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 June 30, 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)
 454 Satellite Boulevard, Suite 100, Suwanee, GA 30024
(Address of principal executive offices)
 
(678) 869-5116
(Registrant’s telephone number, including area code)
 
1145 Hembree Road, Roswell, GA 30076
(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 July 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
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, and Section 21E of the Securities Exchange Act of 1934, as amended. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made. 
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future.  The Company’s actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company’s critical accounting policies and risks and uncertainties related to, but not limited to, 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.

3
Table of Contents



Part I.  Financial Information  
Item 1.  Financial Statements 
ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s)
 
 
June 30, 
 2016
 
December 31, 
 2015
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
3,249

 
$
2,720

Restricted cash
 
1,443

 
9,169

Accounts receivable, net of allowance of $10,700 and $12,487
 
3,994

 
8,805

Prepaid expenses and other
 
1,817

 
3,214

Assets of disposal group held for sale
 
49,353

 
1,249

Total current assets
 
59,856

 
25,157

Restricted cash and investments
 
3,535

 
3,558

Property and equipment, net
 
79,617

 
126,676

Intangible assets - bed licenses
 
2,471

 
2,471

Intangible assets - lease rights, net
 
3,087

 
3,420

Goodwill
 
2,105

 
4,183

Lease deposits
 
1,411

 
1,812

Other assets
 
3,352

 
1,996

Total assets
 
$
155,434

 
$
169,273

LIABILITIES AND DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of notes payable and other debt
 
$
19,306

 
$
50,960

Current portion of convertible debt
 
7,700

 
—

Accounts payable
 
4,340

 
8,741

Accrued expenses and other
 
5,329

 
3,125

Liabilities of disposal group held for sale
 
32,160

 
958

Total current liabilities
 
68,835

 
63,784

Notes payable and other debt, net of current portion:
 
 

 
 

Senior debt, net
 
48,614

 
54,742

Bonds, net
 
6,547

 
6,600

Convertible debt, net
 
1,352

 
8,968

Other debt, net
 
295

 
531

Other liabilities
 
4,078

 
3,380

Deferred tax liability
 
389

 
389

Total liabilities
 
130,110

 
138,394

Commitments and contingencies (Note 14)
 

 

Preferred stock, no par value; 5,000 shares authorized; 2,657 and 2,427 shares issued and outstanding, redemption amount $66,426 and $60,273 at June 30, 2016 and December 31, 2015, respectively
 
59,261

 
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 June 30, 2016 and December 31, 2015, respectively
 
61,366

 
60,958

Accumulated deficit
 
(95,303
)
 
(84,793
)
Total stockholders’ deficit
 
(33,937
)
 
(23,835
)
Total liabilities and stockholders' deficit
 
$
155,434

 
$
169,273

 
See accompanying notes to unaudited consolidated financial statements

4
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 June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 

 
 

 
 

 
 

Rental revenues
 
$
6,890

 
$
4,156

 
$
13,739

 
$
5,496

Management fee and other revenues
 
274

 
305

 
507

 
523

Total revenues
 
7,164

 
4,461

 
14,246

 
6,019

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Facility rent expense
 
2,168

 
1,329

 
4,347

 
1,816

Depreciation and amortization
 
1,339

 
1,798

 
3,052

 
3,473

General and administrative expense
 
2,135


2,569


4,677


5,900

Other operating expenses
 
969

 
119

 
1,172

 
221

Total expenses
 
6,611

 
5,815

 
13,248

 
11,410

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
553

 
(1,354
)
 
998

 
(5,391
)
 
 
 
 
 
 
 
 
 
Other expense:
 
 

 
 

 
 

 
 

Interest expense, net
 
1,751

 
2,279

 
3,576

 
4,769

Loss on extinguishment of debt
 
—

 
—

 
—

 
680

Other expense
 
9

 
193

 
51

 
481

Total other expense, net
 
1,760

 
2,472

 
3,627

 
5,930

 
 
 
 
 
 
 
 
 
Loss from continuing operations before income taxes
 
(1,207
)
 
(3,826
)
 
(2,629
)
 
(11,321
)
Income tax expense
 
—

 
—

 
—

 
20

Loss from continuing operations
 
(1,207
)
 
(3,826
)
 
(2,629
)
 
(11,341
)
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
 
(3,775
)
 
(1,537
)
 
(4,303
)
 
729

Net loss
 
(4,982
)
 
(5,363
)
 
(6,932
)
 
(10,612
)
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
 
—

 
270

 
—

 
500

Net loss attributable to AdCare Health Systems, Inc.
 
(4,982
)
 
(5,093
)
 
(6,932
)
 
(10,112
)
 
 
 
 
 
 
 
 
 
Preferred stock dividends
 
(1,801
)
 
(1,437
)
 
(3,578
)
 
(2,083
)
Net loss attributable to AdCare Health Systems, Inc. Common Stockholders
 
$
(6,783
)
 
$
(6,530
)
 
$
(10,510
)
 
$
(12,195
)
 
 
 
 
 
 
 
 
 
Net loss (income) per share of common stock attributable to AdCare Health Systems, Inc.
 
 

 
 

 
 

 
 

Basic and diluted:
 
 

 
 

 
 

 
 

Continuing operations
 
$
(0.15
)
 
$
(0.27
)
 
$
(0.31
)
 
$
(0.69
)
Discontinued operations
 
(0.19
)
 
(0.06
)
 
(0.22
)
 
0.06

 
 
$
(0.34
)
 
$
(0.33
)
 
$
(0.53
)
 
$
(0.63
)
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 

 
 

 
 

 
 

Basic and diluted
 
19,907

 
19,775

 
19,896

 
19,499


 See accompanying notes to unaudited consolidated financial statements

5
Table of Contents



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
 
—

 
720

 
—

 
720

 
 
 
 
 
 
 
 
 
Common stock repurchase program
 
(150
)
 
(312
)
 
—

 
(312
)
 
 
 
 
 
 
 
 
 
Issuance of restricted stock
 
196

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Preferred stock dividends
 
—

 
—

 
(3,578
)
 
(3,578
)
 
 
 
 
 
 
 
 
 
Net loss
 
—

 
—

 
(6,932
)
 
(6,932
)
Balances, June 30, 2016
 
19,907

 
$
61,366

 
$
(95,303
)
 
$
(33,937
)
 
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)
 
 
Six Months Ended June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 

Net loss
 
$
(6,932
)
 
$
(10,612
)
(Income) loss from discontinued operations, net of tax
 
4,303

 
(729
)
Loss from continuing operations
 
(2,629
)
 
(11,341
)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
3,052

 
3,473

Stock-based compensation expense
 
720

 
432

Rent expense in excess of cash paid
 
409

 
76

Rent revenue in excess of cash received
 
(1,344
)
 
(274
)
Amortization of deferred financing costs
 
433

 
753

Amortization of debt discounts and premiums
 
7

 
7

Loss on debt extinguishment
 
—

 
680

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(244
)
 
(279
)
Prepaid expenses and other
 
1,251

 
(107
)
Other assets
 
30

 
(1,850
)
Accounts payable and accrued expenses
 
(16
)
 
(1,493
)
Other liabilities
 
620

 
741

Net cash provided (used in) by operating activities - continuing operations
 
2,289

 
(9,182
)
Net cash (used in) provided by operating activities - discontinued operations
 
(2,252
)
 
505

Net cash provided by (used in) operating activities
 
37

 
(8,677
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Change in restricted cash
 
4,774

 
(5,586
)
Purchase of property and equipment
 
(44
)

(722
)
Proceeds from the sale of property and equipment
 
1,372

 
—

Earnest deposit

1,000


—

Net cash provided by (used in) investing activities - continuing operations
 
7,102

 
(6,308
)
Net cash (used in) investing activities - discontinued operations
 
(1
)
 
(8
)
Net cash provided by (used in) investing activities
 
7,101

 
(6,316
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from senior debt
 
203

 
22,730

Proceeds from convertible debt
 
—

 
2,049

Repayment of notes payable
 
(6,646
)
 
(22,757
)
Repayment on bonds payable
 
(85
)
 
—

Repayment on convertible debt
 
—

 
(2,367
)
Proceeds from lines of credit
 
—

 
20,780

Repayment of lines of credit
 
—

 
(25,874
)
Debt issuance costs
 
(67
)
 
(830
)
Exercise of warrants and options
 
—

 
1,791

Proceeds from preferred stock issuances, net
 
4,547

 
27,558

Dividends paid on common stock
 
(312
)
 
(990
)
Dividends paid on preferred stock
 
(3,578
)
 
(2,083
)
Net cash (used in) provided by financing activities - continuing operations
 
(5,938
)
 
20,007

Net cash (used in) financing activities - discontinued operations
 
(671
)
 
(409
)
Net cash (used in) provided by financing activities
 
(6,609
)
 
19,598

Net change in cash and cash equivalents
 
529

 
4,605

Cash and cash equivalents, beginning
 
2,720

 
10,735

Cash and cash equivalents, ending
 
$
3,249

 
$
15,340

 
 
 
 
 

7
Table of Contents



Supplemental disclosure of cash flow information:
 
 

 
 

Interest paid
 
$
3,213


$
4,568

Income taxes paid
 
$
—


$
20

2014 Notes surrendered and cancelled in payment for 2015 Notes
 
$
—


$
5,651


  See accompanying notes to unaudited consolidated financial statements

8
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 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 healthcare facilities to third-party tenants, which operate such facilities. The facility operators provide a range of healthcare 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.

As of June 30, 2016 , the Company owned, leased, or managed for third parties 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 Note 7 - Leases below and Part II, Item 8, Notes to Consolidated Financial Statements , Note 7 - Leases in the Annual Report for a more detailed description of the Company's leases).

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 Company to a healthcare property holding and leasing company through a series of leasing and subleasing transactions (the “Transition”). The Company effected 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 completed the Transition on December, 31, 2015.

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 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. These leases are generally long-term in nature with renewal options and annual rent escalation clauses. As a result of the Transition, the Company has many of the characteristics of a real estate investment trust ("REIT") and is focused on the ownership, acquisition and leasing of healthcare properties. The Board continues to analyze and consider: (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; (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.




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 and six months ended June 30, 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 and six months ended June 30, 2015 , to reflect the same facilities in discontinued operations for both periods presented.
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 June 30, 2016 and December 31, 2015 , the Company allowed for approximately $10.7 million and $12.5 million , respectfully of gross patient care related receivables arising from our legacy operations. Allowance for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types. Any changes in patient care receivable allowances are recognized as a component of discontinued operations. All patient care receivables exceeding 365 days are fully allowed at June 30, 2016 and December 31, 2015 . Accounts receivable, net totaled $4.0 million at

10



June 30, 2016 and $8.8 million at December 31, 2015 of which $2.7 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. Identifying performance obligations and licensing (ASU 2016-10) and narrow scope improvements (ASU 2016-12) were issued in April and May 2016 respectively. 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 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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which provides for an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for the Company beginning January 1, 2020 and we do not expect its adoption will have a significant effect on our consolidated financial statements.



12



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 respective 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 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 and six months ended June 30, 2016 and 2015 , approximately 4.5 million and 6.6 million shares, respectively, of potentially dilutive securities were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive for such 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 June 30,
 
Six Months Ended June 30,
(Amounts in 000’s, except per share data)
 
2016
 
2015
 
2016
 
2015
Numerator:

 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(1,207
)
 
$
(3,826
)
 
$
(2,629
)
 
$
(11,341
)
Preferred stock dividends
 
(1,801
)
 
(1,437
)
 
(3,578
)
 
(2,083
)
Basic and diluted Loss from continuing operations
 
(3,008
)
 
(5,263
)
 
(6,207
)
 
(13,424
)
 
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations
 
(3,775
)
 
(1,537
)
 
(4,303
)
 
729

Net loss attributable to noncontrolling interests
 
—

 
270

 
—

 
500

Basic and diluted (loss) income from discontinued operations
 
(3,775
)
 
(1,267
)
 
(4,303
)
 
1,229

Basic and diluted loss from continuing operations attributable to AdCare Health Systems, Inc common stockholders
 
$
(6,783
)
 
$
(6,530
)
 
$
(10,510
)
 
$
(12,195
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Basic earnings per share - weighted average shares
 
19,907

 
19,775

 
19,896

 
19,499

Diluted earnings per share—adjusted weighted average shares (a)
 
19,907

 
19,775

 
19,896

 
19,499

 
 
 
 
 
 
 
 
 
Basic and diluted (loss) earnings per share:
 
 
 
 
 
 
 
 
Loss from continuing operations attributable to AdCare
 
$
(0.15
)
 
$
(0.27
)
 
$
(0.31
)
 
$
(0.69
)
(Loss) income from discontinuing operations
 
(0.19
)
 
(0.06
)
 
(0.22
)
 
0.06

Loss attributable to to AdCare Health Systems, Inc. common stockholders
 
$
(0.34
)
 
$
(0.33
)
 
$
(0.53
)
 
$
(0.63
)
 
 
 
 
 
 
 
 
 
(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:
 
 
June 30,
(Share amounts in 000’s)
 
2016
 
2015
Stock options
 
355

 
774

Warrants - employee
 
1,887

 
1,887

Warrants - non employee
 
109

 
585

Convertible notes
 
2,165

 
3,319

Total anti-dilutive securities
 
4,516

 
6,565


13



  

 
NOTE 3.                           LIQUIDITY AND PROFITABILITY
 
Sources of Liquidity

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

At June 30, 2016 , the Company had $3.2 million in cash and cash equivalents as well as restricted cash of $5.0 million . Over the next twelve months, the Company anticipates both access to and receipt of several sources of liquidity.

On April 25, 2016, the Company completed the sale of one of its office buildings located in Roswell, Georgia for $0.7 million and subsequently repaid the outstanding indebtedness with respect to the property in the amount of approximately $0.9 million . On July 28, 2016, the Company completed the sale of an unencumbered office building located in Roswell, Georgia for $0.2 million . S ee Note 10 - Discontinued Operations and Note 16 - Subsequent Events.

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 such as those operated by the United States Department of Housing and Urban Development ("HUD").

On July 21, 2015, the Company entered into separate At Market Issuance Sales Agreements with each of MLV & Co. LLC and JMP Securities LLC (“JMP”), pursuant to which the Company may offer and sell, from time to time, up to 800,000 shares of the Company’s 10.875% Cumulative Redeemable Preferred Stock, (the "Series A Preferred Stock"), through an “at-the-market” offering program ("ATM"). The Company subsequently announced that the Series A Preferred Stock offered and sold through the ATM will be sold exclusively through JMP on and after June 7, 2016. During the quarter ended June 30, 2016 , the Company sold 43,204 shares of Series A Preferred Stock generating net proceeds to the Company of approximately $0.9 million . Since the inception of the ATM in July 2015 and through June 30, 2016 , the Company has sold 543,804 shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately $11.3 million (see Note 11 - Common and Preferred Stock ).

On March 24, 2016 , the Company received a commitment to refinance certain credit facilities for a combined total of $25.4 million of debt, subject to definitive documentation and certain closing conditions, which commitment expires on November 10, 2016. These credit facilities pertain to the following loan agreements between certain wholly-owned subsidiaries of the Company and The PrivateBank and Trust Company (the “PrivateBank”): (i) the Loan Agreement, dated September 1, 2011, as amended (the “Bentonville, Heritage Park and River Valley Credit Facility”), (ii) the Loan Agreement, dated March 30, 2012, as amended (the “Little Rock Credit Facility”), and (iii) the Loan Agreement, dated February 25, 2015, as amended, (the “Northridge, Woodland Hills and Abington Credit Facility”).

On March 24, 2016 , the Company also obtained a lender commitment to extend the maturity date of the credit facility entered into on January 30, 2015 between certain-wholly owned subsidiaries of the Company and the PrivateBank (the "Georgetown and Sumter Credit Facility") from September 2016 to June 2017, subject to definitive documentation and certain closing conditions, which commitment expires on November 10, 2016. On March 29, 2016, an d subsequently renewed on August 12, 2016, the Company obtained a lender commitment to extend the maturity date of the credit facility entered into in September 2013 between a certain wholly-owned subsidiary of the Company and Housing & Healthcare Funding, LLC (the “Quail Creek Credit Facility”) 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 (the “Arkansas Facilities”) for a total sales price of $55.0 million . June 30, 2016 , total outstanding debt, net of deferred financing costs on those facilities was approximately $29.6 million , net of restricted cash deposits and deferred financing costs included within "Liabilities of disposal group held for sale" in the Company's unaudited consolidated balance sheets at June 30, 2016 . All such debt and restricted cash was current at June 30, 2016 . The Company anticipates cash inflows associated with the sale of such facilities, if completed, to exceed related obligations by approximately $22.0 million , less routine closing costs and a seller note of $3.0 million . The completion of the sale of the Arkansas Facilities is subject to customary termination provisions and closing conditions. The cash impact for the sale of the nine Arkansas facilities consists of total sales proceeds of $55.0 million , payment of associated

14



liabilities held for sale of $32.5 million (excluding deferred loan costs of $0.3 million ), a seller note of $3.0 million , anticipated payments for property taxes of $0.4 million , and release of restricted cash of $2.9 million for total net cash to seller of $22.0 million . There is no assurance that the sale of the Arkansas Facilities will occur on the terms described in this Quarterly Report or at all.


