is primarily due to: (i) an increase of $0.3 million in rent expense resulting from lease extensions and amendments entered into subsequent to March 31, 2015 (see Note 7 - Leases , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q); and (ii) $1.4 million of rent expense reported in discontinued operations for the three months ended March 31, 2015.
Depreciation and Amortization —Depreciation and amortization increase d by $0.04 million or 2.3% , to $1.7 million for the three months ended March 31, 2016 , compared with $1.7 million for the same period in 2015 . The increase is primarily due to certain equipment purchases subsequent to March 31, 2015 .
Other Operating Expenses —Other operating expense increase d by $0.1 million or 99.0% , to $0.2 million for the three months ended March 31, 2016 , compared with $0.1 million for the same period in 2015 . The increase is primarily due to an increase in debt-related legal expenses of approximately $0.1 million .
Interest Expense, Net —Interest expense, net decrease d by $0.7 million or 26.7% , to $1.8 million for the three months ended March 31, 2016 , compared with $2.5 million for the same period in 2015 . The decrease is primarily due to: (i) the repayment in full of four lines of credit with an aggregate outstanding principal totaling $4.9 million at March 31, 2015; and (ii) the repayment of $6.8 million in convertible notes subsequent to March 31, 2015.
Loss on Debt Extinguishment —Loss on extinguishment of debt decrease d by $0.7 million or 100.0% , to $0.0 million for the three months ended March 31, 2016 , compared with $0.7 million for the same period in 2015 . The decrease is primarily due to the February 2015 issuance of promissory notes related to the refinancing of certain loan agreements with one of our lenders (see Note 9 - Notes Payable and Other Debt , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q).
Other Expense —Other expense decrease d by $0.25 million or 85.4% , to $0.04 million for the three months ended March 31, 2016 , compared with $0.29 million for the same period in 2015 . The decrease is primarily due to a reduction in transition-related legal expenses incurred during 2016.
Liquidity and Capital Resources

For information regarding the Company's liquidity, please refer to Note 3 - Liquidity and Profitability , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q and Liquidity Overview , to the Company's Management’s Discussion and Analysis of Financial Condition and Results of Operations located in Part I, Item 2, of this Quarterly Report on Form 10-Q.


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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)
 
2016
 
2015
Net cash used in operating activities - continuing operations
 
$
(941
)
 
$
(5,248
)
Net cash (used in) provided by operating activities - discontinued operations
 
(639
)
 
4,645

Net cash provided by investing activities - continuing operations
 
4,145

 
331

Net cash used in investing activities - discontinued operations
 
(1
)
 
(44
)
Net cash (used in) provided by financing activities - continuing operations
 
(2,752
)
 
277

Net cash used in financing activities - discontinued operations
 
(268
)
 
(16
)
Net change in cash and cash equivalents
 
(456
)
 
(55
)
Cash and cash equivalents at beginning of period
 
2,720

 
10,735

Cash and cash equivalents at end of period
 
$
2,264

 
$
10,680

 
Three Months Ended March 31, 2016
 
Net cash used in operating activities —continuing operations for the three months ended March 31, 2016 , was approximately $ 0.9 million , consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, rent revenue in excess of cash received, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity.
Net cash provided by investing activities —continuing operations for the three months ended March 31, 2016 , was approximately $ 4.1 million . This is primarily the result of a net release in restricted cash deposits of approximately $3.8 million and proceeds from sale of property and equipment of $0.3 million.
Net cash used in financing activities —continuing operations was approximately $ 2.8 million for the three months ended March 31, 2016 . This is primarily the result of repayments of existing debt obligations and payments of dividends. These uses were offset by cash proceeds received from preferred stock issuances and additional debt borrowings. Net cash used in financing activities—discontinued operations was $0.3 million.
Three Months Ended March 31, 2015
 
Net cash used in operating activities —continuing operations for the three months ended March 31, 2015 , was $ 5.2 million , consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, rent revenue and expense in excess of cash paid, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity. Net cash provided by operating activities—discontinued operations was approximately $4.6 million . This is primarily the result of the discontinuation of profitable operating entities which are now subleased to our third-party operators.
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 net decrease in restricted cash deposits of approximately $0.7 million , partially offset by capital expenditures of approximately $0.4 million.
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 and exercises of stock-based compensation awards. These sources were offset by repayments of existing debt obligations and payments of preferred stock dividends.
Notes Payable and Other Debt

For information regarding the Company's debt financings, please refer to Note 9 - Notes Payable and Other Debt , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Receivables

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Our operations could be adversely affected if we experience significant delays in receipt of rental income from our operators. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and accounts receivable) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity.

Accounts receivable, net totaled $8.6 million at March 31, 2016 and $8.8 million at December 31, 2015 of which $6.5 million and $8.0 million, respectively, related to patient care receivables from our legacy operations.
The allowance for doubtful accounts was $11.3 million and $12.5 million at March 31, 2016 and December 31, 2015 , respectively. We continually evaluate the adequacy of our bad debt reserves based on aging of older balances, payment terms and historical collection trends after facility operations transfer to third-party operators. We continue to evaluate and implement additional processes to strengthen our collection efforts and reduce the incidence of uncollectible accounts.
Operating Leases
For information regarding the Company's operating leases, please refer to Note 7 - Leases , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q

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 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.

The Company is party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including claims that the services the Company provides during the time it operated skilled nursing facilities resulted in injury or death to the residents of the Company's facilities and claims related to employment, staffing requirements and commercial matters. Although the Company intends to vigorously defend itself in these matters, there is no assurance that the outcomes of these matters will not have a material adverse effect on the Company's business, results of operations and financial condition.

The Company previously operated, and the Company's tenants now operate, in an industry that is extremely regulated. As such, in the ordinary course of business, the Company's tenants are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition, we believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations against or involving the Company, for the Company's prior operations, or the Company's tenants, whether currently asserted or arising in the future, could have a material adverse effect on the Company's business, results of operations and financial condition.

The Company is a defendant in a purported class action lawsuit captioned Amy Cleveland et. al. v. APHR&R Nursing, LLC et al filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit. On December 16, 2015, the Company's insurance carrier reached a settlement with each of the individual plaintiffs on behalf of the Company and all other defendants pursuant to which separate payments are to be made by the Company's carrier to the plaintiffs. The individual settlements are contingent on approval by the probate courts having jurisdiction over the deceased plaintiffs' respective estates, if applicable. As of March 31, 2016 , all but two of the individual settlement agreements had been approved and the settlement consideration paid to the plaintiffs.

Item 1A.  Risk Factors.
 
The following are certain additional risk factors that you should carefully in addition to the risk factors discussed in Part I, “Item 1A. Risk Factors” of the Annual Report, which are incorporated herein by this reference. The risk factors described below and in the Annual Report should be considered in connection with evaluating the forward-looking statements contained in this Quarterly Report because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. These risk factors are not all the risks applicable to our business, and are intended only as a summary of certain material factors. If any of the risks described below or in the Annual Report actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of the common stock and Series A Preferred Stock could decline.

If we fail to meet all applicable continued listing requirements of the NYSE MKT and the NYSE MKT determines to delist the common stock and Series A Preferred Stock, the delisting could adversely affect the market liquidity of such securities, impair the value of your investment, adversely affect our ability to raise needed funds and subject us to additional trading restrictions and regulations.  

On April 18, 2016, the Company received notice from NYSE Regulation, Inc. that it is not in compliance with certain NYSE MKT continued listing standards relating to stockholders’ equity. Specifically, the Company is not in compliance with Section 1003(a)(i) (requiring stockholders’ equity of $2.0 million or more if an issuer has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring stockholders’ equity of $4.0 million or more if an issuer has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years) and Section 1003(a)(iii) (requiring stockholders’ equity of $6.0 million or more if an issuer has reported losses from continuing operations and/or net losses in its five most recent fiscal years) of the Company Guide because the Company reported a stockholders’ deficit of $23.8 million as of December 31, 2015 and net losses for the last five (5) fiscal years. As a result, the Company has become subject to the procedures and requirements of Section 1009 of the Company Guide and is required to submit a plan by May 18, 2016, advising the NYSE MKT of the actions the Company has taken or will take to regain compliance with the NYSE MKT’s continued listing standards by October 18, 2017.

The Company intends to submit a plan by the May 18, 2016 deadline. The common stock and Series A Preferred Stock will continue to be listed on the NYSE MKT while the Company seeks to regain compliance with the listing standards noted, subject to the

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Company’s compliance with other continued listing requirements. If the Company fails to submit a plan or if the Company’s plan is not accepted, then the NYSE MKT may commence delisting procedures. Furthermore, the NYSE MKT may commence delisting procedures, if it deems appropriate, if the Company does not regain compliance by October 18, 2017 or if the Company does not make progress consistent with its plan during the plan period. We give no assurance that the Company will be able to regain compliance with the applicable NYSE MKT continued listing requirements.

If the common stock and Series A Preferred Stock are delisted from the NYSE MKT, then such securities may trade in the over-the-counter market. If our securities were to trade on the over-the-counter market, selling the common stock and Series A Preferred Stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and any security analysts’ coverage of us may be reduced. In addition, in the event the common stock and Series A Preferred Stock are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in such securities, further limiting the liquidity of the common stock and Series A Preferred Stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities. Such delisting from the NYSE MKT and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions. Any such limitations on our ability to raise debt and equity capital could prevent us from making future investments and satisfy maturing debt commitments.