Cash Requirements

At June 30, 2016 , the Company had $116.0 million in indebtedness of which the current portion is $59.2 million . This current portion is comprised of the following components: (i) debt of held for sale entities of approximately $32.2 million , primarily senior debt and mortgage indebtedness; and (ii) remaining debt of approximately $24.6 million which includes senior debt - bond and 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, during the next twelve months, net principal disbursements of approximately $59.4 million (including approximately $1.3 million of payments on short term vendor notes, $1.9 million of routine debt service amortization, $0.2 million in connection with the sale of an office building and $0.7 million payment of other debt) which is inclusive of anticipated proceeds on refinancing of approximately $11.4 million . On March 24, 2016, the Company received a lender commitment to refinance a combined total of approximately $25.4 million of debt with respect to the Bentonville, Heritage Park and River Valley Credit Facility, the Little Rock Credit Facility and the Northridge, Woodland Hills and Abington Credit Facility and to extend $9.1 million of current maturities with respect to the Georgetown and Sumter Credit Facility, each subject to definitive documentation and certain closing conditions, which commitment expires on November 10, 2016. On March 29, 2016, and subsequently renewed on August 12 2016, the Company received a lender commitment to extend approximately $5.0 million of current maturities with respect to the Quail Creek Credit Facility, subject to definitive documentation and certain closing conditions. The Company anticipates operating cash requirements for the next twelve months as being substantially less than the 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 June 30, 2016 , the Company had approximately $63.9 million of debt maturities due over the next two year period ending June 30, 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.

During the three and six months ended June 30, 2016 the Company generated positive cash flows and anticipates 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; (iv) potentially sell 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 will be realized. 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 additional assets, or suspend payment of preferred dividends.
.



15



NOTE 4.                           RESTRICTED CASH
 
The following table sets forth the Company’s various restricted cash, escrow deposits and related financial instruments excluding $3.0 million classified as assets held for sale:
 
(Amounts in 000’s)
 
June 30, 2016
 
December 31, 2015
Cash collateral and certificates of deposit
 
$
222

 
$
7,687

Replacement reserves
 
665

 
950

Escrow deposits
 
556

 
532

Total current portion
 
1,443

 
9,169

 
 
 
 
 
Restricted investments for other debt obligations
 
2,263

 
2,264

HUD replacement reserves
 
1,235

 
1,174

Reserves for capital improvements
 
37

 
120

Total noncurrent portion
 
3,535

 
3,558

Total restricted cash
 
$
4,978

 
$
12,727

 
NOTE 5.                           PROPERTY AND EQUIPMENT
 
The following table sets forth the Company’s property and equipment excluding $44.3 million classified as assets held for sale:
 
(Amounts in 000’s)
 
Estimated Useful
Lives (Years)
 
June 30, 2016
 
December 31, 2015
Buildings and improvements

5-40
 
$
83,389

 
$
128,912

Equipment

2-10
 
9,194

 
13,470

Land

—
 
3,985

 
7,128

Computer related

2-10
 
2,894

 
2,999

Construction in process
 
—
 
64

 
390

 
 
 
 
99,526

 
152,899

Less: accumulated depreciation and amortization
 
 
 
(19,909
)
 
(26,223
)
Property and equipment, net
 
 
 
$
79,617

 
$
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 June 30, 2016 and 2015 , total depreciation and amortization expense was $1.3 million and $1.8 million , respectively. For the six months ended June 30, 2016 and 2015 , total depreciation and amortization expense was $3.1 million and $3.5 million , respectively. There were no amounts of total depreciation and amortization expense recognized in Loss from discontinued operations, net of tax in the three and six month periods ended June 2016 nor the three month period ended June 2015. Total depreciation and amortization expense excludes $0.1 million for the six months ended June 30, 2015 that is recognized in Income from discontinued operations, net of tax.


16



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

 
 
 
 
 
 
 
 
 
Transfers -Assets of disposal group held for sale
 
 
 
 
 
 
 
 
Gross
 
(12,879
)
 
—

 
—

 
(12,879
)
Accumulated amortization
 
2,123

 
—

 
—

 
2,123

 
 
 
 
 
 
 
 
 
Amortization expense
 
(505
)
 
—

 
(333
)
 
(838
)
 
 
 
 
 
 
 
 
 
Balances, June 30, 2016
 
 
 
 
 
 
 
 
Gross
 
22,811

 
2,471

 
6,881

 
32,163

Accumulated amortization
 
(3,142
)
 
—

 
(3,794
)
 
(6,936
)
Net carrying amount
 
$
19,669

 
$
2,471

 
$
3,087

 
$
25,227

 
Amortization expense for the CON included in property and equipment was approximately $0.2 million and $0.5 million for the three and six month periods ended June 30, 2016 and was approximately $0.3 million and $0.6 million for the three and six month periods ended June 30, 2015 , respectively.
Amortization expense for lease rights was approximately $0.2 million and $0.3 million for the three and six month periods ended June 30, 2016 and was approximately $0.2 million and $0.3 million three and six month periods ended June 30, 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)
 
$
342

 
$
333

2017
 
683

 
667

2018
 
683

 
667

2019
 
683

 
667

2020
 
683

 
482

Thereafter
 
16,595

 
271

Total expected amortization expense
 
$
19,669

 
$
3,087

  (a)  Estimated amortization expense for the year ending December 31, 2016 , includes only amortization to be recorded after June 30, 2016 .

The following table summarizes the carrying amount of goodwill:
(Amounts in 000’s)
 
June 30, 2016
 
December 31, 2015
Goodwill
 
$
5,023

 
$
5,023

Transfers -Assets of disposal group held for sale
 
(2,078
)
 
—

Accumulated impairment losses
 
(840
)
 
(840
)
Net carrying amount
 
$
2,105

 
$
4,183

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

17



 
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 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 Suwanee, 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 June 30, 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)
 
$
4,052

2017
 
8,152

2018
 
8,316

2019
 
8,495

2020
 
8,674

Thereafter
 
55,280

Total
 
$
92,969

(a) Estimated minimum lease payments for the year ending December 31, 2016 , include only payments to be recorded after June 30, 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 the Company and 11 leased to the Company) 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”) 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 $4.2 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 at June 30, 2016, has an outstanding principal amount of $1.1 million and had a maturity date of December 31, 2015. The Company received $0.7 million in partial repayment of the Note during the second quarter of 2016. The Company is currently seeking the repayment of the remaining balance of the Note in accordance with its terms and expects full repayment.

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.

Pending Sale of Arkansas Facilities. 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

18



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.

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 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 $3.0 million , 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 at maturity.

The sale of the Arkansas Facilities is subject to customary conditions and termination rights for transactions of this type. The closing of the transaction shall occur on or before August 31, 2016, subject to customary closing conditions and termination provisions, in accordance with the Letter Agreement, dated as of July 14, 2016 (the “Letter Agreement”), by and among Skyline, Purchaser and the Skyline Lessors (see Note 16 - Subsequent Events ). 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.

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 United States Bankruptcy Code. New Beginnings operated an 85 -bed skilled nursing facility located in Tybee Island, Georgia (the “Oceanside Facility”), a 50 -bed skilled nursing facility located in Tybee Island, Georgia (the “Savannah Beach Facility”) and a 131 -bed skilled nursing facility located in Jeffersonville, Georgia (the “Jefferson Facility”) (collectively, the “New Beginnings Facilities”) pursuant to a master lease dated November 3, 2015 with the Company. The Jeffersonville Facility was decertified by the United States Department of Health and Human Services Center for Medicare and Medicaid 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 New Beginnings 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 New Beginnings Facilities. The Consent Order further provided that if the creditors’ committee was unable to sell the assets by such date, the automatic stay would be lifted and the Company would be allowed to reclaim possession of the New Beginnings Facilities. The court signed the Consent Order on May 9, 2016, and it was entered on the docket on May 10, 2016. The automatic stay was lifted as of June 4, 2016, thereby allowing the Company to take possession of the New Beginnings Facilities from New Beginnings.
 
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 the Oceanside Facility was imminent, New Beginnings obtained a preliminary injunction against the Georgia Department of Community Health and CMS 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 was stayed by the terms of the Bankruptcy Court’s order.

Peach Health Group. On June 18, 2016, ADK Georgia, LLC, a wholly-owned subsidiary of the Company (“Sublessor”), entered into a new master sublease agreement (the “Peach Health Sublease”) with affiliates (collectively, “Sublessee”) of Peach Health

19



Group, LLC (“Peach Health”), providing that Sublessee would take possession of the New Beginnings Facilities and operate them as a subtenant.

The Peach Health Sublease provided that it became effective: (i) with respect to the Jeffersonville Facility, as of June 18, 2016; and (ii) with respect to the Savannah Beach Facility and the Oceanside Facility, on the date on which Sublessor accepted possession of each such facility from New Beginnings. The Peach Health Sublease became effective for the Savannah Beach and Oceanside Facilities on July, 13, 2016. Sublessor shall be responsible for payment of all outstanding bed/provider taxes to the State of Georgia which relate to the operation of the New Beginnings Facilities prior to the effective date of the Peach Health Sublease.
The Peach Health Sublease is structured as a triple net lease, except that Sublessor assumes responsibility for the cost of certain deferred maintenance at the Savannah Beach Facility and capital improvements that may be necessary for the Sublessee to recertify the Oceanside and Jeffersonville Facilities with CMS so they are eligible for Medicare and Medicaid reimbursement. The term of the Peach Health Sublease for all three New Beginnings Facilities expires on August 31, 2027.
Rent for the Savannah Beach Facility, the Oceanside Facility and the Jeffersonville Facility is $0.3 million , $0.4 million and $0.6 million per annum, respectively; provided, however, that rent is only $1 per month for the Oceanside and Jeffersonville Facilities until they are recertified or April 1, 2017, whichever first occurs (the “Rent Commencement Date”). In addition, with respect to the Oceanside and Jeffersonville Facilities, Sublessee is entitled to three months of $1 per month rent following the Rent Commencement Date and, following such three -month period, five months of rent discounted by 50% . In addition, in the event that the Savannah Beach Facility is decertified due to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to $1 a month until it is recertified along with the other facilities. The annual rent for each of the New Beginnings Facilities will escalate at a rate of 3% each year pursuant to the Peach Health Sublease.
Under the terms of the Peach Health Sublease, Sublessee agrees to use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with CMS as soon as possible. In connection therewith, Sublessee will create an operating plan for such recertification to include a timetable and estimate of funds required from Sublessor for capital improvements for each such facility and submit them to Sublessor for approval within sixty days of the commencement date of the Peach Health Sublease (a "Recertification Plan"). If the parties are unable to reach agreement on the terms of a Recertification Plan for any facility, it will be removed from the Peach Health Sublease and the Peach Health Sublease will continue with respect to the remaining facilities.
In connection with the Peach Health Sublease, the Company has extended to Sublessee a working capital line of credit of up to $1.0 million for operations at the New Beginnings Facilities (the “LOC”), with interest accruing on the unpaid balance under the LOC at an interest rate of 13.5% per annum. The entire principal amount due under the LOC, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The LOC is secured by a first priority security interest in Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Sublessee. At June 30, 2016 there was no outstanding balance on the LOC.

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:
 
 
(Amounts in
000's)
2016 (a)
 
$
13,201

2017
 
26,845

2018
 
27,474

2019
 
28,082

2020
 
27,634

Thereafter
 
204,028

Total
 
$
327,264

(a) Estimated minimum lease receivables for the year ending December 31, 2016 , include only payments to be received after June 30, 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.







20








NOTE 8.                           ACCRUED EXPENSES AND OTHER
 
Accrued expenses and other consist of the following:
(Amounts in 000’s)
 
June 30, 2016
 
December 31, 2015
Accrued employee benefits and payroll related
 
$
695

 
$
1,332

Real estate and other taxes
 
1,156

 
411

Self-insured reserve
 
1,522

 
221

Accrued interest
 
441

 
484

Other accrued expenses
 
515

 
677

Total accrued expenses
 
4,329


3,125

Earnest deposit
 
1,000

 
—

   Total accrued expenses and other
 
$
5,329

 
$
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)
 
June 30, 2016
 
December 31, 2015
Senior debt—guaranteed by HUD
 
$
25,178

 
$
25,469

Senior debt—guaranteed by USDA
 
26,111

 
26,463

Senior debt—guaranteed by SBA
 
3,467

 
3,548

Senior debt—bonds, net of discount
 
6,947

 
7,025

Senior debt—other mortgage indebtedness
 
45,285

 
51,128

Other debt
 
2,092

 
2,638

Convertible debt
 
9,200

 
9,200

Deferred financing costs
 
$
(2,306
)
 
$
(2,712
)
Total debt
 
$
115,974

 
$
122,759

Current debt
 
27,006

 
50,960

Debt included in liabilities of disposal group held for sale  (b)
 
32,160

 
958

Notes payable and other debt, net of current portion
 
$
56,808

 
$
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").
(b) Includes $0.3 million deferred financing costs at June 30, 2016 .


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

21



(Amounts in 000's)
 
 
 
 
 
 
 
 
 
 
 
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
June 30, 2016
 
December 31, 2015
Senior debt - guaranteed by HUD
 
 
 
 
 
 
 
 
 
 
The Pavilion Care Center
 
Red Mortgage
 
12/01/2027
 
 Fixed
 
4.16%
 
$
1,484

 
$
1,534

Hearth and Care of Greenfield
 
Red Mortgage
 
08/01/2038
 
 Fixed
 
4.20%
 
2,221

 
2,251

Woodland Manor
 
Heartland Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
5,502

 
5,556

Glenvue
 
Heartland Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
8,543

 
8,628

Autumn Breeze
 
KeyBank
 
01/01/2045
 
 Fixed
 
3.65%
 
7,428

 
7,500

 
Total
 
 
 
 
 
 
 
 
 
$
25,178

 
$
25,469

Senior debt - guaranteed by USDA




 
 
 
 
Attalla

Metro City

09/30/2035

Prime + 1.50%

5.50%
 
$
7,296

 
$
7,400

Coosa

Metro City

09/30/2035

Prime + 1.50%

5.50%
 
6,578

 
6,671

Mountain Trace

Community B&T

01/24/2036

Prime + 1.75%

5.75%
 
4,448

 
4,507

Southland

Bank of Atlanta

07/27/2036

Prime + 1.50%

6.00%
 
4,520

 
4,576

Homestead (b)

Square 1

10/14/2036

Prime + 1.00%

5.75%
 
3,269

 
3,309


Total








 
$
26,111

 
$
26,463

Senior debt - guaranteed by SBA




 
 
 
 
College Park

CDC

10/01/2031

Fixed

2.81%
 
$
1,654

 
$
1,697

Stone County  (b)

CDC

07/01/2032

Fixed

2.42%
 
1,095

 
1,123

Southland

Bank of Atlanta

07/27/2036

Prime + 2.25%
 
5.75%
 
718

 
728

 
Total
 
 
 
 
 
 
 
 
 
$
3,467

 
$
3,548

(a)
Represents cash interest rates as of June 30, 2016 as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
(b) Debt included in liabilities of disposal group held for sale.
(Amounts in 000's)

 
 
 
 
 
 
 
 
 
 
 
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
June 30, 2016
 
December 31, 2015
Senior debt - bonds, net of discount

 
 
 
 
 
 
 
 
 
 
Eaglewood Bonds Series A
 
City of Springfield, Ohio
 
05/01/2042
 
 Fixed
 
7.65%
 
$
6,451

 
$
6,449

Eaglewood Bonds Series B
 
City of Springfield, Ohio
 
05/01/2021
 
 Fixed
 
8.50%
 
496

 
576

 
Total
 
 
 
 
 
 
 
 
 
$
6,947

 
$
7,025

(a)
Represents cash interest rates as of June 30, 2016 as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.