In addition, if the Company fails for 180 or more consecutive days to maintain a listing of the Series A Preferred Stock on a national exchange, then: (i) the annual dividend rate on the Series A Preferred Stock will be increased to 12.875% per annum on the 181st day; and (ii) the holders of the Series A Preferred Stock will be entitled to vote for the election of two additional directors to serve on the Board. Such increased dividend rate and voting rights will continue for so long the Series A Preferred Stock is not listed on a national exchange.

We are exploring strategic alternatives and there is no assurance that we will be successful in identifying or completing any strategic alternative or that any such strategic alternative will yield additional value for shareholders.
 
The Board has commenced a review of strategic alternatives which could result in, among other things, a sale, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. There is no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, then our business, financial condition and results of operations could be adversely affected. We provide no assurance that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
Common stock repurchases made by the Company during the three months ended March 31, 2016 were as follows:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan
 
Maximum Number of Shares That May Yet Be Purchased (a)
January 1, 2016 - January 31, 2016
 
150,000

 
$
2.05

 
150,000

 
350,000

February 1, 2016 - February 29, 2016
 

 

 

 

March 1, 2016 - March 31, 2016
 

 

 

 

Total
 
150,000

 
$
2.05

 
150,000

 
350,000

(a) On November 12, 2015, the Company announced that the Board authorized a stock repurchase plan (the "Repurchase Program") that enables the Company to repurchase up to 500,000 shares of its outstanding common stock during a twelve-month period ending November 12, 2016. Share repurchases may be made from time to time through open market transactions, block trades or privately negotiated transactions and are subject to market conditions, as well as corporate, regulatory and other considerations. The Repurchase Program may be suspended or discontinued at any time.

Item 3.  Defaults upon Senior Securities.
 

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None. 

Item 4.  Mine Safety Disclosures.
 
Not applicable.

Item 5.  Other Information.

As described previously, on April 1, 2016, the Skyline Lessors entered into the Skyline Lease pursuant to which each Skyline Lessor leases one of the Arkansas Facilities to the Skyline Lessee (see Note 7 - Leases , to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q). In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which the Purchaser had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million, which the Purchaser could exercise in accordance with such agreement until May 1, 2016. Pursuant to such purchase option, the purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to evidenced by a promissory note executed by the Purchaser.

On April 22, 2016, the Purchaser delivered notice to the Company of its intent to exercise its option to purchase the Arkansas Facilities.

Pursuant to such purchase option, on May 10, 2016, the Skyline Lessors and the Purchaser entered into the Purchase Agreement whereby the Skyline Lessors agreed to sell, and the Purchaser agreed to buy, the Arkansas Facilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the nursing home business at such facilities, for an aggregate purchase price of $55.0 million, subject to the terms and conditions set forth in the Purchase Agreement. The purchase price consists of: (i) a deposit of $1.0 million deposited by the Purchaser with an escrow agent at the time of the Purchaser’s exercise of the purchase option; (ii) cash consideration of $51.0 million; and (iii) the Skyline Note, a promissory note from the Purchaser in favor of the Skyline Lessors with a principal amount of $3,000,000, to be executed and delivered at closing. The Skyline Note shall be paid in twenty-four (24) equal monthly installments of interest only at the rate of ten percent (10%) per annum, with the principal balance to be due and payable in full on August 1, 2018. The Skyline Note shall be personally guaranteed by Joseph Schwartz.

The purchase and sale of the Arkansas Facilities is subject to customary conditions and termination rights for transactions of this type. The closing of the transaction is required to occur on or before August 1, 2016. The Skyline Lease shall remain in full force and effect through the closing date and, upon the closing, the Skyline Lease shall either terminate or be assigned to the Purchaser’s entities, at the Purchaser’s option. If the closing does not occur, the Skyline Lease shall remain in full force and effect in accordance with its terms.

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
Purchase and Sale Agreement, by and among Valley River Property Holdings, LLC, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Little Ark Realty Holdings, LLC
 
Filed herewith
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
3.9
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 May 28, 2015
Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on June 2, 2015
3.10
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 December 11, 2015.
Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on December 14, 2015
3.11
Amendment No. 2 to the Bylaws 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 14, 2015
4.1
Specimen Common Stock Certificate of AdCare Health Systems, Inc.
Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
4.2*
2004 Stock Option Plan of AdCare Health Systems, Inc.
Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.3*
2005 Stock Option Plan of AdCare Health Systems, Inc.
Incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.4*
AdCare Health Systems, Inc. 2011 Stock Incentive Plan
Incorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011

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4.5*
Form of Non-Statutory Stock Option Agreement
Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.6*
Form of Incentive Stock Option Agreement
Incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.7
Form of 8% Subordinated Convertible Note Due 2015 issued by AdCare Health Systems, Inc.
Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed July 5, 2012
4.8
Form of Warrant to Purchase Common Stock of the Company
Incorporated by reference to Exhibit 4.3 to the Registrant’s Form S-3 (File No. 333-175541)
4.9
Warrant to Purchase 50,000 Shares of Common Stock, dated December 28, 2012, issued by AdCare Health Systems, Inc. to Strome Alpha Offshore Ltd.
Incorporated by reference to Exhibit 4.21 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012
4.10
Form of Warrant, dated March 28, 2014, issued by AdCare Health Systems, Inc. to the placement agent and its affiliates in connection with the offering of 10% Subordinated Convertible Notes Due April 30, 2015
Incorporated by reference to Exhibit 4.3 of the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2014

4.11
Form of Warrant granted to management to Purchase Shares of AdCare Health Systems, Inc. dated November 20, 2007
Incorporated by reference to Exhibit 10.19 of the Registrant's annual report on form 10-KSB as amended March 31, 2008
4.12
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
Incorporated by reference to Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
4.13
Form of 10% Convertible Subordinated Notes Due April 30, 2017
Incorporated by reference to Exhibit 4.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
4.14
Form of 10% Convertible Subordinated Notes Due April 30, 2017 (Affiliate Form)
Incorporated by reference to Exhibit 4.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
4.15
Amendment to Subordinated Convertible Note Issued March 31, 2015, Dated July 30, 2015, by and between AdCare Health Systems, Inc., and Cantone Asset Management, LLC and Cantone Research, Inc.
Incorporated by reference to Exhibit 10.105 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.1
Master Lease Agreement, dated February 5, 2016, by and among Valley River Property Holdings, LLC, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Skyline Healthcare, LLC
Incorporated by reference to Exhibit 10.462 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2015
10.2
Option Agreement, dated February 5, 2016, by and among Valley River Property Holdings, LLC, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Joseph Schwartz
Incorporated by reference to Exhibit 10.463 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2015
10.3
Third Amendment to Lease, dated October 1, 2015, by and between William M. Foster and ADK Georgia, LLC
Filed herewith
10.4*
Letter Agreement, dated February 1, 2016, by and between E. Clinton Cain and AdCare Health Systems, Inc.
Filed herewith
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

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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, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2016 (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (v) the Notes to Consolidated Financial Statements.
Filed herewith

* Identifies a management contract or compensatory plan or arrangement


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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 16, 2016
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chairman and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
May 16, 2016
 
/s/ Allan J. Rimland
 
 
 
Allan J. Rimland
 
 
 
President, Chief Financial Officer and Corporate Secretary (Principal Financial Officer)
 
 
 
 
Date:
May 16, 2016
 
/s/ E. Clinton Cain
 
 
 
E. Clinton Cain
 
 
 
Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

43
Exhibit 2.1

PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this “ Agreement ”) is made and entered into as of May 10, 2016, (the “ Effective Date ”) by and among the entities identified as sellers on the signature page hereto (individually, a “ Seller ” and collectively, the “ Sellers ”) and the entities identified on the signature page hereto as purchasers (individually, a “ Purchaser ” and collectively, “ Purchasers ”).
WITNESSETH :
WHEREAS, each of the Sellers owns the facilities identified on Schedule 1 attached hereto and incorporated herein by reference (individually, a “ Facility ” and collectively, the “ Facilities ”); and
WHEREAS , Sellers desire to sell their entire right, title and interest in and to the Properties (as hereinafter defined) relating to the Facilities to Purchasers, and Purchasers desire to purchase Sellers’ entire right, title and interest in and to the Properties from Sellers, subject to and upon the terms and conditions hereinafter set forth.
NOW, THEREFORE , in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Sellers and Purchasers, intending to be legally bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1      Capitalized Terms . Capitalized terms used in this Agreement shall have the meanings set forth below or in the section of this Agreement referred to below. Such terms, as so defined, shall include in the singular, the plural, and in the plural, the singular.
Agreement ” shall mean this Purchase and Sale Agreement, together with all Schedules and Exhibits attached hereto, as it and they may be amended from time to time as herein provided.
Business Day ” shall mean any day other than a Saturday, Sunday or any other day on which banking institutions in the State of Arkansas are authorized by law or executive action to close.
Closing ” shall mean the closing of the transaction contemplated by this Agreement.
Deposit ” shall mean the amount of One Million and 00/100 Dollars ($1,000,000.00) deposited by Purchasers with Escrow Agent pursuant to the Option Agreement.
Effective Date ” shall have the meaning given such term in the opening paragraph to this Agreement.
Escrow Agent ” shall mean First American Title Insurance Company.

1


FF&E ” shall mean, collectively, all appliances, machinery, devices, fixtures, equipment, furniture, furnishings, partitions, signs or trade fixtures or other tangible personal property owned by Sellers and located at the Facilities and specifically excludes any Leased Equipment.
Improvements ” shall mean, collectively, all buildings and other structures and improvements situated on, affixed or appurtenant to the Land on which a Facility is located.
Inspection Period ” shall mean the period beginning on the Effective Date and expiring at 5:00 p.m. eastern time on the thirtieth (30 th ) day following the Effective Date.
Land ” shall mean, collectively, the parcel or parcels of land described on EXHIBIT “A” attached hereto on which the Facilities are located, together with all appurtenances thereto.
Leased Equipment ” shall mean the photocopiers and other business equipment and vehicles which are leased by Purchaser and located at and used in connection with the operation of the Facilities, a list of which is attached hereto on Schedule 1.1.
Master Lease ” shall mean that certain Master Lease Agreement dated February 5, 2016 between Sellers and Skyline Healthcare, LLC.
Option Agreement ” shall mean that certain Option Agreement For the Sale and Purchase of Real Property dated February 5, 2016 between Sellers and Joseph Schwartz.
Outside Closing Date ” shall mean August 1, 2016.
Property ” shall mean, Sellers’ entire right, title and interest in and to the Real Property and the FF&E related to the Facilities:
(a)      Land . The land associated with each of the Facilities, legally described on Exhibit A-1 through A-9 (collectively, the “ Land ”).
(b)      Improvements . All buildings, structures, fixtures and other improvements situated on the Land, including but not limited to the existing nursing home buildings, landscaping, lawn, trees, shrubs, parking facilities and areas and sidewalks (collectively, the “ Improvements ”).
(c)      Personal Property . All fixtures, machinery, furniture, equipment, beds, non-leased vehicles, office furnishings, equipment, inventory, supplies, tools, computer hardware, computer software (including, without limitation, software addressing healthcare billing, Medicaid/Medicare reimbursement, accounting, and operations), materials, equipment leasehold improvements, and other items of tangible personal property of every kind owned by Seller existing on the Effective Date and on the Closing Date and other tangible personal property located on or at the Property (collectively, the “ Personal Property ”).
(d)      To the extent transferable and subject to applicable approvals, all guarantees and warranties relating solely to the real estate owners that are set forth on the attached schedules

2


(e)      Except as specifically provided herein, all other intangible assets of Seller relating to the operation of the Nursing Home Business, including, but not limited to, all telephone and facsimile numbers used or useful in the operation of the Nursing Home Business, all trademarks, trade names, service marks, service names, brand names, copyrights, technology rights and licenses, know-how, software and patents, registrations thereof and applications therefore, and any other intellectual property used by Seller or useful in the operation of the Nursing Home Business and the goodwill of Seller in or arising from the operation of the Nursing Home Business including, without limitation, the intangible assets set forth on Schedule 1.1.
(f)      All of Seller's right, title and interest in the Seller’s names to the facilities and any and all derivatives thereof and any other names used by Seller for the Facilities or to which Seller has any rights.
Purchase Price ” shall mean Fifty-five Million and 00/100s Dollars ($55,000,000.00).
Real Property ” shall mean, collectively, the Land and the Improvements related to the Facilities.
Tax Code ” shall mean the Internal Revenue Code of 1986 and, to the extend applicable, the Treasury Regulations promulgated thereunder, each as from time to time amended.
ARTICLE 2     
PURCHASE AND SALE; CLOSING
2.1      Purchase and Sale . In consideration of the payment of the Purchase Price by Purchasers to Sellers and for other good and valuable consideration, Sellers hereby agree to (i) sell to Purchasers, and Purchasers hereby agree to purchase from Sellers, all of Sellers’ right, title and interest in and to the Property for the Purchase Price, subject to and in accordance with the terms and conditions of this Agreement free and clear of all liens and encumbrances. The Purchase Price does not include the Leased Equipment which will be returned to Purchaser at Closing.
2.2      Contracts .     Within fifteen (15) days from the Commencement date, the Seller will provide to the Purchaser all of the contracts used and utilized in the ongoing operations of the Seller’s Real Estate entities, which are material to the operation of the Facilities, if any. If no documents are produced, Purchaser shall assume there are none. Purchaser shall have a period of thirty (30) days therafter to determine which, if any, of the Seller’s contracts they wish to assume, assuming the contracts are assumable. On and after the Closing Date, Purchaser shall agree to pay, perform, and discharge, when due, all of the liabilities under the contracts which are expressly assumed by the Purchaser in writing "Assumed Contracts").
2.3      Excluded Liabilities . Except for the Assumed Contracts, Purchaser does not agree to assume, pay, perform, satisfy or discharge any other liability or obligation of Sellers (collectively, the “ Excluded Liabilities ”), other than what is contained in this Purchase and Sale Agreement or is Purchaser's responsibility under the Master Lease and Purchaser shall have no liability or obligation whatsoever with respect thereto.

3


2.4      Closing . The purchase and sale of the Properties shall be consummated on or before the Outside Closing Date on a date designated by Purchasers to Sellers (hereinafter such designated dated is referred to as the “ Closing Date ”). The Closing Date shall occur by the release and delivery of the documents and funds held in escrow by the Escrow Agent.
2.5      Purchase Price . The aggregate consideration to be paid for the Properties shall be the Purchase Price. The Purchase Price shall be paid as follows:
(a)      Cash Consideration . On or before Closing, Purchasers shall wire the sum of Fifty-one Million and 00/100 Dollars ($51,000,000.00) into escrow with the Escrow Agent to be immediately released to Sellers together with the Deposit at the Closing.
(b)      Seller Note . The balance of the Purchase Price shall be evidenced by a promissory note from the Purchasers in favor of the Sellers executed and delivered at the Closing (the “ Seller Note ”). The Seller Note shall be in substantially the form attached hereto as EXHIBIT “B” , shall be paid in twenty-four (24) equal monthly installments of interest only at the rate of ten percent (10%) per annum. The principal balance of the Seller Note shall be due and payable in full on August 1, 2018. The Seller Note may be prepaid in whole or in part at any time without penalty. The Seller Note shall be personally guaranteed by Joseph Schwartz pursuant to a guaranty in the form attached hereto as EXHIBIT “C” (the “ Guaranty ”).
2.6      Duties of Escrow Agent .
(a)      Holding of Deposit . The Escrow Agent shall hold the Deposit in an interest bearing account and shall pay the Deposit to the party entitled thereto in accordance with the terms of this Agreement.
(b)      IRS Real Estate Sales Reporting . The Escrow Agent shall act as “the person responsible for closing” the transactions contemplated hereby pursuant to Section 6045(e) of the Tax Code, and the Escrow Agent shall prepare and file all informational returns, including IRS Form 1099‑S, and shall otherwise comply with the provisions of said Section 6045(e).
2.7      Proration . Base rent and other amounts payable by Purchaser under the Master Lease for the month in which the Closing occurs shall be prorated as of such date. To the extent any rent or other amounts under the Master Lease are due as of the Closing but have not been paid by Purchaser , Seller shall receive a credit for such amount from Purchaser at Closing. To the extent any rent or other amounts under the Master Lease have been prepaid by Purchaser for the period after the Closing, Purchaser shall receive a credit for such amount from Seller at Closing.
2.8      Release and Return of Deposit . On the Effective Date, the Deposit shall be transferred to an interest bearing account at First American Title. The Deposit shall be released to Seller at such time that Seller has (i) executed and contributed the Deeds, in the form described in Section 6.1 above, to Escrow Agent, and after Escrow Agent deems they are sufficient to convey the Real Property to Purchaser, (ii) delivered instructions to the Escrow Agent that the executed Deeds are to be recorded at the Closing contingent only on Purchaser performing its obligation to close prior to the Outside Closing Date which instructions are irrevocable. If Purchaser terminates

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this Agreement prior to the end of the Inspection Period in accordance with the provision of Section 4.2 below or due to some other default by Seller which makes the Closing Impossible, Seller shall return the Deposit to Purchaser within five (5) calendar days. Seller shall provide the Purchaser with a general Corporate Guaranty upon the release of the Deposit to the Seller which guaranties that Seller will return the Deposit or allow Purchaser to use it to off-set future rent if the deposit is not returned as provided herein. If the default of the Seller renders the Closing impossible, but does not affect the Purchaser's rights and obligations to validly and lawfully continue to operate the Facilities under the Master Lease, and the Seller fails to return the Deposit after Seller’s default hereunder, Purchaser shall be free to off-set its future rent and any other payments that may be due to Seller under the Master Lease against the Deposit until exhausted. If Purchaser fails to close the purchase contemplated by this Agreement for any reason other than a material default by Seller, Seller shall be entitled to retain the Deposit as liquidated damages and Purchaser surrenders all rights thereto.
ARTICLE 3     
Intentionally Omitted
ARTICLE 4     
DILIGENCE
4.1      Diligence Materials . Within two (2) days of the Effective Date, Sellers shall provide Purchaser with any Phase 1 environmental investigations and zoning reports (collectively, the “ Sellers’ Diligence Materials ”) regarding the Real Property that Seller may have in its possession.
4.2      Diligence Investigations . During the Inspection Period, Purchasers, at its own cost and expense, shall have the right to obtain new or updated Phase 1 investigations or zoning reports for the Real Property, and Purchasers shall provide copies of any such updates to Sellers within two (2) Business Days after its receipt thereof. At least five (5) calendar days prior to the end of the Inspection Period, Purchasers shall give Sellers notice of any matters set forth in any such updates which are not identified in the Sellers’ Diligence Materials and as to which Purchasers object. Sellers shall have the right, but not the obligation, to remove, satisfy or otherwise cure any such matter as to which Purchasers so object. If Sellers are unable or unwilling to take such actions as may be required to cure such objections, Sellers shall give Purchasers notice thereof; it being understood and agreed that the failure of Sellers to give such notice within five (5) Days after its receipt of Purchasers’ notice of objection shall be deemed an election by Sellers not to remedy such matters. If Sellers shall be unable or unwilling to remove or address any mattes to which Purchasers have so objected, Purchasers shall elect either (a) to terminate this Agreement and receive a refund of the Deposit as provided in Section 2.8 above or (b) to proceed to Closing notwithstanding such matter without any abatement or reduction in the Purchase Price on account thereof. Purchasers shall make any such election by written notice to Sellers given on or prior to the expiration of the Inspection Period. The failure of Purchasers to give such notice shall be deemed an election by Purchasers to proceed to Closing in accordance with clause (b) above.