22



(Amounts in 000's)

 
 
 
 
June 30,
 
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%

4.71%
$
5,073

 
$
5,123

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

LIBOR + 4.25%

4.71%
3,986

 
4,026

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

LIBOR + 4.25%

5.50%
3,647

 
4,230

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

LIBOR + 4.25%

5.50%
3,066

 
3,557

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

LIBOR + 4.25%

5.50%
3,474

 
4,029

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

LIBOR + 3.50%

6.00%
2,870

 
3,370

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

LIBOR + 3.50%

6.00%
3,489

 
3,989

Little Rock/West Markham (b), (f)
Private Bank (d)
12/31/2016
 
LIBOR + 4.00%
 
6.00%
9,844


11,399

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

LIBOR + 4.75%

5.75%
4,494

 
5,000

Northwest
First Commercial
12/31/2017

Prime

5.00%
1,247

 
1,285

Stone County (f)
Metro City
06/08/2022

Prime + 2.25%

6.25%
1,678

 
1,697

College Park
Bank of Las Vegas
05/01/2031

Prime + 2.00%

6.25%
2,417

 
2,465

Hembree Rd. Building
Fidelity Bank
12/01/2017

Fixed

5.50%
—

 
958

 
Total
 
 
 
 
 
 
$
45,285

 
$
51,128

(a)
Represents cash interest rates as of June 30, 2016 as adjusted for applicable interest rate floor limitations, if applicable. 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 Northridge, Woodland Hills, Abington Credit Facility and the Little Rock Credit Facility for a combined total of $25.4 million of debt subject to definitive documentation and certain closing conditions, which commitment expires on November 10, 2016.

(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, which commitment expires on November 10, 2016.

(d)  
On March 24, 2016, and June 16, 2016, the Company obtained the release of approximately $3.9 million and $1.2 million respectively, 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, which commitment was extended on August 12, 2016.

(f) Debt included in liabilities of disposal group held for sale.
(Amounts in 000's)
 
 
 
 
 
 
 
 
 
 
Lender
 
Maturity
 
Interest Rate
 
June 30, 2016
 
December 31, 2015
Other debt
 
 
 
 
 
 
 
 
 
 
First Insurance Funding
 
02/29/2017
 
 Fixed
 
3.99%
 
$
139

 
$
14

Key Bank   (a)
 
08/25/2016
 
 Fixed
 
0.00%
 
680

 
680

Reliant Rehabilitation
 
11/15/2016
 
 Fixed
 
7.00%
 
478

 
944

Pharmacy Care of Arkansas
 
02/08/2018
 
 Fixed
 
2.00%
 
795

 
1,000

Total
 
 
 
 
 
 
 
$
2,092

 
$
2,638

(a)
Extended to October 17, 2017.

23



(Amounts in 000's)
 
 
 
 
 
 
 
 
 
 
Facility
 
Maturity
 
Interest Rate (a)
 
June 30, 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 June 30, 2016 . The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
Debt Covenant Compliance
 
As of June 30, 2016 , the Company has approximately 38 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries). The subsidiary level requirements are further defined in the table below as follows: (i) financial covenants measured against subsidiaries of the Company ("Subsidiary"); and (ii) financial covenants measured against third-party operator performance ("Operator"). Some covenants are based on annual financial metric measurements whereas others are based on quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of June 30, 2016 , the Company has not been in compliance with certain financial covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including, as necessary, modifications to future covenant requirements or the elimination of certain requirements in future periods.
The table below indicates which of the Company's credit-related instruments are not in compliance as of June 30, 2016 :
Credit Facility
 
Balance at
June 30, 2016
(000's)
 
Subsidiary or Operator Level Covenant Requirement
 
Financial Covenant
 
Min/Max
Financial
Covenant
Required
 
Financial
Covenant
Metric
Achieved
 
 
 
Future
Financial
Covenant
Metric
Required
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC
 
$
9,844

 
Operator
 
Minimum Operator EBITDAR (000s)
 
$
450

 
$
212

 
(a)
 
$
450

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Waiver for violation of covenant obtained.

The measurement period for each covenant requirement in the table above is on a quarterly basis.

Scheduled Maturities
The schedule below summarizes the scheduled maturities for the twelve months ended June 30 of the respective year (not adjusted for commitments to refinance or extend the maturities of debt as noted above).
 
(Amounts in 000’s)
2017
$
59,439

2018
4,488

2019
1,607

2020
1,692

2021
1,776

Thereafter
49,476

Subtotal
$
118,478

Less: unamortized discounts
(198
)
Less: deferred financing costs
$
(2,306
)
Total notes and other debt
$
115,974


24





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 and six months ended June 30, 2016 and 2015 :
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2016
 
2015
 
2016
 
2015
Total revenues
 
$
—

 
$
25,048

 
$
—

 
$
71,910

Cost of services
 
3,264

 
25,693

 
3,783

 
68,623

Net income (loss)
 
(3,775
)
 
(1,537
)
 
(4,303
)
 
729

Interest expense, net
 
17

 
303

 
25

 
616


Assets and liabilities of the disposal group held for sale at June 30, 2016 and December 31, 2015 , are as follows: 
 
 
Actual
 
Actual
 
Comparative (a)
(Amounts in 000’s)
 
June 30, 2016
 
December 31, 2015
 
December 31, 2015
Restricted cash
 
$
2,975

 
$
—

 
$
5,887

Buildings and improvements, net
 
38,761

 
1,249

 
40,407

Land, net
 
2,813

 
—

 
2,814

Equipment and other, net
 
2,686

 
—

 
2,866

Goodwill
 
2,078

 
—

 
2,078

Other assets
 
40

 
—

 
35

Assets of disposal group held for sale
 
$
49,353

 
$
1,249

 
$
54,087

 
 
 
 
 
 
 
Notes payable
 
$
32,160

 
$
958

 
$
37,187

Liabilities of disposal group held for sale
 
$
32,160

 
$
958

 
$
37,187


(a) Balance as of December 31, 2015 for the assets and liabilities of the disposal group held for sale at June 30, 2016, inclusive of the Arkansas and Roswell office buildings sold as detailed below and included in the actual balance at December 31, 2015.
On February 9, 2016, the Company sold an office building in Arkansas for $0.3 million . The office space was unencumbered.
On April 25, 2016, the Company completed the sale of an owned office building located in Roswell, Georgia for $0.7 million . Debt obligations on the transaction exceeded proceeds by $0.2 million .
At June 30, 2016 , the Company had one of its office buildings located in Roswell, Georgia, held for sale. The Company completed the sale of this unencumbered building on July 28, 2016, for $0.2 million .

NOTE 11.                        COMMON AND PREFERRED STOCK

Common Stock Repurchase Activity


25



In the six months ended June 30, 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 June 30, 2016 , a maximum 350,000 shares may yet be purchased under the Repurchase Program. During the quarter ended June 30, 2016 , the Company made no repurchases of common stock.

Preferred Stock

The liquidation preference of the 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 the Series A Preferred Stock issued by the Company and net proceeds received from issuance of the Series A Preferred Stock for the six months ended June 30, 2016 :
 
 
Shares Issued & Outstanding
Net Proceeds from Issuance (in 000's)
Balances, December 31, 2015
 
2,426,930

$
54,714

 
 
 
 
At-The-Market offering
 
230,109

$
4,547

 
 
 
 
Balances, June 30, 2016
 
2,657,039

$
59,261


The Company paid $1.8 million and $3.6 million in dividends on the Series A Preferred Stock during the three and six months ended June 30, 2016 , respectively.


26



NOTE 12.                        STOCK BASED COMPENSATION

For the three and six months ended June 30, 2016 and 2015 , the Company recognized stock-based compensation expense as follows: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2016
 
2015
 
2016
 
2015
Employee compensation:
 
 
 
 
 
 

 
 

Restricted stock
 
$
1

 
$
128

 
$
112

 
$
191

Stock options
 
66

 
1

 
151

 
45

Warrants
 
130

 
52

 
376

 
85

Total employee stock-based compensation expense
 
$
197

 
$
181

 
$
639

 
$
321

Non-employee compensation:
 
 
 
 
 
 

 
 
Board restricted stock
 
31

 
36

 
$
57

 
$
87

Board stock options
 
12

 
12

 
24

 
24

Total non-employee stock-based compensation expense
 
$
43

 
$
48

 
$
81

 
$
111

Total stock-based compensation expense
 
240

 
229

 
720

 
432


Stock Incentive Plan
The 2011 Stock Incentive Plan, which expires March 28, 2021, 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 656,894 . 

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 six months ended June 30, 2016 and June 30, 2015 , using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
 
Six Months Ended June 30,
 
2016
 
2015
Dividend yield
—
%
 
4.76
%
Expected volatility
41
%
 
39
%
Risk-free interest rate
1.43
%
 
1.09
%
Expected term in years
5.0 years

 
3.9 years









27



Common Stock Options
The following table summarizes the Company's common stock option activity for the six months ended June 30, 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
(44,905
)
 
$
3.86

 
 
 
 
Outstanding, June 30, 2016
354,782

 
$
3.21

 
6.1
 
$
—

Vested at June 30, 2016
285,628

 
$
3.05

 
5.5
 
$
—

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 June 30, 2016 :
 
Stock Options Outstanding
 
Options Exercisable
Exercise Price
Number of Shares
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Vested at June 30, 2016
 
Weighted Average Exercise Price
$1.31 - $3.99
289,337

 
5.8
 
$
3.01

 
220,183

 
$
2.73

$4.00 - $4.30
65,445

 
7.2
 
$
4.12

 
65,445

 
$
4.12

Total
354,782

 
6.1
 
$
3.21

 
285,628

 
$
3.05

For options unvested at June 30, 2016 , $0.1 million in compensation expense will be recognized over the next 1.4 years.
Common Stock Warrants  
The following table summarizes the Company's common stock warrant activity for the six months ended June 30, 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

 
 
 
 
 
Expired
(55,125
)
 
$
4.08

 
 
 
 
Outstanding, June 30, 2016
1,996,350

 
$
3.44

 
4.4
 
$
109

Vested at June 30, 2016
1,613,017

 
$
3.22

 
3.4
 
$
109


28



The following table summarizes the common stock warrants outstanding and exercisable as of June 30, 2016 :
 
Warrants Outstanding
 
Warrants Exercisable
Exercise Price
Number of Shares
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Vested at June 30, 2016
 
Weighted Average Exercise Price
$0 - $1.99
327,664

 
1.4
 
$
1.56

 
327,664

 
$
1.56

$2.00 - $2.99
335,354

 
2.0
 
$
2.58

 
335,354

 
$
2.58

$3.00 - $3.99
500,355

 
3.3
 
$
3.59

 
500,355

 
$
3.59

$4.00 - $4.99
809,644

 
7.1
 
$
4.39

 
426,311

 
$
4.41

$5.00 - $5.90
23,333

 
6.8
 
$
5.90

 
23,333

 
$
5.90

Total
1,996,350

 
4.4
 
$
3.44

 
1,613,017

 
$
3.22

For warrants unvested at June 30, 2016 , $0.4 million in compensation expense will be recognized over the next 1.5 years.
Restricted Stock
The following table summarizes the Company's restricted stock activity for the six months ended June 30, 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
(94,808
)
 
$
3.01

 
Forfeited
(5,844
)
 
$
2.49

Unvested at June 30, 2016
389,620

 
$
3.47

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 June 30, 2016 , $1.0 million in compensation expense will be recognized over the next 2.4 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).

29



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 $ 1.1 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. For further information, please 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.

The Aria Lease Inducement and Note entered into by the Company create a variable interest that may absorb some or all of a 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 $1.0 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 "Beacon Lease Inducement"). 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, the 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 June 30, 2016 , $0.6 million outstanding principal on the Beacon Note was re-paid in full.

The Beacon Lease Inducement and Beacon Note 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.

Peach Health Group. In connection with the Peach Health Sublease, the Company extended the LOC to Sublessee in an amount of up to $1.0 million , with interest accruing on the unpaid balance under the LOC at a rate of 13.5% per annum. The entire principal amount due under the LOC, together with all accrued and unpaid interest thereunder, shall be due one year from the date of the first disbursement. The LOC is secured by a first priority security interest in Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Sublessee. For further information on the Peach Health Sublease, 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.

The LOC creates 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 affiliates of Peach Health 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, CMS decertified the Jeffersonville and Oceanside Facilities meaning the facilities can no longer accept Medicare or Medicaid patients. For further information, see Note 7 - Leases .

Legal Matters


30



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 patients of the Company's facilities and claims related to professional and general negligence, 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 was 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 were contingent on approval by the probate courts having jurisdiction over the deceased plaintiffs' respective estates, if applicable. As of June 30, 2016 , all of the individual settlement agreements had been approved and the settlement consideration paid to the plaintiffs.

As of June 30, 2016, the Company was a defendant in a total of 19 professional and general liability cases from current or former patients, including 9 cases recently filed in the State of Arkansas by the same plaintiff attorney who represented the plaintiffs in the Amy Cleveland purported class action. The claims generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured while patients of facilities operated by the Company due to professional negligence and/or understaffing. The Company self-insures against these risks and uses a third party administrator and outside counsel to manage and defend the claims. The cases are in various stages of discovery but the Company intends to vigorously litigate the claims.
The Company established a self-insurance reserve for these professional and general liability claims, included within "Accrued expenses and other" in the Company's unaudited consolidated balance sheets of $1.5 million and $0.2 million at June 30, 2016 , and December 31, 2015 , respectively.

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 previously owned 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 June 30, 2016 , the total outstanding principal owed under the loans was approximately $17.9 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 June 30, 2016 , the Company had an outstanding balance of $0.3 million receivable from Mr. Brogdon for a prior promissory note.

NOTE 16.                        SUBSEQUENT EVENTS


31

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 July 28, 2016, the Company completed the sale of one of its unencumbered office buildings located in Roswell, Georgia for $0.2 million . (see Note 10 - Discontinued Operations ).

Letter Agreement with Skyline

On July 14, 2016, the Skyline Lessors entered into the Letter Agreement with Skyline and the Purchaser. The Letter Agreement amended (i) the Purchase Agreement to extend the latest date by which the purchase and sale of the Arkansas Facilities must close from August 1, 2016 to August 31, 2016 and (ii) the Skyline Lease to eliminate the indemnification obligations of the Skyline Lessors to Skyline pursuant to such lease. The Purchaser further agreed to provide evidence of a lender financing commitment with respect to the purchase of the Arkansas Facilities on or before August 10, 2016, which has been provided and acknowledged the Purchaser’s release or waiver of all conditions to the Purchaser’s obligation to complete such purchase.

Lender Commitment to Refinance Debt and Extend Maturities

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, which commitment was extended on August 11, 2016 until November 10, 2016. 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, the expiration of such commitment was extended until November 10, 2016. On March 29, 2016, and subsequently renewed on August 12, 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.

32

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 healthcare facilities to third-party tenants. As of June 30, 2016 , the Company owned, leased, or managed for third parties 38 facilities primarily in the Southeast. The Company currently has the 9 of these facilities located in Arkansas under contract to sell. 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 June 30, 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 June 30, 2016 :
Operator Affiliation
 
Number of
Facilities
 
Beds / Units
Skyline Healthcare (1)
 
9

 
958

Beacon Health Management
 
7

 
585

C.R. Management
 
7

 
830

Wellington Health Services
 
4

 
641

Peach Health Group (1)
 
3

 
252

Symmetry Healthcare
 
3

 
286

Southwest LTC
 
2

 
197

Subtotal
 
35

 
3,749

AdCare Managed
 
3

 
332

Total
 
38

 
4,081


(1)
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.


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Liquidity Overview
 
At June 30, 2016 , we had $3.2 million in cash and cash equivalents as well as restricted cash of $5.0 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 equity securities, including under the ATM. 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 June 30, 2016 , we had $116.0 million in indebtedness of which the current portion is $59.2 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.

During the three and six months ended June 30, 2016 the Company generated positive cash flows and anticipates 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; (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 will be realized. 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. Our ability to raise additional capital through the issuance of equity securities and the terms upon which we are able to raise such capital may be adversely affected if we are unable to maintain the listing of the common stock and Series A Preferred Stock on the NYSE MKT (the “NYSE MKT”). For further information, see the risk factors discussed in Part II, Item 1A. Risk Factors., of this Quarterly Report on Form 10-Q.

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, which commitment expires on November 10, 2016. 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, which commitment expires on November 10, 2016. On March 29, 2016, and subsequently renewed on August 12, 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. Our ability 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, and to extend the maturity dates of the Georgetown and Sumter Credit Facility and the Quail Creek Credit Facility, are subject to the negotiation and execution of definitive agreements with respect to the applicable refinancing or extension and the satisfaction or waiver of the closing conditions to be included therein. There is no assurance that we will be able to refinance, or extend the maturity dates of, the applicable credit facilities on terms that are favorable to us or at all.

On May 10, 2016, the Company executed a purchase and sale agreement to sell the Arkansas Facilities, which will provide a net cash inflow of $22.0 million . There is no assurance that the sale of the Arkansas Facilities will occur on the terms described in this Quarterly Report ( see Note 3 Liquidity and Profitability ) or at all.

As of June 30, 2016, the Company was a defendant in a total of 19 professional and general liability cases, the claims generally seek unspecified compensatory and punitive damages. If we are unable to settle our professional and general liability claims on terms acceptable to us, then it could have a material adverse effect on our business, financial condition and results of operations.

Rent for the Oceanside Facility and the Jeffersonville Facility is $0.4 million and $0.6 million per annum, respectively; provided, however, that rent is only $1 per month for the Oceanside and Jeffersonville Facilities until they are recertified or April 1, 2017, whichever first occurs (the “Rent Commencement Date”). In addition, with respect to the Oceanside and Jeffersonville Facilities, Sublessee is entitled to three months of $1 per month rent following the Rent Commencement Date and, following such three-month period, five months of rent discounted by 50%. In addition, in the event that the Savannah Beach Facility is decertified due

34
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to any previous non-compliance attributable to New Beginnings, rent for such facility will revert to $1 a month until it is recertified along with the other facilities. The annual rent for each of the New Beginnings Facilities will escalate at a rate of 3% each year pursuant to the Peach Health Sublease.Under the terms of the Peach Health Sublease, Sublessee agrees to use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with CMS as soon as possible (see Note 7 Leases). If recertification fails to occur, then it could have an adverse effect on our business, financial condition and results of operations.

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 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   

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 and six months ended June 30, 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. These reclassifications did not affect total assets, total liabilities, or stockholders' equity. Reclassifications were made to the Consolidated Statements of Operations for three and six months ended June 30, 2015 to reflect the same facilities in discontinued operations for both periods presented.
 

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Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2016
 
2015
 
Percent Change
 
2016
 
2015
 
Percent Change
Revenues:
 
 

 
 

 
 

 
 

 
 

 
 

Rental revenues
 
$
6,890

 
$
4,156

 
65.8
 %
 
$
13,739

 
$
5,496

 
150.0
 %
Management fee and other revenues
 
274

 
305

 
(10.2
)%
 
507

 
523

 
(3.1
)%
Total revenues
 
7,164

 
4,461

 
60.6
 %
 
14,246

 
6,019

 
136.7
 %
Expenses:
 
 

 
 

 
 
 
 

 
 

 
 
Facility rent expense
 
2,168

 
1,329

 
63.1
 %
 
4,347

 
1,816

 
139.4
 %
Depreciation and amortization
 
1,339

 
1,798

 
(25.5
)%
 
3,052

 
3,473

 
(12.1
)%
General and administrative expenses
 
2,135

 
2,569

 
(16.9
)%
 
4,677


5,900

 
(20.7
)%
Other operating expenses
 
969

 
119

 
NM

 
1,172

 
221

 
430.3
 %
Total expenses
 
6,611

 
5,815

 
13.7
 %
 
13,248

 
11,410

 
NM

Income (loss) from operations
 
553

 
(1,354
)
 
140.8
 %
 
998

 
(5,391
)
 
118.5
 %
Other expense:
 
 

 
 

 
 
 
 

 
 

 
 
Interest expense, net
 
1,751

 
2,279

 
(23.2
)%
 
3,576

 
4,769

 
(25.0
)%
Loss on extinguishment of debt
 
—

 
—

 
NM

 
—

 
680

 
NM

Other expense
 
9

 
193

 
(95.3
)%
 
51

 
481

 
(89.4
)%
Total other expense, net
 
1,760

 
2,472

 
(28.8
)%
 
3,627

 
5,930

 
(38.8
)%
Loss from continuing operations before income taxes
 
(1,207
)
 
(3,826
)
 
(131.5
)%
 
(2,629
)
 
(11,321
)
 
(76.8
)%
Income tax benefit
 
—

 
—

 
NM

 
—

 
20

 
NM

Loss from continuing operations
 
(1,207
)
 
(3,826
)
 
131.5
 %
 
(2,629
)
 
(11,341
)
 
76.8
 %
(Loss) income from discontinued operations, net of tax
 
(3,775
)
 
(1,537
)
 
NM

 
(4,303
)
 
729

 
NM

Net loss
 
$
(4,982
)
 
$
(5,363
)
 
192.9
 %
 
$
(6,932
)
 
$
(10,612
)
 
115.8
 %

Three Months Ended June 30, 2016 and 2015
Rental Revenues —Total rental revenue increase d by $2.7 million , or 65.8% , to $6.9 million for the three months ended June 30, 2016 , compared with $4.2 million for the same period in 2015 . The increase reflects the completion of the Transition and the resulting increase in leasing of facilities to third-party operators which occurred during the corresponding prior year period. As of June 30, 2016 , we have leased or subleased all of our facilities. As of June 30, 2015 , we had leased fourteen owned and subleased eight leased skilled nursing and rehabilitation facilities and leased one owned assisted living facility to third-party operators. The Company recognizes all rental revenues on a straight line rent accrual basis except with respect to the Aria Subleases (bankruptcy) and Skyline Lease (pending sale of the Arkansas Facilities), for which rental revenue is recognized based on cash amount owed, and the sublease with New Beginnings, for which rental revenue is recognized when cash is received.
Management Fee and Other Revenues —Management revenues were flat at $0.3 million for the three months ended June 30, 2016 , compared with $0.3 million for the same period in 2015 .
Facility Rent Expense —Facility rent expense increase d by $0.8 million or 63.1% , to $2.2 million for the three months ended June 30, 2016 , compared with $1.3 million for the same period in 2015 . The increase is primarily due to: (i) an increase of $0.2 million in rent expense resulting from the transition of leased facilities, lease extensions and amendments entered into subsequent to June 30, 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) $0.6 million of rent expense reported in discontinued operations for the three months ended June 30, 2015 .
Depreciation and Amortization —Depreciation and amortization decrease d by $0.5 million or 25.5% , to $1.3 million for the three months ended June 30, 2016 , compared with $1.8 million for the same period in 2015 . The decrease is primarily due to Arkansas Facilities now classified as held for sale and the subsequent cessation of depreciation expense during the three month period ended June 30, 2015 .
General and Administrative —General and administrative costs decrease d by $0.4 million or 16.9% , to $2.1 million for the three months ended June 30, 2016 , compared with $2.6 million for the same period in 2015 . The net decrease is primarily due to the following: (i) a decrease in salaries, wages and employee benefits expense of approximately $0.4 million, (ii) a decrease in contract services expense of approximately $0.2 million , (iii) a decrease in IT-related expenses of approximately $0.1 million , and (iv) $0.3

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million of expenses reported in discontinued operations, which is offset by (v) an increase in legal expenses of approximately $0.3 million , (vi) an increase in insurance of $0.2 million, and (vii) an increase in accounting expenses of approximately $0.1 million .
Other Operating Expenses —Other operating expense increase d by $0.9 million or 714.3% , to $1.0 million for the three months ended June 30, 2016 , compared with $0.1 million for the same period in 2015 . The increase is due to one time charges of property and bed tax liabilities arising from the bankruptcies of Aria ($0.4 million) and New Beginnings ($0.5 million).
Interest Expense, Net —Interest expense, net decrease d by $0.5 million or 23.2% , to $1.8 million for the three months ended June 30, 2016 , compared with $2.3 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 from Discontinued Operations —The loss from discontinued operations increased by $2.2 million to $3.8 million for the three months ended June 30, 2016 , compared with $1.5 million for the same period in 2015 . The increase is primarily due to increased self-insured reserve and allowance for doubtful accounts.
Six Months Ended June 30, 2016 and 2015
Rental Revenues —Total rental revenue increase d by $8.2 million , or 150.0% , to $13.7 million for the six months ended June 30, 2016 , compared with $5.5 million for the same period in 2015 . The increase reflects the completion of the Transition and the resulting increase in leasing of facilities to third-party operators.
Management Fee and Other Revenues —Management revenues were flat at $0.5 million for the six months ended June 30, 2016 , compared with $0.5 million for the same period in 2015 . The Company no longer recognizes interest on the Aria Lease Inducement which is offset by increases to management fee revenue and asset management fee revenues.
Facility Rent Expense —Facility rent expense increase d by $2.5 million or 139.4% , to $4.3 million for the six months ended June 30, 2016 , compared with $1.8 million for the same period in 2015 . The increase is primarily due to: (i) an increase of $0.5 million in rent expense resulting from the transition of leased facilities, lease extensions and amendments entered into subsequent to June 30, 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) $2.0 million of rent expense reported in discontinued operations for the three months ended March 31, 2015.
Depreciation and Amortization —Depreciation and amortization decrease d by $0.4 million or 12.1% , to $3.1 million for the six months ended June 30, 2016 , compared with $3.5 million for the same period in 2015 . The decrease is primarily due to Arkansas facilities now classified as held for sale and the subsequent cessation of depreciation expense during the six month period ended June 30, 2015 slightly offset by equipment purchases during the first quarter of 2016.
General and Administrative —General and administrative costs decrease d by $1.2 million or 20.7% , to $4.7 million for the six months ended June 30, 2016 , compared with $5.9 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 $0.8 million, (ii) a decrease in salaries, wages and employee benefits expense of approximately $0.6 million and $0.4 million of expenses reported in discontinued operations which is offset by an increase in employee stock-based compensation expense of approximately $0.3 million and an increase in legal expenses of approximately $0.4 million.
Other Operating Expenses —Other operating expense increase d by $1.0 million or 430.3% , to $1.2 million for the six months ended June 30, 2016 , compared with $0.2 million for the same period in 2015 . The increase is due to one time charges of property and bed tax liabilities arising from the bankruptcies of Aria ($0.4 million) and New Beginnings ($0.5 million) and to an increase in debt-related legal expenses of approximately $0.1 million.
Interest Expense, Net —Interest expense, net decrease d by $1.2 million or 25.0% , to $3.6 million for the six months ended June 30, 2016 , compared with $4.8 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 $0.7 million for the six months ended June 30, 2015 , is due to the February 2015 issuance of promissory notes related to the refinancing of certain loan agreements with one of our lenders.
Loss from Discontinued Operations —The loss from discontinued operations increased by $5.0 million to $4.3 million for the six months ended June 30, 2016 , compared with a gain of 0.7 million for the same period in 2015 . The increase is primarily due to increased self-insured reserve and allowance for doubtful accounts.
Liquidity and Capital Resources

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For information regarding the Company's liquidity, 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.

Cash Flows
The following table presents selected data from our consolidated statement of cash flows for the periods presented:
 
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2016
 
2015
Net cash provided (used in) by operating activities - continuing operations
 
$
2,289

 
$
(9,182
)
Net cash (used in) provided by operating activities - discontinued operations
 
(2,252
)
 
505

Net cash provided by (used in) investing activities - continuing operations
 
7,102

 
(6,308
)
Net cash (used in) investing activities - discontinued operations
 
(1
)
 
(8
)
Net cash (used in) provided by financing activities - continuing operations
 
(5,938
)
 
20,007

Net cash (used in) financing activities - discontinued operations
 
(671
)
 
(409
)
Net change in cash and cash equivalents
 
529

 
4,605

Cash and cash equivalents at beginning of period
 
2,720

 
10,735

Cash and cash equivalents at end of period
 
$
3,249

 
$
15,340

 
Six Months Ended June 30, 2016
 
Net cash provided in operating activities—continuing operations for the six months ended June 30, 2016 , was approximately $ 2.3 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 used in operating activities—discontinued operations was approximately $2.3 million as we continue to settle legacy vendor liabilities.
Net cash provided by investing activities—continuing operations for the six months ended June 30, 2016 , was approximately $ 7.1 million . This is primarily the result of a net release in restricted cash deposits of approximately $4.8 million and proceeds from sale of property and equipment of $1.4 million.
Net cash used in financing activities—continuing operations was approximately $ 5.9 million for the six months ended June 30, 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.
Six Months Ended June 30, 2015
 
Net cash used in operating activities—continuing operations for the six months ended June 30, 2015 , was $ 9.2 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 $0.5 million . 
Net cash provided by investing activities—continuing operations for the six months ended June 30, 2015 , was approximately $ 6.3 million . This is primarily the result of a net increase in restricted cash deposits of approximately 5.6 million and capital expenditures of approximately $0.7 million .
Net cash provided by financing activities—continuing operations was approximately $ 20.0 million for the six months ended June 30, 2015 .  This is primarily the result of cash proceeds received from additional debt borrowings and exercises of options and warrants. These sources were offset by repayments of existing debt obligations and payments of preferred and common stock dividends.
Notes Payable and Other Debt

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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

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 $4.0 million at June 30, 2016 and $8.8 million at December 31, 2015 of which $2.7 million and $8.0 million, respectively, related to patient care receivables from our legacy operations.
The allowance for doubtful accounts was $10.7 million and $12.5 million at June 30, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (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 has been no change 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 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 patients of the Company's facilities and claims related to professional and general negligence, 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. Although arising in the ordinary course of the Company’s business, certain of these matters are described below under “Professional and General Liability Claims .”

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 or the Company's tenants, including with respect to the Company's prior operations, 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.

Amy Cleveland Class Action . The Company was 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 in the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit (the “Cleveland Class Action”), which lawsuit was previously disclosed in Part II, Item 1., Legal Proceedings , in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2016, and in Part I. Item 3., Legal Proceedings , in the Annual Report. 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 by which separate payments are to be made by the Company's carrier to the plaintiffs. The individual settlements were contingent upon approval by the probate courts having jurisdiction over the deceased plaintiffs' respective estates, if applicable. During the quarter ended March 30, 2016, all but two of the individual settlement agreements were approved and the settlement consideration paid to the plaintiffs. During the quarter ended June 30, 2016, the remaining two settlement agreements were approved and the settlement consideration paid to the plaintiffs. As of June 30, 2016, the Cleveland Class Action has been fully settled and paid.

Professional and General Liability Claims . As of June 30, 2016, the Company was a defendant in a total of 19 professional and general liability cases from current or former patients, including nine cases recently filed in the State of Arkansas by the same plaintiff attorney who represented the plaintiffs in the Cleveland Class Action. The claims generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured while patients of facilities operated by the Company due to professional negligence and/or understaffing. The Company self-insures against these risks and uses a third-party administrator and outside counsel to manage and defend the claims. The cases are in various stages of discovery but the Company intends to vigorously litigate the claims.
The Company established a self-insurance reserve for these professional and general liability claims, included within "Accrued expenses and other" in the Company's unaudited consolidated balance sheets, of $1.5 million and $0.2 million at June 30, 2016, and December 31, 2015, respectively.


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.


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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. (“NYSE Regulation”) 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 fiscal years. As a result, the Company became subject to the procedures and requirements of Section 1009 of the Company Guide and was required to submit a plan (a “Compliance Plan”) by May 18, 2016 describing the actions the Company has taken or will take to regain compliance with the NYSE MKT’s continued listing standards during the period ending October 18, 2017 (the “Plan Period”).The Company submitted a Compliance Plan by the May 18, 2016 deadline.

On June 2, 2016, the Company received notice from NYSE Regulation that it accepted the Company’s Compliance Plan. During the Plan Period, the Company will be subject to periodic review by NYSE Regulation staff, and the common stock and Series A Preferred Stock will continue to be listed on the NYSE MKT pursuant to an extension granted by NYSE Regulation. If the Company is not in compliance with NYSE MKT continued listing standards by October 18, 2017 or if the Company does not make progress consistent with its Compliance Plan during the Plan Period, then NYSE Regulation staff will initiate delisting proceedings.

We give no assurance that the Company will be able to regain compliance with the applicable NYSE MKT continued listing standards. 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 satisfying 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 is undertaking a review of the strategic alternatives available to the Company, 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.

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If we are unable to settle our professional and general liability claims on terms acceptable to us, then it could have a material adverse effect on our business, financial condition and results of operations.

The Company is a defendant in a total of 19 professional and general liability lawsuits which seek unspecified compensatory and punitive damages from the Company for injuries allegedly sustained by former patients due to the Company's alleged professional negligence and understaffing. The Company self-insures against claims stemming from legacy operations and has no insurance coverage or proceeds to defend these claims or pay a settlement or judgment. The cost of defending the claims and one or more adverse verdicts, should the Company be unable to settle the cases on terms acceptable to the Company, could have a material adverse effect on the Company's business, financial condition and results of operations.
  

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

Not applicable.

Item 3.  Defaults upon Senior Securities.
 
None. 

Item 4.  Mine Safety Disclosures.
 
Not applicable.

Item 5.  Other Information.

Not applicable.