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4.3      Insurance/Indemnity . To the extent Purchasers hire any third party site inspectors, engineers or other parties that will invasively inspect and/or test the Facilities, Purchasers shall also ensure that such third party(ies) have adequate insurance, determined in Sellers’ reasonable discretion, covering any potential damage to the Facilities as a result of such inspection/testing (and certificates evidencing such coverage naming Sellers as an additional insured shall be made available to Sellers prior to such access). Purchasers shall indemnify, defend and hold Sellers harmless from and against any costs, damage, liability, loss, expense, lien or claim (including, without limitation, reasonable attorney's fees) arising from physical damage to the Facilities and injury to persons asserted against or incurred by Sellers as a direct result of such inspections and investigations.
4.4      Diligence Materials . Seller makes no representations or warranties as to the truth, accuracy, completeness, methodology of preparation or otherwise concerning any Sellers’ Diligence Materials or any other materials, data or other information supplied to Purchaser in connection with Purchaser's inspection of the Properties that were originated and provided to Seller by third parties (e.g., that such materials are complete, accurate or the final version thereof, or that such materials are all of such materials as are in Seller's Possession). It is the parties' express understanding and agreement that such materials are provided only for Purchaser's convenience in making its own examination and determination prior to the expiration of the Inspection Period as to whether it wishes to purchase the Properties, and, in doing so, Purchaser shall rely exclusively on its own independent investigation and evaluation of every aspect of the Property and not on any materials made available or supplied by Seller. Buyer expressly agrees that Buyer shall be solely responsible for the cost of any additional diligence reports or materials ordered by Buyer and any and all costs and expenses incurred (including third party costs) in the course of its examination of the Property.
4.5      Survival. The provisions of this Section 4 shall survive the Closing or the termination of this Agreement, as applicable.
ARTICLE 5     
TITLE
5.1      Title Commitment . Within two (2) days of the Effective Date, Seller shall provide the Purchaser with all title reports and surveys in their possession and within five (5) days from the Effective Date, Purchaser shall order an owner's title insurance report from First American Title except such order may be coordinated through Riverside Abstract, LLC in Purchaser's discretion. Promptly upon receipt, Purchaser shall send a copy of the title insurance report (the “ Title Commitment ”) and legible copies of any covenants, easements and other underlying documents referenced as title exceptions therein. If Purchaser elects to obtain, at Purchaser’s sole cost and expense, a new or updated survey for the Real Estate (the “Purchaser Survey”), Purchaser shall send a copy of the same to Seller promptly upon receipt. In the event that any exceptions appear on the Title Commitment other than the Permitted Encumbrances, as defined below, and to the extent that such new matters set forth in the Title Commitment are unacceptable to Purchaser, Purchaser shall notify Seller in writing of such objections and the reasons therefor (collectively, “ Purchaser's Title Objections ”) within thirty (30) calendar days of the Effective Date (the " Inspection Period "). Upon the expiration of the Inspection Period, except for Purchaser's Title Objections,

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Purchaser shall be deemed to have accepted the condition of title of the Real Property and all items shown or addressed in the Title Commitment (collectively, the “ Approved Title Matters ”).
5.2      Title Objections . Seller shall have no obligation to take any steps or bring any action or proceeding or otherwise to incur any effort or expense whatsoever to eliminate or modify any of Purchaser's Title Objections. Notwithstanding the foregoing, on or before Closing, Seller shall pay or otherwise satisfy (i) any mortgages on the Real Estate, and (ii) other monetary liens against the Real Estate. Seller, at its sole option, may attempt to cure or satisfy all or a portion of Purchaser's Title Objections prior to the Closing Date. If Seller is willing to attempt to cure or satisfy all or a portion of Purchaser's Title Objections, Seller shall provide written notice to Purchaser of those objections Seller will attempt to cure or satisfy (“Seller's Notice”) within five (5) calendar days of receipt of Purchaser’s Title Objections, if any. Seller’s failure to deliver a Seller’s Notice within such time period shall be deemed an election by Seller not to cure or satisfy any objections. If Seller notifies Purchaser that it is unwilling to cure or satisfy all or certain of Purchaser's Title Objections or Seller fails to provide a Seller’s Notice, Purchaser shall have the option (as its sole and exclusive remedy) to terminate this Agreement by delivering written notice thereof to Seller which notice must be delivered within five (5) calendar days after the delivery of a Seller's Notice (or Seller’s deemed election not to cure or satisfy and objections). If Purchaser fails to terminate this Agreement as set forth in this Section 5.2 , such termination right shall be waived and Purchaser shall proceed to Closing without adjustment to the Purchase Price. If Purchaser shall duly give such termination notice, then the Escrow Agent shall return to Purchaser the Deposit, this Agreement shall immediately terminate and be deemed null and void, and neither party shall have any further rights or obligations hereunder.
5.3      Permitted Encumbrances . The term “Permitted Encumbrances” as used herein includes: (i) all of the Approved Title Matters, (ii) standard conditions and exclusions to title contained in the form of title policy used by the Title Company, (iii) the Lease, (iv) liens for real property taxes, assessments, and water and sewer meter charges which are not yet due and payable as of the Closing Date and/or which are apportioned pursuant to this Agreement, (v) any other matter which the Title Company may raise as an exception to title, provided the Title Company will insure against collection or enforcement of the same out of the Property without imposition of a additional premium costing more than ten percent (10%) of the total policy cost and/or that no prohibition of present use or maintenance of the Property will result therefrom, as may be applicable, and (vi) those items set forth in Schedule 4 attached hereto.
5.4      Subsequent Title Issues. Purchaser shall, at or prior to Closing, notify Seller in writing of any objection to title (i) raised by the Title Company between the expiration of the Inspection Period and the Closing and (ii) not disclosed by the Title Company or otherwise actually known to Purchaser prior to the expiration of the Inspection Period; provided that Purchaser must notify Seller of such new objection to title within five (5) business days of Purchaser's actual knowledge of the existence of such matter. If Purchaser sends such notice to Seller, Purchaser and Seller shall have the same rights and obligations with respect to such notice as apply to Purchaser's Title Objections under Sections 3.1 and 3.2 hereof.

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ARTICLE 6     
SELLERS’ CLOSING DELIVERIES
6.1      Closing Documents . The Sellers shall have delivered to Escrow Agent and shall have authorized and directed Escrow Agent to record or release to Purchasers the following:
(a)      Deeds . Special warranty deeds with respect to the Real Property for each Facility, in proper statutory form for recording, duly executed and acknowledged by Sellers and substantially in the form of EXHIBIT “D” attached hereto and made a part hereof.
(b)      Bills of Sale . One or more bill(s) of sale, duly executed by Sellers and with respect to Sellers’ right, title and interest in and to the Property and FF&E related to each Facility and substantially in the form of EXHIBIT “E” attached hereto.
(c)      FIRPTA . A so-called “FIRPTA” affidavit pursuant to Section 1445 of the Tax Code, duly executed by Sellers, in the form of EXHIBIT “F” attached hereto.
(d)      Escrow Direction . A confirmation to Escrow Agent confirming the prorations and the Closing and directing that the Deposit and Purchase Price is to be delivered to Seller.
(e)      Other Documents . Other such usual documents reasonably requested by First American Title Company in similar transactions
(f)      Assignment and Assumption Agreement for any and all Assumed Contracts assumed by the Purchaser, if any.
(g)      A duly executed Owner’s Affidavit reasonably acceptable to the Title Company.
ARTICLE 7     
PURCHASERS’ CLOSING DELIVERIES
7.1      Closing Deliveries . The Purchasers shall have delivered to Escrow Agent and shall have authorized the Escrow Agent to release to Sellers prior to the Closing the following:
(a)     Cash Consideration . The balance of the Cash Consideration (including the Deposit).
(b)     Closing Documents . Duly executed and acknowledged (i) Seller Note, (ii) Guaranty and (iii) counterparts of the documents described in Section 4.1 , where applicable.
ARTICLE 8     
REPRESENTATIONS AND WARRANTIES OF SELLERS
8.1      Sellers’ Representations . To induce Purchasers to enter into this Agreement, Sellers represent and warrant to Purchasers as follows:

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(a)      Status and Authority . Sellers (i) are limited liability companies, duly formed, validly existing and in good standing under the laws of their state of formation, (ii) have all requisite power and authority under the laws of such state and their charter documents to enter into and perform their obligations under this Agreement and to consummate the transactions contemplated hereby and thereby and (iii) are qualified to transact business in the State of Arkansas.
(b)      Action . Sellers have taken (or will have taken prior to Closing) all necessary action to authorize the execution, delivery and performance of this Agreement and upon the execution and delivery of this Agreement and/or any document to be delivered by Sellers hereunder or thereunder, this Agreement and such document shall constitute the valid and binding obligations and agreements of Sellers, enforceable against Sellers in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors.
(c)      No Violations of Agreements . Neither the execution, delivery or performance of this Agreement by Sellers, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any of the Properties pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which such Sellers are bound.
(d)      Litigation . There are no pending investigations, actions or proceedings which questions the validity of this Agreement or any action taken or to be taken pursuant hereto or thereto. Sellers have not received any written notice regarding any pending or threatened litigation or administrative proceedings with respect to the Real Property which could reasonably be expected to have a material adverse effect on the ownership of the Real Property.
(e)      Violation of Laws . Seller has no knowledge of, nor have they received any notice of any violation of any laws, ordinances or regulations from any governmental or regulatory authority with respect to the Real Property that could reasonably be expected to have a material adverse effect on the ownership or operation of the Real Property; and
(f)      No Condemnation . Seller has not received any written notice of any condemnation proceeding with regard to all or any portion of the Real Property
8.2      Survival . The representations and warranties made in this Agreement by each Seller shall be continuing and shall be deemed remade as of the Closing Date, with the same force and effect as if made on, and as of, such date, subject to such Seller’s right to update such representations and warranties by written notice to Purchaser prior to the Closing Date. All representations and warranties made in this Agreement by Sellers shall survive the Closing for a period of one (1) year. Purchasers must notify Sellers of any alleged breach of any representation on or before the day preceding the first anniversary of the Closing Date, and no action or proceeding may be commenced against any Sellers for any breach of any representation or warranty after the day preceding the first anniversary of the Closing Date.

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8.3      AS-IS . EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, SELLERS HAVE NOT MADE, AND PURCHASERS HAVE NOT RELIED UPON, ANY INFORMATION, PROMISE, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE PROPERTIES, WHETHER MADE BY SELLERS, INCLUDING, WITHOUT LIMITATION, ANY INFORMATION, PROMISE, REPRESENTATION OR WARRANTY REGARDING THE PHYSICAL CONDITION OR VALUE OF THE PROPERTIES, TITLE TO OR THE BOUNDARIES OF ANY OF THE REAL PROPERTY, PEST CONTROL MATTERS, SOIL CONDITIONS, THE PRESENCE, EXISTENCE OR ABSENCE OF HAZARDOUS SUBSTANCES, TOXIC SUBSTANCES OR OTHER ENVIRONMENTAL MATTERS, COMPLIANCE WITH BUILDING, HEALTH, SAFETY, LAND USE AND ZONING LAWS, REGULATIONS AND ORDERS, STRUCTURAL AND OTHER ENGINEERING CHARACTERISTICS, TRAFFIC PATTERNS, MARKET DATA, ECONOMIC CONDITIONS OR PROJECTIONS, AND ANY OTHER INFORMATION PERTAINING TO ANY OF THE PROPERTIES, OR THE MARKET AND PHYSICAL ENVIRONMENTS IN WHICH THEY MAY BE LOCATED AND SELLERS EXPRESSLY DISCLAIM ALL WARRANTIES RELEVANT TO THE PROPERTIES, EITHER EXPRESS OR IMPLIED, INCLUDING MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND SUITABILITY FOR ITS INTENDED USE. PURCHASERS ACKNOWLEDGE AND AGREE THAT (A) PURCHASERS ARE SOPHISTICATED OWNERS AND OPERATORS OF FACILITIES SIMILAR TO THE FACILITIES, (B) PURCHASERS HAVE ENTERED INTO THIS AGREEMENT WITH THE INTENTION OF MAKING AND RELYING UPON THEIR OWN INVESTIGATION OR THAT OF THIRD PARTIES WITH RESPECT TO THE PHYSICAL, ENVIRONMENTAL, ECONOMIC AND LEGAL CONDITION OF THE PROPERTIES AND (C) PURCHASERS ARE NOT RELYING UPON ANY STATEMENTS, REPRESENTATIONS OR WARRANTIES OF ANY KIND, AND ARE ACQUIRING THE PROPERTIES IN “AS IS, WHERE IS” CONDITION, EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT. THE DISCLAIMERS AND OTHER PROVISIONS SET FORTH IN THIS SECTION 5 SHALL SURVIVE THE CLOSING AND SHALL NOT MERGE THEREIN OR INTO ANY DOCUMENTS EXECUTED IN CONNECTION THEREWITH.
ARTICLE 9     
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
9.1      Representations of Purchasers . To induce Sellers to enter in this Agreement, Purchasers represent and warrant to Sellers as follows:
(a)      Status and Authority of Purchasers . Purchasers are limited liability companies duly formed, validly existing and in good standing under the laws of its state of formation, and have all requisite power and authority under the laws of such state and its charter documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby and thereby.
(b)      Action of Purchasers, Etc. Purchasers have taken (or will have taken prior to Closing) all necessary action to authorize the execution, delivery and performance of this Agreement and upon the execution and delivery of this Agreement and/or any document to be

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delivered by Purchasers hereunder or thereunder, this Agreement and such documents shall constitute the valid and binding obligations and agreements of Purchasers, enforceable against Purchasers in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors.
(c)      No Violations of Agreements . Neither the execution, delivery or performance of this Agreement by Purchasers, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon the property or assets of Purchasers pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which Purchasers are bound.
(d)      Litigation . No investigation, action or proceeding is pending and, to Purchasers’ knowledge, no action or proceeding is threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto or thereto.
(e)      Prohibited Transactions . Purchaser is not acquiring the Property with the assets of a “plan” within the meaning of Section 4975(e) of the Internal Revenue Code of 1986, as amended (the “Code”); and the transaction contemplated by this Agreement is not a “prohibited transaction” within the meaning of Section 4975(c) of the Code or Section 406 of the Employee Income Security Act of 1974, as amended, or is covered by an individual or class exemption from the prohibited transaction rules; and
(f)      Specially Designated and Blocked Persons . Purchaser is not, nor will Purchaser become, a person with whom United States persons or entities are restricted from doing business. Such excluded persons include those named in the Office of Foreign Asset Control of the Department of the Treasury of the United States of America (OFAC) Specially Designated and Blocked Persons list and/or those persons who commit, threaten to commit, or support terrorism. Purchaser shall not engage in any dealings or transactions or be otherwise associated with any persons or entities listed in the OFAC Specially Designated and Blocked Persons list
9.2      Survival . The representations and warranties made in this Agreement by Purchasers shall be continuing and shall be deemed remade as of the Closing Date, with the same force and effect as if made on, and as of, such date. All representations and warranties made in this Agreement by Purchasers shall survive the Closing for a period of one (1) year. Sellers must notify Purchasers of any alleged breach of any representation on or before the day preceding the first anniversary of the Closing Date, and no action or proceeding may be commenced against Purchasers for any breach of any representation or warranty after the day preceding the first anniversary of the Closing Date.
ARTICLE 10     
CLOSING COSTS
10.1      Closing Costs . Purchasers shall pay, on the Closing Date, the title insurance premium for any title policies desired by Purchasers, all recording and filing charges and fees to record the

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documents evidencing the conveyance of the Properties, and all other costs and charges of the closing and consummation of the purchase and sale transaction contemplated in this Agreement as customarily charged to and payable by a Purchaser in such transactions in the location in which the Properties are situated (including one-half of the escrow charges of the Escrow Agent). Sellers shall pay, on the Closing Date, all customary fees, including but not limited to transfer taxes, costs and charges of the closing and consummation of the purchase and sale transaction contemplated in this Agreement as customarily charged to and payable by a Seller in such transactions in the location in which the Properties are situated (including one-half of the escrow charges of the Escrow Agent). Notwithstanding the foregoing, each party shall pay its own attorneys' fees and the fees of any accountants and/or advisors incurred in connection with the transaction contemplated in this Agreement. State and/or local real and personal property transfer taxes, if any, shall be paid Purchasers.
ARTICLE 11     
DAMAGE TO OR CONDEMNATION OF PROPERTY
11.1      Casualty . If, prior to the Closing, all or any material part of any Facility is destroyed or damaged by fire or other casualty, Sellers shall promptly notify Purchasers of such fact. In such event, the sale of the Properties shall be consummated as herein provided without any abatement of the Purchase Price, and the Sellers shall assign to Purchasers at the Closing all of such Sellers’ right, title and interest in and to the proceeds to which Sellers are entitled under any insurance policies covering such Facility with respect to such damage or destruction.
11.2      Condemnation . If, prior to the Closing, all or any material part of any Facility is taken by eminent domain (or becomes the subject of a pending taking which has not yet been consummated), Sellers shall notify Purchasers of such fact promptly after obtaining knowledge thereof. In such event, the sale of the Properties shall be consummated as herein provided without any adjustment to the Purchase Price, and the Sellers shall assign to Purchasers at the Closing all of such Sellers’ right, title and interest in and to all condemnation awards for the taking, and Purchasers shall be entitled to receive and keep all awards for such taking.
ARTICLE 12     
INDEMNIFICATION AND DEFAULT
12.1      Sellers’ Indemnification . The Sellers shall jointly and severally defend, indemnify and hold the Purchasers harmless against and in respect of any and all liability, damage, loss, cost, and expenses arising out of or otherwise in respect of: (a) any breach of a representation or warranty made by Sellers in this Agreement and (b) any and all actions, suits, proceedings, audits, judgments, costs, and legal and other expenses incident to any of the foregoing or to the enforcement of this Section 10.1 . Provided, however, the liabilities indemnified hereunder shall not exceed, in the aggregate, the amount of the cash consideration received by the Sellers hereunder, including any principal payments made on the Seller Note.