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, dated May 10, 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 Little Ark Realty Holdings, LLC
 
Incorporated by reference to Exhibit 2.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2016
2.2
Letter Agreement, dated July 14, 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, Little Ark Realty Holdings, LLC and Skyline Healthcare 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 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

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Table of Contents



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
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 Registration Statement on 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

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Table of Contents



10.3
Letter Agreement, dated February 23, 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

Filed herewith
10.4
Master Sublease Agreement, dated June 18, 2016, by and among ADK Georgia, LLC, OS Tybee, LLC, SB Tybee, LLC and JV Jeffersonville, LLC
Filed herewith
10.5
Promissory Note, dated July 6, 2016, issued by OS Tybee, LLC, SB Tybee, LLC and JV Jeffersonville, LLC, in favor of AdCare Health Systems, Inc., in the amount of $1,000,000

Filed herewith
10.6
Security Agreement, dated July 6, 2016, by and among ADK Georgia, LLC, OS Tybee, LLC, SB Tybee, LLC and JV Jeffersonville, LLC
Filed herewith
10.7
Letter Agreement, dated July 14, 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, Little Ark Realty Holdings, LLC and Skyline Healthcare LLC
Filed herewith as Exhibit 2.2
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
Furnished herewith

32.2
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
Furnished herewith

101
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Stockholders’ Deficit for the six months ended June 30, 2016 (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015, and (v) the Notes to Consolidated Financial Statements.
Filed herewith

* Identifies a management contract or compensatory plan or arrangement


46
Table of Contents



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:
August 15, 2016
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chairman and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 15, 2016
 
/s/ Allan J. Rimland
 
 
 
Allan J. Rimland
 
 
 
President, Chief Financial Officer and Corporate Secretary (Principal Financial Officer)
 
 
 
 
Date:
August 15, 2016
 
/s/ E. Clinton Cain
 
 
 
E. Clinton Cain
 
 
 
Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

47
Skyline Heathcare LLC    -1-    Exhibit 2.2
Little Ark Realty Holdings, LLC




Valley River Property Holdings, LLC
Homestead Property Holdings, LLC
Park Heritage Property Holdings, LLC
MT. V Property Holdings, LLC
Mountain Top Property Holdings, LCC
Little Rock HC&R Property Holdings, LLC
Woodland Hills HC Property Holdings, LLC
Northridge HC&R Property Holdings, LLC
APH&R Property Holdings, LLC
c/o AdCare Health Systems, Inc
454 Satellite Blvd, Suite 100
Suwanne, GA 30024


July 14, 2016


Joseph Schwartz, Manager
Skyline Heathcare LLC and Little Ark Realty Holdings, LLC
505 Marlboro Road,
Wood-Ridge, NJ 07075

Re:
Amendments to Master Lease and Purchase and Sale Agreement

Dear Mr. Schwartz,

Reference is made to that certain (i) Master Lease dated February 5, 2016 as amended, by and between Skyline Healthcare LLC ("Skyline") and the entities that are signatories to this letter listed below (the "Master Lease"), and (ii) Purchase and Sale Agreement dated May 10, 2016 between Little Ark Realty Holdings, LLC and the entities that are signatories to this letter listed below (the "Purchase Agreement"). Capitalized terms used in this letter which are not otherwise defined shall have the meanings assigned to such terms in either the Master Lease or the Purchase Agreement as applicable based on the context in which the term is used.

This letter shall confirm that the parties have agreed, for good and valuable consideration, the receipt of which is acknowledged, to amend and modify the Master Lease and Purchase Agreement as follows:

Master Lease

The last sentence of Section 20 (indemnity) of the Master Lease, which reads " Landlord shall indemnify Tenant to the extent Tenant incurs fines, penalties or fees from any regulatory entity or agency that oversees the Facilities, or liabilities in the form of a demand for return of funds or claw-back of payments from Medicare or Medicaid payor sources (collectively, "Claims"), which Claims stem from the acts or omissions of the previous tenant of the Facilities occurring prior to April 1, 2016, but only to the extent such Claims exceed $500,000 of actual loss to Tenant and such loss is not otherwise offset by the former tenants receivables " shall be deleted in its entirety and not replaced. Landlord shall have no indemnity obligations to Tenant under the Master Lease.

Skyline Heathcare LLC    -2-    Exhibit 2.2
Little Ark Realty Holdings, LLC




Purchase Agreement

1. The Purchase Agreement shall be amended to change the "Outside Closing Date" from August 1, 2016 to August 31, 2016.

2. Purchasers acknowledge that the Inspection Period has expired and Purchasers have no objections to the condition of the property or title thereto and have released or waived all of Purchaser's contingencies to Closing.

3. On or before August 10, 2016, Purchasers shall provide evidence of a financing commitment from a lender to enable Purchasers to timely close the transaction.

All other terms and condition of the Master Lease and Purchase and Sale Agreement not modified or amended herein shall remain in full force and effect.

To acknowledge Skyline's consent to these amendments and modifications, please countersign this letter in the space designated below and return it to me. Once countersigned by you, this letter shall constitute a binding amendment to the respective agreements.

Valley River Property Holdings, LLC
Homestead Property Holdings, LLC
Park Heritage Property Holdings, LLC
MT. V Property Holdings, LLC
Mountain Top Property Holdings, LCC
Little Rock HC&R Property Holdings, LLC
Woodland Hills HC Property Holdings, LLC
Northridge HC&R Property Holdings, LLC
APH&R Property Holdings, LLC


By:____________________________________
William McBride, Manager of each entity

Agreed as of this 14 th day of July 2016

Skyline Healthcare LLC and
Little Ark Realty Holdings, LLC



By:_____________________________________
Joseph Schwartz, Manager

cc: Allen Koss, Koss & Schonfeld LLP

Skyline Heathcare LLC        Exhibit 10.3
.     -1-    




Valley River Property Holdings, LLC
Homestead Property Holdings, LLC
Park Heritage Property Holdings, LLC
MT. V Property Holdings, LLC
Mountain Top Property Holdings, LCC
Little Rock HC&R Property Holdings, LLC
Woodland Hills HC Property Holdings, LLC
Northridge HC&R Property Holdings, LLC
APH&R Property Holdings, LLC
c/0 AdCare Health Systems, Inc
1145 Hembree Road
Rosewell, GA 30076


February 23, 2016


Via Federal Express

Joseph Schwartz, Manager
Skyline Heathcare LLC
505 Marlboro Road,
Wood-Ridge, NJ 07075

Re:
Amendment to Master Lease


Dear Mr. Schwartz,

Reference is made to that certain Master Lease dated February 5, 2016 by and between Skyline Healthcare LLC and the entities listed below (the "Master Lease"). Capitalized terms used in this letter which are not otherwise defined shall have the meanings assigned to such terms in the Master Lease.

This letter shall confirm that the parties have agreed, for good and valuable consideration the receipt of which is acknowledged, to amend the Master Lease as follows:

1. The references to March 1, 2016 in Sections 1 and 2 of the Lease shall be deleted and replaced with April 1, 2016.

2. The last two sentences of Section 20 (indemnity) shall be deleted in their entirety and replaced with the following:

"Landlord shall indemnify Tenant to the extent Tenant incurs fines, penalties or fees from any regulatory entity or agency that oversees the Facilities, or liabilities in the form of a demand for return of funds or claw-back of payments from Medicare or Medicaid payor sources (collectively, "Claims") which Claims stem from the acts or omissions of the previous tenant of the Facilities

Skyline Heathcare LLC        Exhibit 10.3
.     -2-    




occurring prior to April 1, 2016, but only to the extent such Claims exceed $500,000 of actual loss to Tenant and such loss is not otherwise offset by the former tenant's receivables. "

3. All other terms and conditions of the Master Lease not specifically modified herein shall remain in full force and effect.

To acknowledge Tenant's consent to this amendment, please countersign this letter in the space designated below and return it to me. Thank you for you cooperation in clarifying this issue.


Very truly yours,

Valley River Property Holdings, LLC
Homestead Property Holdings, LLC
Park Heritage Property Holdings, LLC
MT. V Property Holdings, LLC
Mountain Top Property Holdings, LCC
Little Rock HC&R Property Holdings, LLC
Woodland Hills HC Property Holdings, LLC
Northridge HC&R Property Holdings, LLC
APH&R Property Holdings, LLC.



By:
William McBride, Manager of each entity




Tenant concurs as of this 23rd day of February, 2016

Skyline Heathcare LLC

By:
Joseph Schwartz, Manager


Exhibit 10.4

MASTER SUBLEASE AGREEMENT

THIS MASTER SUBLEASE AGREEMENT (this “ Sublease ”) is entered into as of the 18th day of June, 2016 (the “ Execution Date ”) by and among ADK GEORGIA, LLC, a Georgia limited liability company (“ Sublessor ”) and OS TYBEE, LLC , a Georgia limited liability company (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability company (“ SB Tybee ”) and JV JEFFERSONVILLE, LLC , a Georgia limited liability company (“ JV Jeffersonville ”) (OS Tybee, SB Tybee and JV Jeffersonville are sometimes collectively referred to as “ Sublessee ”) for the improved real property described on Exhibit “A-1” and any and all improvements now or hereinafter located on such real property, together with all parking and loading areas, all easements, rights of way, and other rights appurtenant thereto (collectively, the “ Premises ”), on which Premises are located those certain Facilities (as defined below) including the “ Sublessor Personal Property ” associated therewith described on Exhibit “A-2” . Certain capitalized terms used in this Sublease are defined on Exhibit “B” . Each of Sublessor, OS Tybee, SB Tybee and JV Jeffersonville may be referred to as a “Party” hereto, and one or more of such parties may be referred to as “Parties.”

RECITALS

WHEREAS , pursuant to that certain Lease dated August 1, 2010, as amended by that certain First Amendment to Lease dated August 31, 2010, by that certain Second Amendment to Lease dated August 14, 2015 and by that certain Third Amendment to Lease dated October 2015 (as amended, the “ Master Lease ”), Sublessor leased from William F. Foster (“ Landlord ”) the improved real property described in the Master Lease, which improved real property includes the Premises; and
WHEREAS , Sublessor desires to sublease to OS Tybee that certain 85 bed skilled nursing facility located in Tybee Island, Georgia (the “ Oceanside Facility ”); and
WHEREAS , Sublessor desires to sublease to SB Tybee that certain 50 bed skilled nursing facility located in Tybee Island, Georgia (the “ Savannah Beach Facility ”) (collectively with the Oceanside Facility, the “Tybee Facilities”); and
WHEREAS , Sublessor desires to sublease to JV Jeffersonville that certain 131 bed skilled nursing facility located in Jeffersonville, Georgia (the “ Jeffersonville Facility ”);
WHEREAS , the Tybee Facilities and the Jeffersonville Facility are sometimes collectively referred to as the “ Facilities ” and individually as a “ Facility ;
WHEREAS , the Parties intend that this Sublease of the entirety of the three Facilities be a single and inseparable transaction as set forth below, and recognize and acknowledge that the Rent and other provisions attributable to each Facility would have been materially different had the Parties intended to enter into separate transactions;
WHEREAS , Sublessor is taking possession of the Facilities from New Beginnings Care, LLC, a Tennessee limited liability company and its affiliated entities (collectively, “Prior Operator”) which is a debtor in possession in a series of bankruptcy cases jointly administered under the caption In re New Beginnings Care, LLC, et al ., Bankr. E.D. TN Chattanooga Division Case No. 16-10272



Exhibit 10.4

NWW (collectively, the “Bankruptcy Case”), but which rejected the subleases for the Facilities pursuant to the terms of a consent order issued in the Bankruptcy Case which provides for rejection on June 4, 2016; and
WHEREAS, Sublessor desires to sublease the Premises to Sublessee and Sublessee desires to sublease the Premises from Sublessor on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1. Conditions to Effectiveness . This Sublease shall be effective as of the Commencement Date but shall be subject to early termination by any party if, within 30 days of the Effective Date or such later date as the Parties may in the sole discretion of each approve in writing (which may be by email), (i) Landlord has not approved this Sublease, or (ii) Landlord and Sublessee have not entered into a non-disturbance and attornment agreement (" NDA ") in a form substantially similar to the agreement which is attached hereto as Exhibit C. Both Sublessee and Sublessor shall use their best efforts to obtain such executed documents from Landlord within such 30 day period.
2.     Sublease Subordinate to Master Lease . Subject to Section 28 below, this Sublease is subject and subordinate to the Master Lease. As and to the extent hereinafter provided, all applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessee were the lessee under the Master Lease. Unless expressly provided for in this Sublease to the contrary, Sublessee assumes and agrees to perform the Sublessor’s obligations under the Master Lease during the term of this Sublease with respect to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee by virtue of its payments and reimbursements to Sublessor pursuant to this Sublease. Sublessee shall not cause or suffer any act of negligence that will violate any of the provisions of the Master Lease. Subject to the provisions of the NDA, if the Master Lease terminates for any reason, this Sublease shall terminate and the parties shall be relieved from all liabilities and obligations under this Sublease.
3.     Term. .
3.1     Term . This Sublease shall commence on the June 18, 2016 and shall end on August 31, 2027 (the “ Term ”).
3.2     Sublease Year. The first “Sublease Year” for the Jeffersonville Facility shall mean the period commencing on July 1, 2016 and ending on June 30, 2017. The first “Sublease Year” for the Savannah Beach and Oceanside Facilities shall be the first day of the calendar month subsequent to the month in which the Commencement Date, as defined below, for that Facility occurs, and ending 12 months later. Each subsequent Sublease year shall commence on the anniversary date of the first Sublease Year and end 12 months later.
3.3     Commencement Date . The commencement date of the Term for the Jeffersonville Facility shall be the Execution Date of this Lease. The commencement


2
Exhibit 10.4

date for the Savannah Beach Facility and Oceanside Facilities shall be the date and specific time that Sublessor accepts possession of such Facilities from the Prior Operator (such dates for all three Facilities shall be referred to herein as the “Commencement Date” of each Facility).
3.4     Termination Date . “ Termination Date ” shall mean the last day of the Term as defined in Paragraph 3.1 above, or the earlier date on which this Sublease may be terminated as provided herein.
3.5     Termination as to the Jeffersonville and Oceanside Facilities Only . If the Sublease is terminated as to the Jeffersonville and/or Oceanside Facilities as set forth in Section 9.3 below, the Sublease shall otherwise remain in full force and effect, and the Termination Date shall not have occurred, with respect to the remaining Facilities.
4.     Rent . During the Term, Sublessee shall pay in advance to Sublessor on or before the 1 st day of each calendar month the following rent (“ Rent ”):
4.1     Rent/Sublease Year One . During Sublease Year one, Rent shall be as follows:
(a)     The Savannah Beach Facility - - $21,000.00 per calendar month, with a proration of the first partial calendar month’s rent, so that the payment schedule shall be as follows:
i.
     No rent shall be due on the Commencement Date;
ii.    On the first day of the next calendar month, the Sublessee shall pay in arrears the prorated amount due for the first partial month and shall pay in advance the Rent for the then calendar month, i.e., $21,000.
iv.    On the first day of each succeeding month, the Sublessee shall pay $21,000.00 in monthly rent in advance, subject to the increases provided herein.
(b)     Jeffersonville and Oceanside Facilities - -
i.
$1.00 per month beginning on the Commencement Date for each such Facility;
ii.
$26,500.00 per month for the Jeffersonville Facility and $18,000.00 per month for the Oceanside Facility, each to begin on the first day of the third calendar month following that Facility’s certification such that it is eligible for Medicare and Medicaid reimbursement or April 1, 2017, whichever date shall first occur; and


3
Exhibit 10.4

iii.
$53,000.00 per month for the Jeffersonville Facility and $36,000.00 for the Oceanside Facility, each to begin on the month following the fifth month for which the amount for that Facility is due under the subparagraph just above.

(c)
The Savannah Beach Facility – Decertification. In the event, and only in the event, that the Savannah Beach Facility is decertified as set forth in Section 9.3(b) below, then Section 4.1(a) shall not apply on and after the date of decertification, and Rent for the Savannah Beach Facility shall be as follows instead:
(i)     $1.00 per month beginning on the next calendar month after decertification;

(ii)    $10,500.00 per month, to begin on the first day of the third calendar month following Savannah Beach’s recertification such that it is eligible for Medicare and Medicaid reimbursement, or April 1, 2017, whichever date shall first occur; and

(iii) $21,000.00 per month to begin on the month following the fifth month for which the amount of $10,500.00 per month is due under the subparagraph just above.

4.2     Subsequent Sublease Years . The Rent due each Sublease Year for each Facility shall increase by Three percent (3%) over the annualized Rent payable for the immediately preceding Sublease Year. Rent for any Facility in which the Term ends within a calendar month shall be prorated for that last month, and if rent for a full month has already been paid, the Sublessor shall promptly refund or credit the amount due. Notwithstanding anything to the contrary in § 4.1 above, the “annualized Rent payable for the immediately preceding Sublease Year” as used in this § 4.2 means, for the first Sublease Year, $21,000.00 for the Savannah Beach Facility, $36,000.00 for the Oceanside Facility, and $53,000.00 for the Jeffersonville Facility.
4.2     Absolute Net Sublease. All Rent payments shall be absolutely net to Sublessor, free of any and all Taxes (as defined below in Section 7 ), Other Charges (as defined below in Section 7 ), and operating or other expenses of any kind whatsoever, all of which shall be paid by Sublessee, except as otherwise provided in this Sublease. Sublessee shall at all times during the Term remain obligated under this Sublease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind.
4.3     Payment Terms . All Rent and other payments to Sublessor hereunder shall be paid by wire transfer in accordance with Sublessor’s wire transfer instructions to be provided by Sublessor from time to time.


4
Exhibit 10.4

5.     Security Deposit. Upon payment in full of the Note (defined in Section 9.5 below), Sublessee shall deposit with Sublessor and Sublessee shall maintain during the Term an amount equal to one month’s Rent as a security deposit (the “ Security Deposit ”) which Sublessor shall hold as security for the full and faithful performance by Sublessee of every term, provision, obligation and covenant under this Sublease. The Security Deposit shall not be considered an advance payment of Rent (or of any other sum payable by Sublessee under this Sublease) or a measure of Sublessor’s damages in case of a default by Sublessee under this Sublease. Sublessor shall have no obligation to maintain the Security Deposit separate and apart from Sublessor’s general and/or other funds. If Sublessee defaults beyond the applicable notice and/or cure period in respect of any of the terms, provisions, covenants and conditions of this Sublease, Sublessor may, but shall not be required to, in addition to and not in lieu of any other rights and remedies available to Sublessor, apply all or any part of the Security Deposit to the payment of any sum in default, or any other sum that Sublessor may expend or be required to expend by reason of such default, including but not limited to, any damages or deficiency in reletting the Premises. Whenever, and as often as, Sublessor has applied any portion of the Security Deposit to cure any such default beyond the applicable notice and/or cure period hereunder, Sublessee shall, within ten (10) days after Notice from Sublessor, deposit additional money with Sublessor sufficient to restore the Security Deposit to the full amount then required to be deposited with Sublessor, and Sublessee’s failure to do so shall constitute an Event of Default without any further Notice. If Sublessor transfers or assigns its interest under this Sublease, Sublessor shall assign the Security Deposit to the new Sublessor and thereafter Sublessor shall have no further liability for the return of the Security Deposit, and Sublessee agrees to look solely to the new Sublessor for the return of the Security Deposit. Sublessee agrees that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that Sublessor, its successors and assigns may return the Security Deposit to the last Sublessee in possession of the Premises at the last address for which Notice has given by such Sublessee and that Sublessor thereafter shall be relieved of any liability therefor, regardless of one or more assignments of this Sublease or any such actual or attempted assignment or encumbrances of the Security Deposit.

6.     Late Charges . The late payment of Rent or other amounts due under this Sublease will cause Sublessor to lose the use of such money and incur administrative and other expenses not contemplated under this Sublease. While the exact amount of the foregoing is difficult to ascertain, the parties agree that as a reasonable estimate of fair compensation to Sublessor, if Rent or any other amount is not paid within (a) five (5) days after the due date for such payment, then Sublessee shall thereafter pay to Sublessor on demand a late charge equal to five percent (5%) of such delinquent amounts, and (b) thirty (30) days after the due date for such payment, such unpaid amount shall accrue interest from such date at the rate of eight percent (8%) per annum (the “ Agreed Rate ”).
1.     Taxes and Other Charges . Sublessor shall promptly forward to Sublessee copies of all bills and payment receipts for Taxes or Other Charges received by it. Throughout the Term, Sublessee shall pay and discharge (including the filing of all required returns), prior to delinquency or imposition of any fine, penalty, interest or other cost (“ Penalty ”), (a) “ Taxes ”, consisting of any real property and other taxes and assessments levied or assessed with respect to the Premises (excluding income taxes, franchise taxes, estate taxes, transfer taxes and/or gross receipts taxes that may be imposed upon Sublessor), and (b) “ Other Charges ”, consisting of any utilities and other costs and expenses of the Facilities or any portion of the Premises and all other


5
Exhibit 10.4

charges, obligations or deposits assessed against any portion of the Premises during the Term. Sublessee shall pay the foregoing prior to delinquency and before any Penalty, but may pay the foregoing in permitted installments (whether or not interest accrues on the unpaid balance). Within ten (10) days of its receipt of Sublessor’s written notice of payment, Sublessee shall pay Sublessor an amount equal to any Taxes or Penalty that Sublessor at any time is assessed or otherwise becomes responsible and for which Sublessee is liable under this Sublease. However, nothing in this Sublease shall obligate Sublessee to pay penalties incurred as a result of Sublessor’s failure to timely forward bills to Sublessee.
1.1     Protests . Sublessee has the right, but not the obligation, in good faith to protest or contest (a “ Protest ”) in whole or in part (a) the amount or payment of any Taxes or Other Charges, and (b) the existence, amount or validity of any Lien (as defined in Section 10 ), by appropriate proceedings sufficient to (i) prevent the collection or other realization of such Taxes, Other Charges or Liens, or (ii) prevent the sale, forfeiture or loss of any portion of the Premises, or (iii) prevent the forfeiture of Rent to satisfy such Taxes, Other Charges or Liens. If Sublessee commences a Protest, Sublessee shall diligently prosecute any such Protest at its sole cost and expense and pay such Taxes, Other Charges or Lien. Sublessor shall cooperate in any Protest that involves an amount assessed against the Premises.

1.2     Impound . During the Term, Sublessee shall pay with each Base Rent payment a deposit of one-twelfth (1/12 th ) of the amount required to discharge the annual amount of real property Taxes encumbering any portion of the Premises as and when they become due (“ Impound Payments ”). The deposits shall not bear interest nor be held by Sublessor in trust or as an agent of Sublessee, but rather shall be applied to the payment of the related obligations. If at any time within thirty (30) days prior to the due date the deposits shall be insufficient for the payment of the obligation in full, Sublessee shall within ten (10) days after demand deposit the deficiency with Sublessor. If deposits are in excess of the actual obligation, the required monthly deposits for the ensuing Sublease Year shall be reduced proportionately and any such excess as of the Termination Date shall be refunded to Sublessee. Sublessee shall forward to Sublessor or its designee all Tax bills, bond and assessment statements promptly upon receipt. If Sublessor transfers this Sublease, it shall transfer all such deposits to the transferee, and Sublessor shall thereafter have no liability of any kind with respect thereto.
2.     Insurance . Sublessee shall provide and maintain at its expense during the Term, all insurance required under the Master Lease. Such insurance shall (i) be maintained under valid and enforceable policies issued by insurers licensed and approved to do business in the state of Georgia, (ii) name Sublessor as an additional insured, (iii) be on an “occurrence” basis, or if claims made, include a provision whereby tail coverage costs are specified upon policy inception, (iv) cover all of Sublessee’s operations at the Facilities, (v) provide that the policy may not be canceled except upon not less than thirty (30) days’ prior written notice to Sublessor and (vi) be primary and provide that any insurance with respect to any portion of the Premises maintained by Landlord is excess and noncontributing with Sublessee’s insurance. The property policy(ies) shall also name the Sublessor, Landlord and Landlord’s lenders as loss payees; provided, however, that (a) all proceeds from any property insurance shall be made available to Sublessee to make repairs or replacements to the Facilities, and (b) all insurance proceeds related to equipment break-down shall be paid directly to Sublessee so that Sublessee


6
Exhibit 10.4

can use such proceeds to repair the applicable equipment. Sublessee hereby waives as to Sublessor all rights of subrogation which its insurance carriers may have by reason of any provision in any policy issued to it, provided such waiver does not thereby invalidate such policy. Insurer certificates evidencing the existence of the insurance required by this Sublease and showing the interest of Sublessor, Landlord and Landlord’s lenders shall be provided to Sublessor prior to the Commencement Date or, for a renewal policy, not less than ten (10) days prior to the expiration date of the insurance policy being renewed. If Sublessor is provided with a certificate, it may demand that Sublessee provide a complete copy of the related policy within thirty (30) days. Notwithstanding any provision in the Master Lease to the contrary, Sublessee shall provide, at is expense, “all risk” property insurance coverage for the full replacement value of the Facilities which replacement value amounts shall be provided by Sublessor to Sublessee from time to time. The deductible for such coverage shall not be greater than Twenty-five Thousand Dollars ($25,000.00). Sublessee shall also provide business interruption insurance for loss of rental value for a period of not less than twelve (12) months and providing that any covered loss under such policy shall be payable to Sublessor.
9.     Use, Regulatory Compliance and Preservation of Business .
9.1     Permitted Use; Qualified Care . Sublessee shall continuously use and occupy the Facilities during the Term as a skilled nursing facilities with not less than the number of licensed beds set forth in the Recitals hereto and for ancillary services relating thereto, but for no other purpose except that with respect to the Jeffersonville and Oceanside Facilities, Sublessee shall only be required to provide services to a limited number of residents (as set forth in its Recert Plan) at either such Facility until such time that such Facility is formally recertified. Sublessee shall provide care, treatment and services to all residents of the Facilities in a manner consistent with all applicable laws and in a manner consistent with the highest standard in the industry for the geographical region in which the Facilities are located. Notwithstanding any common law or statutory right, Sublessee agrees not to transfer, move or otherwise take action that reduces the licensed bed complement of the Facilities and Sublessee agrees not to take any action or fail to take any action which would cause the number of licensed beds to decrease or move to a different location.
9.2     Regulatory Compliance . During the Term, Sublessee, the Facilities and the Premises shall comply in all material respects with all licensing and other laws and all covenants, conditions, restrictions and other use or maintenance requirements applicable to the Facilities. To the extent applicable, Sublessee shall comply in all material respects with all Medicare, Medicaid and other third-party payor certification requirements, including timely filing properly completed cost and other required reports, timely paying all expenses shown thereon, and ensuring that the Facilities continue to be fully certified for participation in Medicare and Medicaid (if applicable) throughout the Term and when they are returned to Sublessor, all without any suspension, revocation, decertification or other material limitation of such certification. Further, Sublessee shall not commit any act or omission that would in any way materially violate any certificate of occupancy affecting the Facilities, result in closure of the Facilities or result in the sale or transfer of all or any portion of any related certificate of need (if applicable), bed rights or other similar certificate or license at the Facilities. During the Term, all inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Sublessee. Notwithstanding anything to the contrary contained in this Sublessee, Sublessee shall have the right to protest or appeal any licensing


7
Exhibit 10.4

and other laws and all covenants, conditions, restrictions and other use or maintenance requirements applicable to the Facilities and, to the extent applicable, all Medicare, Medicaid and other third-party payor certification requirements. Sublessor agrees to cooperate with Sublessee provided that Sublessor does not incur any out-of-pocket expenses in connection therewith that are not reimbursed by Sublessee.
9.3     Recertification of Facilities .
(a)    General. Sublessee shall use its best efforts to pursue recertification of the Jeffersonville and Oceanside Facilities with the Center for Medicare and Medicaid Services ("CMS") as soon as possible. Sublessee shall create an operating plan for such recertification to include a time table and estimate of funds required from Sublessor for each of such Facility (the “ Recert Plan(s) ”) and submit them to Sublessor for approval within sixty (60) days of the Commencement Date. Sublessor acknowledges that the Recert Plans will require Sublessor to pay for all of the capital expenditures set forth in the Recert Plans; however, Sublessor reserves the right to decline to make some or all of the expenditures in the Recert Plans. If Sublessor declines to make any of the requested payments and Sublessee declines to pay for the improvements itself or if Sublessor and Sublessee are otherwise unable to reach agreement on a final Recert Plan for either Facility, as evidenced by their mutual execution thereof, either Sublessor or Sublessee, shall have the right to terminate this Sublease, as to the Facility for which they were unable to reach agreement on a Recert Plan only, on ten (10) days written notice. In such case, this Sublease shall remain in full force and effect as to the Savannah Beach Facility and, if applicable, the Facility for which the parties reached agreement on a Recert Plan but the Working Capital LOC (as defined in Section 9.5 below) shall be reduced to $500,000.00 for each Facility which is removed from the Lease. If, after a Recert Plan is approved, Sublessee determines that the cost of capital improvements required by CMS for recertification materially exceeds the amount set forth in the Recert Plan, and such additional costs could not reasonably have been foreseen at the time the Recert Plan was created ("Additional Capital Expenses"), Sublessee shall so notify Sublessor and Sublessor, in its sole discretion, may pay for such additional capital improvement expense. If Sublessor declines to pay for the cost of such Additional Capital Expenses, or at least an amount sufficient so that the Additional Capital Expense is not material to the overall cost of the project, Sublessee may terminate this Agreement as to the applicable Facility requiring Additional Capital Expenses only, on 30 days' notice. In no event shall Sublessor be responsible for any additional operational or administrative costs or expenses associated with the recertification process, other than any Additional Capital Expense which it approves, and Sublessee acknowledges it assumes all risks therefor.
(b) Savannah Beach Decertification . Notwithstanding anything else contained herein to the contrary, in the event that the Savannah Beach Facility is decertified after the Commencement Date for such Facility due to any pending failure by the Prior Operator to operate in substantial compliance with applicable regulations, then Lessee shall promptly vacate the Savannah Beach Facility and propose a Recert Plan for the Facility within 60 days of the decertification.
(i) If Sublessor and Sublessee are able to reach agreement on a final Recert Plan for the Savannah Beach Facility, as evidenced by their mutual execution thereof, Rent for the Savannah Beach Facility shall be payable as set forth in Section 4.1(c) above.


8
Exhibit 10.4

(ii) If Sublessor and Sublessee are not able to reach agreement on a final Recert Plan for the Savannah Beach Facility, then either party shall have the right to terminate this Sublease as to that Facility as provided in this section 9.3 in which case this Sublease shall remain in full force and effect for the other Facilities.
9.4     Bed Taxes. Sublessor shall be responsible for payment of all outstanding bed/provider taxes to the State of Georgia which relate to the operation of the Facilities prior to the Commencement Date. Sublessee shall use its reasonable best efforts to negotiate a reduction in the total provider fee payment obligation and a payment agreement with the State of Georgia. Sublessee shall involve Sublessor in all discussion, communications and negotiations with the State regarding this issue and any payment agreement must be approved in advance by Sublessor. Sublessor agrees to reimburse Sublessee for any amounts recouped by the State of Georgia relating to bed/provider taxes for any periods prior to the Commencement Date within ten (10) business days of written notice thereof. In addition, Sublessee shall cooperate with Sublessor as Sublessor may request in making an administrative claim against the estate of the Prior Operator in an amount equal to the Bed Taxes that Sublessor pays or reimburses to Sublessee hereunder.
9.5     Working Capital Line of Credit . Subject to reduction in the principal amount available as provided in Section 9.3 above, Sublessee's parent corporation, AdCare Health Systems, Inc., a Georgia corporation (“ ADK ”) shall provide to Sublessee a working capital line of credit of up to $1,000,000.00 (the “ Working Capital LOC ”). Sublessee may use the Working Capital LOC for its operations at all Facilities (including the recertification of the Jeffersonville and Oceanside Facilities). The Working Capital LOC will be available in five (5) draws and interest will accrue and be paid on the outstanding balance. The Working Capital LOC will be evidenced by a promissory note in favor of ADK (the “ Note ”) a form of which is attached hereto as Exhibit F (the "Promissory Note"). The Note will be secured by a first priority security interest in Sublessee’s assets and accounts receivable pursuant to a Security Agreement which the parties will execute concurrent with execution of the Promissory Note, a form of which is attached hereto as Exhibit G (the "Security Agreement"). If Sublessee is ever in default under this Sublease, the Security Agreement or Promissory Note, regardless of whether Sublessee subsequently cures such default, Sublessor may require Sublessee to immediately establish a control account or double lock box sweep account as collateral for the Note until paid in full (" Deposit Control Agreement "), a form of which is attached hereto as Exhibit H, and Sublessee agrees to execute such Deposit Control Agreement and cause its bank to do the same. Upon payment in full of the Note, ADK will release its security interest in Sublessee’s assets and accounts.
10.     Repairs, Improvements, Capital Expenditures and Environmental .
10.1     Repairs and Improvements . Except as defined in section 10.2 below , Sublessor shall not be required to make any repairs or improvements to the Premises. Sublessee shall make no alterations in, or additions to, any Facility in excess of twenty-five thousand dollars ($25,000) without first obtaining, in writing, Sublessor's consent for such alterations or additions. All such alterations or additions shall be at the sole cost and expense of Sublessee and shall become a part of the Premises. Sublessee covenants and agrees that it will take good care of the Premises, its fixtures and appurtenances, and suffer no waste or injury thereto and keep and maintain same in good and clean condition, reasonable wear and tear excepted. Sublessee shall be liable for and