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12.2      Purchasers’ Indemnification . Purchasers shall jointly and severally defend, indemnify and hold Sellers harmless against and in respect of any and all liability, damage, loss, cost, and expenses arising out of or otherwise in respect of: (a) any breach of a representation or warranty made by Purchasers in this Agreement; (b) the ownership and/or prior or future operation of the Facilities; (c) any and all actions, suits, proceedings, audits, judgments, costs, and legal and other expenses incident to any of the foregoing or to the enforcement of this Section 10.2 .
12.3      Default by Sellers . If, on or prior to the Closing, Sellers shall fail to deliver the closing documents described in Section 4.1 above , Purchasers, as their sole and exclusive remedy at law or in equity, may elect to either (a) terminate this Agreement and receive a refund of the Deposit (following which no party shall have any rights or obligations hereunder) or (b) pursue a suit for specific performance. In no event shall Seller be liable to Purchaser for any punitive, speculative, special, consequential or other damages.
12.4      Default by Purchasers . If, on or prior to Closing, Purchasers shall fail to close the transaction by the Outside Closing Date, Sellers, as their sole and exclusive remedy at law or in equity, may terminate this Agreement and receive the Deposit, as liquidated damages and not as a penalty. The parties agree that in the event of such a default, it would be extremely difficult or impossible to determine Sellers’ actual damages and that the liquidated damages amount is a reasonable estimate thereof.
12.5      Termination. Following any such termination, no party shall have any rights or obligations hereunder.
ARTICLE 13     
MISCELLANEOUS
13.1      Master Lease . The Master Lease shall remain in full force and effect through the Closing Date and, upon the Closing, the Master Lease shall either terminate and thereafter be null and void or assigned to the Purchaser’s entities, at the choice of the Purchaser. If the Closing does not occur, the Master Lease shall remain in full force and effect in accordance with its terms.
13.2      Single Transaction . The transaction contemplated by this Agreement is a single purchase and sale transaction with respect to all of the Properties. Under no circumstances shall Sellers have any obligation to sell less than all of the Properties to Purchasers, and under no circumstances shall Purchasers shall have a right to purchase less than all of the Properties from Sellers. Termination of this Agreement shall operate to terminate this Agreement as to all of the Properties.
13.3      Brokers . Neither party has dealt with any broker, finder or like agent in connection with this Agreement or the transactions contemplated hereby. Each party shall indemnify, defend and hold harmless the other parties from and against any loss, liability or expense, including, without limitation, reasonable attorneys’ fees, arising out of any claim or claims for commissions or other compensation for bringing about this Agreement or the transactions contemplated hereby made by any other broker, finder or like agent, if such claim or claims are based in whole or in part on dealings with the indemnifying party.

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13.4      Notices .
(a)      Form of Notices . Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement may be given by the attorneys of the parties and shall be deemed adequately given if in writing. All such notices shall be delivered either in hand, by email or facsimile with written confirmation of transmission, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier).
(b)      Timing of Notices . All notices shall be deemed to have been given for all purposes of this Agreement upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. For purposes of any notice given by facsimile, the date of receipt shall be the date of transmission (as confirmed by electronic confirmation of transmission generated by the sender’s machine). Delivery of Notice to a party’s’ attorney shall be deemed notice to the party.
(c)      Notice Addresses . All such notices shall be addressed,
 
if to Sellers, to:
 
c/o AdCare Health Systems, Inc.
 
 
 
Two Buckhead Plaza
 
 
 
3050 Peachtree Road NW, Suite 355
 
 
 
Atlanta, Georgia 30305
 
 
 
Attn: CEO
 
 
 
Facsimile: (404) 842-1899
 
 
 
 
 
with a copies to:
 
Andrew D. Simons, Esq.
 
 
 
Reicker, Pfau, Pyle & McRoy LLP
 
 
 
1421 State Street, Suite B
 
 
 
Santa Barbara, California 93101
 
 
 
Facsimile: (805) 966-3320
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
Gregory P. Youra, Esq.
 
 
 
Holt Ney Zatcoff & Wasserman, LLP
 
 
 
100 Galleria Parkway, Suite 1800
 
 
 
Atlanta, Georgia 30339
 
 
 
Facsimile: (770) 956-1490


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If to Purchasers, to:
c/o Skyline Health Care, LLC
 
 
505 Marlboro Road
 
 
Wood-Ridge, New Jersey
 
 
Attn: Joseph Schwartz
 
 
Facsimile: _______________
 
 
 
 
With copies to:
Koss & Schonfeld LLP
 
 
90 John Street – Suite 408
 
 
New York, NY 10038
 
 
(Fax) 212-401-4757
 
 
Attention: Allen Koss, Esq.
 
 
 
 
If to Escrow Agent:
WACO Title Company
 
 
11300 Cantrell Road, Suite 105
 
 
Little Rock, AR 72212
 
 
Attn: Sandy J. Batteria
 
 
 

(d)      Change of Notice Addresses . By notice given as herein provided, the parties hereto shall have the right from time to time and at any time to change their respective addresses to any other address within the United States of America effective upon receipt by the other parties of such notice.
(e)      Notices to Sellers . Any notice given to or received by any Seller shall be effective as if such notice was given to or received by the Seller or the Seller’s attorney..
13.5      Waivers . Any waiver of any term or condition of this Agreement, or of the breach of any covenant, representation or warranty contained herein, in any one instance, shall not operate as or be deemed to be or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty, nor shall any failure at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such party’s right at a later time to enforce or require performance of such provision or any other provision hereof.
13.6      Amendments . This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected, except by an instrument in writing executed by or on behalf of the party against whom enforcement of any amendment, waiver, change, modification, consent or discharge is sought.
13.7      Assignment; Successors and Assigns . This Agreement and all rights and obligations hereunder shall not be assignable by Purchasers without the prior written consent of Sellers. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. This Agreement is not intended and shall not be construed to create any rights in or to be enforceable in any part by any

15


other persons or entities. Notwithstanding anything herein to the contrary, Purchaser may assign this Purchase and Sale Agreement, without Seller’s consent, to any entity or entities controlled by Joseph Schwartz.
13.8      Severability . If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case.
13.9      Counterparts, Etc . This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Any such counterparts or signatures may be delivered by facsimile or e-mail (in .pdf format), and any counterparts or signatures so delivered shall be deemed an original counterpart or signature for all purposes related to this Agreement.
13.10      Integration . This Agreement and the documents referenced herein constitute the entire agreement of the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof.
13.11      Attorneys’ Fees . Notwithstanding anything contained herein to the contrary, if any lawsuit or arbitration or other legal proceeding arises in connection with the interpretation or enforcement of this Agreement, the prevailing party therein shall be entitled to receive from the other party the prevailing party’s costs and expenses, including reasonable attorneys’ fees incurred in connection therewith, in preparation therefor and on appeal therefrom, which amounts shall be included in any judgment therein.
13.12      Section and Other Headings . The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
13.13      No Presumption Against Drafter . This Agreement has been extensively negotiated between Sellers and Purchasers and none of the provisions set forth herein shall be construed narrowly against either party on the account of the fact that such party (or its attorney) drafted such provision.
13.14      Time of Essence . Time shall be of the essence with respect to the performance of each and every covenant and obligation, and the giving of all notices, under this Agreement.

16


13.15      Performance on Business Days . In the event the date on which performance or payment of any obligation of a party required hereunder is other than a Business Day, the time for payment or performance shall automatically be extended to the first Business Day following such date.
13.16      Governing Law . This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the State of Arkansas without regard to conflicts of laws principles.
13.17      Survival . The provisions of this Section 13 shall survive the Closing hereunder.


[Signatures on Following Pages]

17


IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as a sealed instrument as of the date first above written.
 