9
Exhibit 10.4

shall indemnify and hold Sublessor harmless in respect of any claims, liabilities, actions, damage, or injury to Sublessor, the Premises, and property or persons of anyone else, if due to wrongful act or negligence of Sublessee, or Sublessee's agents, employees, licensees or invitees. With respect to work, services, repairs, repainting, restoration, the provision of utilities or HVAC services, or the performance of other obligations required of Landlord under the Master Lease, Sublessor shall, at the written request of Sublessee, request the same from Landlord and use reasonable efforts to obtain the same from Landlord at Sublessee’s expense. Sublessee shall reasonably cooperate with Sublessor as may be required to obtain from Landlord any such work, services, repairs, repainting restoration, the provision of utilities or HVAC services, or the performance of any of Landlord’s other obligations under the Master Lease with respect to the Premises.
10.2     Capital Expenditures . Promptly following the Commencement Date for the Savannah Beach Facility and acknowledgement from the GDCH that the Facility is in substantial compliance, Sublessee shall begin construction on the capital improvements for the Savannah Beach Facility as described on Schedule 10.2 attached hereto. Once the work is commenced, Sublessee shall complete such capital improvements within the time frames and using the contractors as the Sulessor and Sublessee may mutually agree. Sublessor shall be solely responsible for the costs of such capital improvements in an amount not to exceed the amounts set forth on such schedule and shall pay the contractors directly for the costs subject to its obtaining customary evidence of work completion and lien releases. . Upon obtaining the required evidence of work completion and lien releases, Sublessor shall not cause a delay in any payment that causes a delay in work completion.
10.3     Hazardous Materials . Sublessee’s use of the Premises shall comply in all material respects with all Hazardous Materials Laws. If any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws by Sublessee during the Term or if Sublessee has received written notice of any Hazardous Materials Claim against any portion of the Premises as a result of Sublessee’s acts or omissions during the Term, Sublessee shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Sublessor’s approval of the remediation plan, remedy any such problem to the reasonable satisfaction of Sublessor and all applicable governmental authorities, in accordance with all Hazardous Materials Laws and good business practices. During the Term, Sublessee shall promptly advise Sublessor in writing of (a) any Environmental Activities in violation of any Hazardous Materials Laws; (b) any Hazardous Materials Claims against Sublessee or any portion of the Premises; (c) any remedial action taken by Sublessee in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about any portion of the Premises in violation of any Hazardous Materials Laws; (d) Sublessee’s discovery of any occurrence or condition on or in the vicinity of any portion of the Premises that materially increase the risk that any portion of the Premises will be exposed to Hazardous Materials; and (e) all written communications to or from Sublessee, any governmental authority or any other Person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to any portion of the Premises, including copies thereof. Sublessor shall have the right, at Sublessee’s sole cost and expense (including, without limitation, Sublessor’s reasonable attorneys’ fees and costs) and with counsel chosen by Sublessor, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims.


10
Exhibit 10.4

1.     Sublessee Personal Property . Sublessee may bring his own articles of personal property to the Premises for use and Sublessee shall have the right to remove any such personal property from the Premises provided that Sublessee, at its expense, shall repair any damages to the Premises caused by such removal or by the original installation thereof.
2.     Financial, Management and Regulatory Reports . In addition to any reports required under the Master Lease, Sublessee shall provide Sublessor with the reports listed in Exhibit “D” at the time described therein, and such other information about it or the operations of the Facilities as Sublessor may reasonably request from time to time, including such information requested in connection with any financing of the Premises sought by Sublessor. All financial information provided by Sublessee shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be submitted electronically in the form of unrestricted, unlocked “.xlsx” spreadsheets created using Microsoft Excel (2003 or newer editions). Similarly, should Sublessor or its parent, AdCare Health Systems, Inc., be subject to any particular reporting requirements of the Securities Exchange Commission during the Term for which it needs reports, documentation or other information from Sublessee, Sublessee agrees to deliver such reports, documentation and information within ten (10) days after Sublessor’s request for the same. Sublessor shall comply with all requirements of applicable law with respect to any such information provided by Sublessee, including, without limitation, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations as amended by the Health Information Technology for Economic and Clinical Health Act (“HIPAA”). Sublessee shall provide copies of all reports required under the Master Lease to Sublessor and to Lessor.
3.     Representations and Warranties . Sublessor and Sublessee each represents and warrants to the other that: (a) this Sublease and all other documents executed or to be executed by it in connection herewith have been duly authorized and shall be binding upon it; (b) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform this Sublease within the states where the Facilities are located; and (c) neither this Sublease nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party and will not result in a breach of or default by Sublessor under any term or provision of any law, order, writ, decree, contract, agreement or other instrument to which the party is a party or to which the party or any Facility is subject.
4.     Events of Default . So long as there is no Event of Default, Sublessee shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Sublessee or pursuant to Sections 16 or 17 . The occurrence of any of the following events will constitute an “ Event of Default ” on the part of Sublessee, and there shall be no cure period therefor except as otherwise expressly provided:


11
Exhibit 10.4

(a)     Sublessee’s failure to pay within five (5) days of when due any Rent, Taxes, Other Charges, Impound Payments or other required payments;
(b)     Sublessee's default under the Note, Security Agreement or the Deposit Control Agreement;
(c)     (i) The revocation, suspension or termination of any material license held by Sublessee required for the operation of the Facilities or the certification of the Facilities for provider status under Medicare or Medicaid, if applicable (ii) the closure of the Facilities (except with respect to the time required to make any required repairs or to make any Alterations); (iii) the sale or transfer by Sublessee of all or any portion of any certificate of need, bed rights or other similar certificate or license relating to the Facilities; or (iv) the use of any portion of the Facilities other than for skilled nursing facilities and for ancillary services relating thereto;

(d)     Sublessee’s failure to perform or comply with the provisions of the Master Lease after expiration of the applicable cure period, if any;
(e)     (i) Sublessee shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment of all or substantially all of its property for the benefit of creditors; or (ii) a receiver, trustee or liquidator shall be appointed for Sublessee or its property, if not discharged within sixty (60) days after the date of such appointment; (iii) the filing by Sublessee of a voluntary petition under any federal bankruptcy or state law to be adjudicated as bankrupt or for any arrangement or other debtor’s relief; or (iv) the involuntary filing of such a petition against Sublessee by any other party, unless dismissal is diligently prosecuted and such petition is dismissed within sixty (60) days after filing;

(f)     Sublessee’s failure to perform or comply with any provision of this Sublease not requiring the payment of money unless remedied within ten (10) days after such notice from Sublessor or if such default cannot with due diligence be so cured because of the nature of the default or delays beyond the control of Sublessee and such additional time does not jeopardize Sublessee's authority to operate Facilities, then such default shall not constitute an Event of Default if Sublessee uses its commercially reasonable efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof;
(g)     The receipt by Sublessee of a citation from the Georgia Department of Community Health (“ DCH ”) or from CMS indicating any Facility is not in substantial compliance with CMS' requirements of participation for any Facility which Sublessee does not promptly and fully address and remedy to Sublessor’s reasonable satisfaction; or


12
Exhibit 10.4

(h)     Except as provided in Section 9.4 above, Sublessee’s failure to pay when due any outstanding provider tax (“ Bed Tax ”) payments that it is required to make with respect to its operations of the Facilities unless such Bed Tax is immediately paid, along with any penalties or late fees, once the deficiency is brought to Sublessee's attention.
5.     Remedies . Upon the occurrence of an Event of Default, Sublessor may exercise all rights and remedies under this Sublease and the laws of the State of Georgia that are available to a Sublessor of real and personal property in the event of a default by its Sublessee, and as to the Sublessee Property, all remedies granted under the laws of such state to a secured party under its Uniform Commercial Code. Sublessor shall use commercially reasonable efforts to mitigate damages, however, Sublessor shall not be responsible or liable for any failure to relet the Premises or to collect any rent due upon any such reletting notwithstanding such commercially reasonable efforts. Upon the occurrence of an Event of Default, Sublessee shall pay Sublessor, promptly upon demand, all reasonable expenses incurred by it in obtaining possession and reletting any of the Premises, including reasonable fees, commissions and costs of attorneys, architects, agents and brokers.

5.1     General . Without limiting the foregoing, Sublessor shall have the right (but not the obligation) to do any of the following upon an Event of Default: (a) sue for the specific performance of any covenant of Sublessee as to which it is in breach; (b) enter upon any portion of the Premises, terminate this Sublease, dispossess Sublessee from the Premises through appropriate legal procedures and/or collect money damages by reason of Sublessee’s breach, including pursue its rights with respect to all obligations and liabilities of Sublessee under this Sublease which survive the termination of the Term; (c) elect to leave this Sublease in place and sue for Rent and other money damages as the same come due; (d) (before or after repossession of the Premises pursuant to clause (b) above and whether or not this Sublease has been terminated) relet any portion of the Premises to such Sublessee(s), for such term(s) (which may be greater or less than the remaining balance of the Term), rent, conditions (which may include concessions or free rent) and uses as it may determine in its sole discretion and collect and receive any rents payable by reason of such reletting, (e) pursue the remedies set forth in Section 15.2 below.
5.2     Transition of Operations to Sublessor . Commencing on the date of the Event of Default, Sublessor or its designee, upon written notice to Sublessee, may elect to assume operation of the Facilities and Sublessee agrees to use its best efforts to fully accomplish the transfer of such management and operation without interrupting the operation of the Facilities. Sublessee shall immediately take all actions to effect a change of ownership ("CHOW") on an expedited basis if possible including but not limited to assigning its license and its Medicare and Medicaid provider numbers and agreements to Sublessor or its designee to enable Sublessor or its designee to operate the Facilities to the extent allowed by law. Sublessee shall further use its best efforts to avoid jeopardizing any then existing licensure or certification of the Facilities, and Sublessee shall, at no cost to Sublessee, comply with all requests for an orderly CHOW and transfer of any and all licenses, Medicare and Medicaid certifications and possession of the Premises. Sublessee agrees to execute and deliver a usual and customary operations transfer agreement (“ OTA ”) in favor of Sublessor or its designee and any other


13
Exhibit 10.4

documents required in connection with the change of operators at the Facilities. If Sublessee fails to execute an OTA, the CHOW documents or assign its provider agreements and certifications, an officer of Sublessor may act as Sublessee's authorized representative to execute such documents on behalf of Sublessee to the extent allowed by applicable law.
5.3     Remedies Cumulative; No Waiver . No right or remedy herein conferred upon or reserved to Sublessor or Sublessee is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. Any notice or cure period provided herein shall run concurrently with any provided by applicable law. No failure of Sublessor or Sublessee to insist at any time upon the strict performance of any provision of this Sublease or to exercise any option, right, power or remedy contained herein shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Sublessee or Sublessor, as applicable. Sublessor’s receipt of and Sublessee’s payment of any Rent or other sum due hereunder (including any late charge) with knowledge of any breach shall not be deemed a waiver of such breach, and no waiver by Sublessor of any provision of this Sublease shall be effective unless expressed in a writing signed by it.
5.4     Performance of Sublessee’s Obligations . If Sublessee at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Sublease and not remedy the same within the applicable notice and/or cure period, then Sublessor may, without waiving or releasing Sublessee from any obligations or default hereunder, make such payment or perform such act for the account and at the expense of Sublessee, and enter upon any portion of the Premises for the purpose of taking all such action as may be reasonably necessary. No such entry shall be deemed an eviction of Sublessee. All sums so paid by Sublessor and all necessary and reasonable incidental costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the performance of any such act by it from the date of the making of such payment or the incurring of such costs and expenses, shall be payable by Sublessee to Sublessor upon Sublessor’s written demand therefor.
5.5     Equitable Relief . If Sublessee breaches any portion of this Section 15, Sublessee agrees that: (i) Sublessor would suffer irreparable harm; (ii) it would be difficult to determine damages, and money damages alone would be an inadequate remedy for the injuries suffered by Sublessor; and (iii) if Sublessor seeks injunctive relief to enforce this Section 15, Sublessee shall waive and shall not (a) assert any defense that Sublessor has an adequate remedy at law with respect to the breach or (b) require Sublessor to post a bond or any other security. Nothing contained in this Agreement shall limit Sublessor’s right to any other remedies at law or in equity.
6.     Provisions on Termination .
6.1     Surrender of Possession . On the Termination Date, Sublessee shall deliver to Sublessor or its designee possession of (a) the Facilities in a neat and clean condition and in as good a condition as existed at the date of Sublessee’s possession and occupancy pursuant to this Sublease, ordinary wear and tear casualty and acts of God excepted, (b) a fully


14
Exhibit 10.4

operational, licensed and certified (if applicable) business at the Facilities including, at Sublessee’s sole cost, any alterations required to be made prior to the termination of this Sublease, including any alterations required in connection with a change of ownership inspection survey for the transfer of operation of any portion of the Premises to Sublessor or its designee, and (c) all patient charts and resident records along with appropriate resident consents if necessary and copies of all of its books and records relating to the Facilities and the Premises. Accordingly, Sublessee shall not at any time during or after the Term seek to transfer, surrender, allow to lapse, or grant any security interest or any other interest in and to the licenses, permits or certifications relating to the Facilities or the Premises, nor shall Sublessee commit or omit any act that would jeopardize the Facilities or any licensure or certification of the Facilities. Sublessee shall, at no cost to Sublessee, cooperate fully with Sublessor or its designee in transferring or obtaining all necessary licenses and certifications for Sublessor or its designee, and Sublessee shall comply with all reasonable requests for an orderly transfer of the Facilities licenses, and Medicare and Medicaid certifications and possession at the time of its surrender of the Premises to Sublessor or its designee to operate the Facilities. Subject to all applicable laws, Sublessee hereby assigns, to the extent assignable, effective upon the Termination Date, all rights to operate the Facilities to Sublessor or its designee, including all required licenses and permits and all rights to apply for or otherwise obtain them relating to any portion of the Premises.
6.2     Holding Over . If Sublessee shall for any reason remain in possession of the Premises after the Termination Date without Sublessor’s consent, such possession shall be a month-to-month tenancy during which time Sublessee shall pay as rental on the first (1 st ) business day of each month one hundred twenty-five percent (125%) of the monthly Rent payable with respect to the last Sublease Year, plus all additional charges accruing during the month and all other sums, if any, payable by Sublessee pursuant to this Sublease. Nothing contained herein shall constitute the consent, express or implied, of Sublessor to the holding over of Sublessee after the Termination Date, nor shall anything contained herein be deemed to limit Sublessor’s remedies. In the event that as of the Termination Date Sublessor does not have a replacement operator to operate all of the Facilities effective as of the Termination Date, and Sublessee continues to operate the Facilities after the Termination Date until a replacement operator is permitted under applicable law to operate the Facilities, the Rent for such period of time after the Termination Date shall equal fifty percent (50%) of the monthly Rent payable with respect to the last Sublease Year.
6.3     Survival . All representations, warranties, covenants and other obligations of Sublessee and Sublessor under this Sublease shall survive the Termination Date.
7.     Certain Sublessor Rights .
7.1     Entry and Examination of Records . Sublessor and its representatives may enter any portion of the Premises with a representative designated by Sublessee at any reasonable time after at least forty-eight (48) hours’ written notice to Sublessee to inspect the Premises for compliance or for any other reason; provided that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanics’ or materialmans’ lien law. No such entry shall unreasonably interfere with residents, patients, patient care or the Sublessee’s operations of the Facilities, and Sublessor shall