 
SELLERS :
 
 
 
 
 
 
VALLEY RIVER PROPERTY HOLDINGS,
 
 
LLC , a Georgia limited liability company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
HOMESTEAD PROPERTY HOLDINGS, LLC ,
 
 
a Georgia limited liability company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
PARK HERITAGE PROPERTY
 
 
HOLDINGS, LLC , a Georgia limited liability
 
 
company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
MT. V PROPERTY HOLDINGS, LLC , a Georgia
 
 
limited liability company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
MOUNTAIN TOP PROPERTY HOLDINGS,
 
 
LLC , a Georgia limited liability company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 



18


 
 
LITTLE ROCK HC&R PROPERTY
 
 
HOLDINGS, LLC , a Georgia limited liability
 
 
company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
WOODLAND HILLS HC PROPERTY
 
 
HOLDINGS, LLC , a Georgia limited liability
 
 
company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
NORTHRIDGE HC&R PROPERTY
 
 
HOLDINGS, LLC , a Georgia limited liability
 
 
company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 
 
 
APH&R PROPERTY HOLDINGS, LLC ,
 
 
a Georgia limited liability company
 
 
 
 
 
 
By:
/s/ William McBride
 
 
Name:
William McBride
 
 
Title:
Manager
 
 
 
 


 
 
PURCHASERS :
 
 
 
 
 
LITTLE ARK REALTY HOLDINGS, LLC,
 
 
an Arkansas limited liability company
 
 
 
 
 
 
By:
/s/ Joseph Schwartz
 
 
Name:
Joseph Schwartz
 
 
Title:
Manager
 
 
 
 

19


SCHEDULE 1

FACILITIES

Facility Name
Landlord
Tenant
Address
Bed Number
Facility Type
Homestead Manor Nursing Home
Homestead Property Holdings, LLC
__________
826 North Street
Stamps, AR 71860-4522
104 bed SNF
Heritage Park Nursing Center
Park Heritage Property Holdings, LLC
__________
1513 S. Dixieland Road
Rogers 72758-4935

110 bed SNF
Stone County Nursing and Rehabilitation Center

Mt. V Property Holdings, LLC
__________
706 Oak Grove Street
Mountain View, AR 72560-8601

97 bed SNF
Stone County Residential Care Facility
Mountain Top Property Holdings, LLC
__________
414 Massey Avenue
Mountain View, AR 72560-6132

32 bed ALF
West Markham Sub Acute and Rehabilitation Center
Little Rock HC&R Property Holdings, LLC
__________
5720 West Markham Street
Little Rock, AR 72205-3328

154 bed SNF
Woodland Hills Healthcare and Rehabilitation
Woodland Hills HC Property Holdings, LLC
__________
8701 Riley Dr.
Little Rock, AR 72205-6509

140 bed SNF
Northridge Healthcare and Rehabilitation
Northridge HC&R Property Holdings, LLC
__________
2501 John Ashley Dr.
North Little Rock, AR
72114-1815

140 bed SNF
Cumberland Health and Rehabilitation Center

APH&R Property Holdings, LLC

__________
1516 S. Cumberland Street
Little Rock, AR 72202-5065
120 bed SNF
River Valley Health and Rehabilitation Center


Valley River Property Holdings, LLC


__________
5301 Wheeler Avenue
Fort Smith, AR 72901-8339

129 bed SNF







THIRD AMENDMENT TO LEASE
This Third Amendment to Lease (this " Amendment ") is made and entered into as of October 1,2015 (the " Effective Date ") by and between WILLIAM M. FOSTER , an individual residing in Twiggs County, Georgia (" Lessor ") and ADK GEORGIA, LLC , a Georgia limited liability company (" Lessee ") with regard to the foregoing.

WITNESSETH:
A. Lessor and Lessee are parties to that certain Lease Agreement dated September 28, 2009, as amended by that restated Lease dated August 31, 2010, and as amended by that Second Amendment to Lease dated August 14, 2015 (the " Lease ");
B. Lessor and Lessee have agreed to amend the Lease to clarify certain requirements of the parties under the Lease;
NOW, THEREFORE , for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree that the Lease shall be amended as set forth below. Capitalized terms not otherwise defined herein shall have the same meanings assigned to such terms in the Lease.
SUBLESSEE SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT. Lessee, existing sublessees, and all sublessees approved in the future by Lessor under the terms of the Second Amendment to Lease shall execute subordination, non-disturbance, and attornment (" SNDA ") agreements in favor of Lessor and Lessor's lender related to the leased premises in a form substantially similar to that attached as Exhibit A. Such SNDA agreements shall supersede any contrary sublease provisions.
The parties agree that no sublease (whether existing or executed after the date hereof) shall be amended or modified in any material respect without the prior written consent of Lessor, which consent shall not be unreasonably withheld, conditioned or delayed.
ALL OTHER TERMS STILL IN EFFECT. All other terms and conditions of the Lease not expressly modified or amended herein shall remain in full force and effect. To the extent that any of the provisions of this Amendment conflict with or are inconsistent with the provisions of the Lease, the provisions of this Amendment shall control.
IN WITNESS WHEREOF , there undersigned have executed this Amendment and caused it to be effective as of the date and year first written above.
LESSOR:
 
LESSEE:
 
 
 
 
 
 
 
ADK GEORGIA, LLC,  a Georgia limited liability
 
 
company
 
 
 
 
 
/s/ William M. Foster
By:
/s/ William McBride
William M. Foster
 
William McBride, Manager


1



EXHIBIT A TO THIRD AMENDMENT TO LEASE
Recording Requested By
And When Recorded Mail To:

                

                

                



SUBORDINATION. NON-DISTURBANCE AND ATTORNMENT AGREEMENT

(    Facility -    County)
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
AGREEMENT (this "Agreement") , is made and entered into effective as of _______________, 2015, by and among ADK GEORGIA, LLC , a Georgia limited liability company ("Sub‑Landlord") , and ______________________________, a Georgia limited partnership ("Operator") , in favor of WILLIAM M. FOSTER, A/K/A W.M. FOSTER, A/K/A WILLIAM M. FOSTER, JR. , an individual resident of the State of Georgia ("Owner") , and REGIONS BANK , an Alabama banking corporation (together with its successors and assigns, the "Lender") , as the holder of the "Security Deed" hereinafter described.
WITNESSETH:
WHEREAS, Owner (as landlord) and Sub-Landlord (as tenant) are parties to that certain Lease Agreement dated September 28, 2009, as amended by that certain First Amendment to Lease dated as of August 31, 2010 (as modified, amended or restated from time to time, the "Master Lease"), relating to certain improved real property of Owner located in ______________ County, Georgia and legally described on Exhibit A attached hereto and incorporated herein by this reference, together with all buildings and improvements situated thereon (collectively, the "Property") ;

WHEREAS, without proper authority and in violation of the terms of the Master Lease, Sub-Landlord subleased the Property to Operator pursuant to that certain Sublease Agreement, dated as of __________________ (as modified, amended or restated from time to time, the "Sublease") ;

WHEREAS, Owner is indebted to Lender under a term loan with a remaining principal balance outstanding of [______________________________ and ____________/100 Dollars ($ _________)] (the "Loan" ), which Loan is made pursuant to that certain Loan Agreement, dated as of January 27, 2012, between Owner and Lender (as the same may be modified, amended or restated from time to time, the "Loan Agreement"), and evidenced by that certain Promissory Note, dated as of January 27, 2012, made by Owner in favor of Lender (as the same may be modified, amended or restated from time to time, the "Note"), in

2



the principal amount of the Loan. The Loan is secured by, among other things, that certain Second Amendment to and Restatement of Deed to Secure Debt and Security Agreement covering the Property and certain other property as described therein (as the same may be modified, amended or restated from time to time, the "Security Deed"), and that certain Assignment of Leases and Rents (as the same may be modified, amended or restated from time to time, the "Assignment of Rents"), each dated as of __________________________, made by Owner in favor of Lender and recorded in the Office of the Official Records of County, Georgia, and by the other Loan Documents (as defined in the Loan Agreement);

WHEREAS, Sub-Landlord's entering the Sublease caused an "Event of Default" by Owner under the Loan Documents;

WHEREAS, contemporaneously herewith, and as required by Owner, Sub-Landlord and Operator have executed that certain [Amendment to Sublease Agreement], dated as of the date hereof, amending certain provisions of the Sublease as provided therein (the "Sublease Amendment");

WHEREAS, notwithstanding Sub-Landlord's unauthorized subleasing of the Property to the Operator, Owner has determined he will consent to the Sublease only if Sub-Landlord and Operator execute and deliver to Owner, among other things, the Sublease Amendment and this Agreement;

WHEREAS, in accordance with Lender's rights under the Assignment of Rents, Lender has agreed to consent to the Sublease only if Sub-Landlord and Operator execute and deliver, among other things, the Sublease Amendment and this Agreement; and

WHEREAS, the parties hereto now desire to enter into this Agreement to establish certain rights and obligations with respect to their interests, and to provide for various contingencies as hereinafter set forth.

NOW, THEREFORE, in consideration for the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the mutual benefits to accrue to the parties hereto, it is hereby declared, understood and agreed as follows:

1. Subordination. The Sublease, the leasehold interests and estates created thereby, and the priorities, rights, privileges and powers of Operator (as subtenant) and Sub-Landlord (as sublandlord) thereunder shall be and the same are hereby, and with full knowledge and understanding of the effect thereof, unconditionally made subject and subordinate to the Master Lease and to the lien and charge of the Security Deed and the other Loan Documents, to all terms and conditions contained in the Master Lease and said Loan Documents, and to the rights, privileges and powers of Owner and the Lender thereunder, respectively.


3



2. Consent to Sublease. Owner and Lender hereby consent to the Sublease, as the same has been amended pursuant to the Sublease Amendment. Sub-Landlord and Operator shall not amend or modify the Sublease (except as provided in the Sublease Amendment) without the prior written consent of Owner and Lender.

3. Attornment.
(a) Owner. In the event that the Master Lease (or Sub-Landlord's right of possession thereunder) is terminated with respect to the Property prior to the expiration of the Sublease, Operator shall attorn to and recognize Owner as the Operator's landlord under the Sublease for the unexpired balance of the term (including any extensions) of the Sublease and Operator waives any right or option it may have to terminate the Sublease or to surrender possession thereunder as a result of any such termination of the Master Lease (or termination of Sub-Landlord's right of possession thereunder). In such an event, Operator shall be bound to Owner under all of the terms, covenants and conditions of the Sublease for the remaining balance of the term thereof, with the same force and effect as if Owner were the original sublandlord under the Sublease, and such attornment shall be effective and self-operative without the execution of any further instruments on the part of any of the parties to this Agreement, immediately upon any such termination of the Master Lease (or the termination of Sub-Landlord's right of possession thereunder).

(b) Lender. In the event Lender or any other purchaser (in any such case, a " Transferee ") at a foreclosure sale or sale under private power contained in the Security Deed, or by acceptance of a deed in lieu of foreclosure, or by any other manner, succeeds to the interest of Owner, as owner of the Property or as landlord under the Master Lease, in any such event, Sub-Landlord and Operator agree that such Transferee shall have all the rights, benefits, privileges and obligations of Owner as provided in Section 3(a) above and elsewhere in this Agreement.

4. Nondisturbance. Subject to Operator's observance and performance of all the terms, covenants and conditions of the Sublease on the part of Operator (as subtenant) to be observed and performed, Owner (or such other Transferee) shall recognize the leasehold estate of Operator under all of the terms, covenants and conditions of the Sublease for the remaining balance of the term (as the same may be extended in accordance with the provisions of the Sublease) and such leasehold estate shall not be terminated, except in accordance with the terms of the Sublease or this Agreement; provided, however, that Owner (or such other Transferee) shall not be (a) liable for any act or omission of Sub-Landlord under the Sublease, (b) obligated to cure any defaults of Sub-Landlord under the Sublease which occurred prior to the time that Owner (or such other Transferee) succeeded to the interest of Sub-Landlord under the Sublease, (c) subject to any offsets, claims, credits or defenses which Operator may be entitled to assert against Sub-Landlord, (d) bound by any payment of rent or additional rent by Operator to Sub-Landlord for more than one (1) month in advance, (e) bound by any amendment or modification of the Sublease made without the written consent of Owner and Lender. Owner (or such other Transferee) shall be liable or responsible for or with respect to the retention, application and/or return to Operator of any security deposit paid to Sub-Landlord, whether or not still held by Sub-Landlord, but only to the extent, if any, that such Transferee has actually received the amount of such security deposit in whole or part.


4



5. No Termination.

(a) Operator shall not exercise any right granted to it under the Sublease, or which it might otherwise have under applicable law, to terminate the Sublease on account of a default by Sub-landlord under the Sublease, without first giving Owner prior written notice of its intent to terminate, which notice shall include a statement of the default or event on which such intent to terminate is based. Thereafter, Operator shall not take any action to terminate the Sublease if Owner (i) within thirty (30) days after service of such written notice on Owner of its intention to terminate the Sublease, shall cure such default or event if the same can be cured by the payment or expenditure of money, or (ii) shall diligently take action to recover possession of the Property from Sub-Landlord (or to terminate Sub-Landlord's leasehold under the Master Lease) and to cure such default or, in the case of a default which cannot be cured, unless and until Owner has obtained possession, but in no event to exceed ninety (90) days after service of such written notice on Owner by Operator of its intention to terminate. For the purposes of facilitating Owner's (and Lender's) rights hereunder, Owner shall have, and for such purposes is hereby granted by Operator and Sub-Landlord, the right to enter upon the Property for the purpose of effecting any such cure, during reasonable business hours and provided Owner complies with all federal and state laws regarding patient and resident privacy.

(b) Sub-Landlord shall not exercise any right to terminate the Sublease without Owner's and Lender's prior written consent.

6. Notices of Default. Each of Sub-Landlord and Operator shall provide Owner copies of any notices of default under the Sublease concurrently with the giving of such notice to the other party. Owner shall immediately provide a copy of any such notice to Lender.

7. Reaffirmation of 2012 Subordination and Attornment. Sub-Landlord hereby reaffirms all the terms, conditions and obligations under that certain Subordination and Adornment Agreement, dated as of January 27, 2012, executed and delivered by Owner and Sub-Landlord in favor of Lender (as the same may be modified, amended or restated from time to time).

8. Other Notices. Any notice or other communication required or permitted to be given by this Agreement or by applicable law shall be in writing and shall be deemed received: (a) on the date delivered, if sent by hand delivery (to the person or department if one is specified below) with receipt acknowledged by the recipient thereof; (b) three (3) business days following the date deposited in U.S. mail, postage prepaid, certified or registered, with return receipt requested; or (c) one (1) business day following the date deposited with Federal Express or other national overnight carrier, and in each case addressed as follows:


5



If to Owner:

William M. Foster
c/o Foster Development Company
146 Spring Street
Macon, Georgia 31201

With a copy to:

Joshua E. Kight, Esq.
306 Academy Ave., Suite 200
P.O. Box 816
Dublin, GA 31040

If to Sub-Landlord:
ADK Georgia, LLC
3050 Peachtree Road NW, Suite 355
Atlanta, Georgia 30305
Attn: Manager

With a copy to:
Gregory P. Youra, Esq.
Holt Ney Zatcoff & Wasserman, LLP 100 Galleria Parkway, Suite 1800
Atlanta, Georgia 30339

If to Lender:
Regions Bank
1900 5th Avenue North, 14th Floor Birmingham, AL 35203
Attn: Steven W. "Steve" Mitchell

With a copy to:
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
1600 Wells Fargo Tower
Birmingham, Alabama 35203
Attn: Luther P. Crull, III, Esq


Any party may change its or its attorney address to another single address by notice given as herein provided, except any change of address notice must be actually received in order to be effective.

9. Binding Effect. The covenants and agreements contained herein shall be binding upon and inure to the benefit of the respective representatives, successors and assigns of the parties hereto.

10. Counterpart. This Agreement may be executed in one or more counterparts, all of which when taken together shall constitute a single instrument.

11. Governing Law. This Agreement shall, in all respects, be governed by and construed and interpreted in accordance with the laws of the State of Georgia.
[SEE ATTACHED SIGNATURE PAGES]



6



IN WITNESS WHEREOF , the undersigned have executed this instrument to be effective as of the day and year first above written, although actually executed on the date(s) indicated below.

Signed, sealed and delivered in the presence of:


                  
Unofficial Witness


                  
Notary Public

My Commission Expires:          

OPERATOR :

                  


By:                   
Name:                   
Its:                   

Date:                   

Signed, sealed and delivered in the presence of:


                  
Unofficial Witness

                  
Notary Public

My Commission Expires:          

SUB-LANDLORD :

ADK GEORGIA, LLC

By:                   
Name:                   
Its:                   

Date:                   

Signed, sealed and delivered in the presence of:


                  
Unofficial Witness

                  
Notary Public

My Commission Expires:          

OWNER :  

                  


By:                   
Name:                   
Its:                   

Date:                   



7




Signed, sealed and delivered in the presence of:


                  
Unofficial Witness

                  
Notary Public

My Commission Expires:          

LENDER:

                  


By:                   
Name:                   
Its:                   

Date:                   



8
Exhibit 10.4

February 1, 2016
E. Clinton Cain
AdCare Health Systems, Inc.
1145 Hembree Road
Roswell, GA 30076

Dear Clinton,
On behalf of AdCare Health Systems, Inc. (“AdCare”), this letter agreement (the “Letter Agreement”) outlines the terms of potential payments from AdCare to you. In this agreement, the terms “you” and “your” refer to you, Clinton Cain. The terms “us,” “we,” and “our” refer to AdCare, and are collectively referred to as the “parties.”
The parties agree that termination “for cause” means due to negligence or misconduct in the performance of your material duties that directly results in an economic loss to AdCare, and termination “without cause” means due to any other reason, including, but not limited to, the relocation of the offices of AdCare and/or its successors or affiliates from the greater Atlanta area and/or any adverse change to compensation such as any reduction in salary, regardless of whether your salary has increased between the date of signing this Letter Agreement and your last day of employment. Your last day of employment referred to herein shall be known as the “Termination Date.”
If you are terminated without cause, you will be paid twelve (12) months of severance pay comprised of salary continuation. This amount will be the greater of either (i) your salary upon the date of signing this Letter Agreement, or (ii) your salary at the Termination Date (“Severance”). Severance is subject to all applicable withholdings and is to begin immediately after the Termination Date until Severance is paid in full. You will not receive Severance if you are terminated for cause or you voluntarily terminate your employment, except for, as specified above, you voluntarily terminate your employment with AdCare and/or its successors or affiliates upon a reduction in compensation. Such voluntary termination resulting from any reduction in salary shall be considered termination “without cause” for purposes of this Letter Agreement. Such Severance shall only be applicable to the extent your Termination Date is within 24 months of the date of this Letter Agreement.
This Letter Agreement represents the entire agreement between the parties as it relates to potential salary continuation payments, and any modifications must be made in writing and executed by both parties.

This Agreement shall be interpreted according to the laws of the State of Georgia. The undersigned accepts the terms of this Letter Agreement as outlined above.
Regards,
 
 
 
 
 
/s/ Allan J. Rimland 2/1/2016
 
/s/ E. Clinton Cain 2/1/2016
Allan J. Rimland, President, Date
 
Name, Date
 
 
 
 
 
 
 
 
 
 





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, 2016 , 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 16, 2016
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chief Executive Officer




Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL 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, 2016 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 16, 2016
 
/s/ Allan J. Rimland
 
 
 
Allan J. Rimland
 
 
 
President, Chief Financial Officer, and Corporate Secretary (Principal 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, 2016 , 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 16, 2016
 
/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, 2016 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allan J. Rimland, President, Chief Financial Officer, and Corporate Secretary 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 16, 2016
 
/s/ Allan J. Rimland
 
 
 
Allan J. Rimland
 
 
 
President, Chief Financial Officer, and Corporate Secretary