15
Exhibit 10.4

not contact or communicate with any of Sublessee’s employees at any time when Sublessor or its representatives are at the Premises. Sublessor and its representatives shall abide by all rules and regulations governing nursing facilities during any time when they are at the Premises. During normal business hours, Sublessee will permit Sublessor and its representatives, inspectors and consultants to examine all contracts, books and financial and other records at Sublessee’s offices relating to Sublessee’s operations of the Facilities.
7.2     Grant Liens . This Sublease shall be subordinate to the right, title, and interest of any lender or other party holding a security interest in or a lien upon the Premises under any and all mortgage instruments or deeds to secure debt presently encumbering the Premises or the Facilities and to any and all other deeds to secure debt or mortgage instruments hereafter encumbering the Premises or the Facilities. Sublessee shall at any time hereafter, on demand of Landlord, Sublessor or the holder of any such deed to secure debt or mortgage instrument, execute any instruments which may reasonably be required by such party for the purpose of evidencing the subordination of this Sublease to the lien or security of such party. Sublessee shall, upon demand, at any time or times, execute, acknowledge, and deliver to Landlord, Sublessor or the holder of any such instruments or deeds to secure debt, without expense, any and all documents that may be reasonably necessary to make this Sublease superior to the lien of any of the same. If the holder of any of said instruments or deeds to secure debt shall hereafter succeed to the rights of Sublessor under this Sublease, Sublessee shall, at the option of such holder or a purchaser at any foreclosure or sale under power, attorn to and recognize such successor as Sublessor under this Sublease. Sublessee shall promptly execute, acknowledge, and deliver any instrument that may be reasonably necessary to evidence such attornment.
7.3     Estoppel Certificates . Sublessor and Sublessee shall, at any time upon not less than ten (10) business days’ prior written request by the other party, have an authorized representative execute, acknowledge and deliver to Landlord, Sublessor or Sublessee, as the case may be, or their designee a written statement certifying (a) that this Sublease, together with any specified modifications, is in full force and effect, (b) the dates to which Rent and additional charges have been paid, (c) to the party’s knowledge, that no default by either party exists or specifying any such default, and (d) as to such other matters as Landlord, Sublessor or Sublessee, as the case may be, may reasonably request.
7.4     Conveyance Release . If Landlord or any successor owner shall sell or transfer any portion of the Premises, they shall thereafter be released from all future liabilities and obligations hereunder first arising or accruing from and after the date of such conveyance or other transfer, which instead shall thereupon be binding upon the new owner.
8.     Assignment and Subletting .
8.1     Except as otherwise expressly permitted in this Sublease, without Sublessor’s prior written consent, Sublessee shall not assign this Sublease, or sublease all or any part of the Premises, or permit the use of the Premises by any party other than Sublessee. This prohibition includes an assignment or subletting to or by a receiver or trustee in any federal or state bankruptcy, insolvency, or other proceeding. For purposes of this Section, a sale or transfer


16
Exhibit 10.4

of all or a controlling ownership interest in Sublessee or a merger or other combination by Sublessee or a sale of all or substantially all of Sublessee’s assets in lieu thereof shall be deemed an assignment or other transfer of this Sublease.
9.     Damage by Fire or Other Casualty .
9.1     Damage by Fire or Other Casualty . Sublessee shall promptly notify Sublessor of any damage or destruction of any portion of the Premises and diligently repair or reconstruct such portion of the Premises to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be paid directly to Sublessor and, if an Event of Default has not occurred hereunder, shall be used for the repair or reconstruction of the applicable portion of the Premises. If such proceeds are insufficient, Sublessee shall provide the required additional funds; provided, however, that if the damage or destruction occurs during the final year of the Sublease through no fault of Sublessee, Sublessee may elect to terminate the Sublease on thirty (30) days notice provided it remits all insurance proceeds and rental value insurance to Sublessor. Sublessee shall contribute an amount equal to the applicable deductible under the property insurance coverage. Sublessee shall not have any right under this Sublease, and hereby waives all rights under applicable law, to abate, reduce or offset Rent by reason of any damage or destruction of any portion of the Premises by reason of an insured or uninsured casualty.
10.     Condemnation . Except as provided to the contrary in this Section 18 , this Sublease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and the Base Rent and Additional Rent payable under this Sublease thereafter shall be equitably adjusted. If during the Term all or substantially all (a “ Complete Taking ”) or a smaller portion (a “ Partial Taking ”) of any Facility is taken or condemned by any competent public or quasi-public authority, then (a) in the case of a Complete Taking, Sublessee may at its election made within thirty (30) days of the effective date of such Taking, terminate this Sublease as to the applicable Facility and the current Rent and Additional Rent payable under this Sublease thereafter shall be equitably adjusted as of the effective date of such termination, or (b) in the case of a Partial Taking, the Rent shall be abated to the same extent as the resulting diminution in Fair Market Value of the applicable portion of the Premises. The resulting diminution in Fair Market Value on the effective date of a Partial Taking shall be as established pursuant to Exhibit “E” . Sublessor alone shall be entitled to receive and retain any award for a taking or condemnation other than a temporary taking; provided, however, Sublessee shall be entitled to submit its own claim in the event of any such taking or condemnation with respect to the value of Sublessee’s Subleasehold interest in any portion of the Premises and/or the relocation costs incurred by Sublessee as a result thereof. In the event of a temporary taking of less than all or substantially all of any Facility, Sublessee shall be entitled to receive and retain any and all awards for the temporary taking and the Rent due under this Sublease shall be not be abated during the period of such temporary taking.
11.     Indemnification. Sublessee agrees to protect, indemnify, defend and save harmless Sublessor, its members, managers, Affiliates, directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any


17
Exhibit 10.4

kind or nature, including reasonable attorneys’ fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Sublease, the Premises or the operations of Sublessee on any portion of the Premises, including, without limitation, (a) the breach by Sublessee or any of its representations, warranties, covenants or other obligations hereunder, (b) any Protest, (c) all known and unknown Environmental Activities on any portion of the Premises, Hazardous Materials Claims or violations by Sublessee of a Hazardous Materials Law with respect to any portion of the Premises, and (d) upon or following the Termination Date, the correction of all deficiencies of a physical nature identified by, and any liability assessed or asserted by, any governmental agency or Medicare or Medicaid as a result of or arising out of or in connection with Sublessee’s use, occupancy and operations of the Facilities during the Term (including any refunds or overpayments to Medicare, Medicaid or any other third party payor). Upon receiving knowledge of any suit, claim or demand asserted by a third party that Sublessor believes is covered by this indemnity, it shall give Sublessee notice of this matter. Sublessee shall then defend Sublessor at Sublessee’s expense (including Sublessor’s reasonable attorneys’ fees and costs) with legal counsel satisfactory to Sublessor. The foregoing indemnity shall exclude any liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any kind or nature resulting due to acts or omissions of Sublessor, its members, managers, Affiliates, directors, officers, shareholders, agents and employees.
12.     Disputes . If any party brings any action to interpret or enforce this Sublease, or for damages for any alleged breach, the prevailing party shall be entitled to reasonable attorneys’ fees and costs as awarded by the court in addition to all other recovery, damages and costs, at all trial and appellate levels.
EACH PARTY HEREBY WAIVES ANY RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER IN CONNECTION WITH ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS SUBLEASE, INCLUDING RELATIONSHIP OF THE PARTIES, SUBLESSEE’S USE AND OCCUPANCY OF ANY PORTION OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE RELATING TO THE FOREGOING OR THE ENFORCEMENT OF ANY REMEDY.
13.     Notices . All notices and demands, certificates, requests, consents, approvals and other similar instruments under this Sublease shall be in writing and sent by personal delivery, U. S. certified or registered mail (return receipt requested, postage prepaid) or FedEx or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows:
If to Sublessee :                 If to Sublessor :

____________________            AdCare Health Systems, Inc.
____________________            1145 Hembree Rd.             
____________________             Roswell, Georgia 30076            Attention: ___________             Attention: CEO
                        


18
Exhibit 10.4

A party may designate a different address by notice as provided above. Any notice or other instrument so delivered (whether accepted or refused) shall be deemed to have been given and received on the date of delivery established by U.S. Post Office return receipt or the carrier’s proof of delivery or, if not so delivered, upon its receipt. Delivery to any officer, general partner or principal of a party shall be deemed delivery to such party. Notice to any one co-Sublessee shall be deemed notice to all co-Sublessees.

14.     Miscellaneous . This Sublease has been freely and fairly negotiated, and all provisions shall be interpreted according to their fair meaning and shall not be strictly construed against any party. While nothing contained in this Sublease should be deemed or construed to constitute an extension of credit by Sublessor to Sublessee, if a portion of any payment made to Sublessor is deemed to violate any applicable laws regarding usury, such portion shall be held by Sublessor to pay the future obligations of Sublessee as such obligations arise and if Sublessee discharges and performs all obligations hereunder, such funds will be reimbursed (without interest) to Sublessee on the Termination Date. If any part of this Sublease shall be determined to be invalid or unenforceable, the remainder shall nevertheless continue in full force and effect. Time is of the essence, and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a Saturday, Sunday or federal holiday, then such period or date shall be extended until the immediately following business day. Whenever the words “ including ”, “ include ” or “ includes ” are used in this Sublease, they shall be interpreted in a non-exclusive manner as though the words “ without limitation ” immediately followed. Whenever the words day or days are used in this Sublease, they shall mean “ calendar day ” or “ calendar days ” unless expressly provided to the contrary. The titles and headings in this Sublease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision. Unless otherwise expressly provided, references to any “Section” mean a section of this Sublease (including all subsections), to any “ Exhibit ” or “ Schedule ” mean an exhibit or schedule attached hereto or to “ Medicare ” or “ Medicaid ” include any successor program. If more than one Person is Sublessee hereunder, their liability and obligations hereunder shall be joint and several. Promptly upon the request of either party and at its expense, the parties shall prepare, enter into and record a suitable short form memorandum of this Sublease. This Sublease (a) contains the entire agreement of the parties as to the subject matter hereof and supersedes all prior or contemporaneous verbal or written agreements or understandings, (b) may be executed in several counterparts, (including electronically mailed copies in portable document format (PDF)), each of which shall be deemed an original, but all of which shall constitute one and the same document, (c) may only be amended by a writing executed by the parties, (d) shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties, (e) shall be governed by and construed and enforced in accordance with the internal laws of the State of South Carolina, (f) venue of any legal action arising under or pursuant to this Sublease shall be in the county where the premises are located, and (g) incorporates by this reference any Exhibits and Schedules attached hereto.
15.     Sublease of Entire Premises . Sublessee and Sublessor each acknowledge and agree that this Sublease constitutes a single, indivisible Sublease of the entire Premises which includes all three Facilities, and the Premises constitutes a single economic unit, except as


19
Exhibit 10.4

specifically set forth in this Sublease. The Rent, other amounts payable hereunder and all other provisions contained herein have been negotiated and agreed upon based on the intent to the Sublease the entirety of the three Facilities as a single and inseparable transaction as set forth in this Sublease, and such Rent, other amounts and other provisions would have been materially different had the parties intended to enter into separate subleases or a divisible sublease. Any Event of Default under this Sublease shall constitute an Event of Default as to the entire Premises.
Sublessee acknowledges and agrees that Sublessor is entering into this Sublease as an accommodation to Sublessee. Sublessee, in order to induce Sublessor to enter into this Sublease, to the extent permitted by law:

(a)
     Agrees, acknowledges and is forever estopped from asserting to the contrary that the statements set forth in the first sentence of this Section are true, correct and complete;
(b)
     Agrees, acknowledges and is forever estopped from asserting to the contrary that this Sublease is a single Sublease pursuant to which the collective Premises are demised as a whole to Sublessee; and
(c)
     Agrees, acknowledges and is forever estopped from asserting to the contrary that if, notwithstanding the provisions of this Section, this Sublease were to be determined or found to be in any proceeding, action or arbitration under state or federal bankruptcy, insolvency, debtor-relief or other applicable laws to constitute multiple Subleases demising multiple properties, such multiple Subleases could not, by the debtor, trustee, or any other party, be /selectively or individually assumed, rejected or assigned.
26.     Brokers . Sublessor and Sublessee represent and warrant to each other that no brokerage commissions are due to any real estate broker in relation to this Sublease, and agree to indemnify and hold each other harmless for any damages, costs or legal fees which may be incurred as a result of any claims for such commissions in contravention of the representations in this Section.

27.     Relationship of Parties . Nothing contained in this Sublease shall be deemed or construed as creating the relationship of principal and agent or of partnership or joint venture between the parties hereto, it being understood and agreed that neither the method of computing Rent nor any other provision contained herein nor any acts of the parties hereto shall be deemed to create any relationship between the parties hereto other than that of landlord and tenant.

28.     Master Lease Provisions Not Incorporated . Notwithstanding the foregoing or any other provision of this Sublease to the contrary, the following Sections of the Master Lease are not incorporated into this Sublease, and Sublessee shall have no obligation to perform and shall not be bound by them: 1(b)(i)-(iii), 1(c), 1(d), 1(e), 6(c), 27 and 30(a). In the event of any conflict between the Master Lease and the terms of this Sublease, this Sublease shall control.
 


20
Exhibit 10.4

29.     Sublessor Consent : In each case provided herein for the consent or approval of Sublessor, in no event shall Sublessor’s consent or approval be unreasonably withheld, conditioned or delayed. If a consent or approval of Landlord is required under the Master Lease, the giving of such consent or approval shall be deemed the consent or approval of Sublessor and no further consent or approval of Sublessor shall be required.

30.     Counterparts . This Sublease may be executed in any number of counterparts, all of which will be considered one and the same Sublease notwithstanding that all parties hereto have not signed the same counterpart. Signatures on this Sublease which are transmitted electronically shall be valid for all purposes. Any party shall, however, deliver an original signature on this Sublease to the other party upon request.


[Signatures on Following Page]

































21
Exhibit 10.4







IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement as of the date first above set forth.

AGENT SIGNATURE PAGE
FOR
DEPOSIT ACCOUNT INSTRUCTION AND SERVICE AGREEMENT


IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement as of the date first above set forth.

SECURED LENDER :

ADCARE HEALTH SYSTEMS, INC. ,
a Georgia corporation
    
By:      _____________________________              Name:      _____________________________              Title:      _____________________________                             

Notice Address :
        
















22
Exhibit 10.4


EXHIBIT “A-1”
LEGAL DESCRIPTIONS



Exhibit 10.4

EXHIBIT A-2
SUBLESSOR PERSONAL PROPERTY

“Sublessor Personal Property” means: (i) all personal property used in the operation or management of the Facilities, including machinery, equipment, furniture, furnishings, beds, computers, signage, trade fixtures or other personal property and consumable inventory and supplies, including any and all such personal property replaced by Sublessee as set forth in the Sublease, and (ii) all site plans, surveys, soil and substrata studies, architectural drawings, plans and specifications, engineering plans and studies, floor plans, landscape plans, and other plans and studies that relate to the Facilities; provided, however, that Sublessor Personal Property shall not include: (a) any vehicles or computer software used in connection with the operation of the Facilities, or (b) any equipment Subleased by Sublessee from third parties, which equipment is not a replacement of what would otherwise be Sublessor Personal Property. A detailed description of Sublessor Personal Property is as follows:






2

Exhibit 10.4


EXHIBIT “B”
CERTAIN DEFINITIONS
For purposes of this Sublease, the following terms and words shall have the specified meanings:

“ Affiliate ” shall mean with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“ Control ” shall mean, as applied to any Person, the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise.

“ Environmental Activities ” shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from any portion of the Premises or located on or present on or under any portion of the Premises.

“ Facility Mortgage ” shall mean any mortgage, deed of trust or other security agreement or lien encumbering the Premises or any portion thereof and securing an indebtedness of Sublessor or any Affiliate of Sublessor or any ground, building or similar Sublease or other title retention agreement to which the Premises or any portion thereof is subject from time to time.

“ Facility Mortgagee ” shall mean the holder or beneficiary of a Facility Mortgage and any other rights of the lender, credit party or Sublessor under the applicable Facility Mortgage Documents.

“ Facility Mortgage Documents ” shall mean with respect to each Facility Mortgage and Facility Mortgagee, the applicable Facility Mortgage, loan or credit agreement, Sublease, note, collateral assignment instruments, guarantees, indemnity agreements and other documents or instruments evidencing, securing or otherwise relating to the loan made, credit extended, Sublease or other financing vehicle pursuant thereto.

“ Hazardous Materials ” shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to any portion of the Premises or to Persons on or about any portion of the Premises or cause any portion of the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards not disposed of in accordance with applicable law; (f) radon gas; and (g) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of any portion of the Premises or the owners and/or occupants of property adjacent to or surrounding any portion of the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time.

“ Hazardous Materials Claims ” shall mean any and all enforcement, clean up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against any portion of the Premises, Sublessor or Sublessee relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

“ Hazardous Materials Laws ” shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters.

“ Person ” shall mean any individual, partnership, association, corporation, limited liability company or other entity.





3

Exhibit 10.4

EXHIBIT “C”

Non-Disturbance and Attornment Agreement

RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO :

____________________________________


Attn: _______________________________



NON-DISTURBANCE, RECOGNITION AND ATTORNMENT AGREEMENT


This Non-Disturbance, Recognition and Attornment Agreement (this "Agreement") is made and entered into this _______ day of ________ by and among Mr. William Foster, as Master Lessor ("Master Lessor"), ADK Georgia, LLC , a Georgia limited liability company, as Sublessor ("Sublessor") and OS Tybee, LLC, SB Tybee, LLC and JV Jeffersonville, LLC., all Georgia limited liability companies, as Sublessees ( collectively "Sublessee").


R E C I T A L S

A.    Master Lessor is the owner in fee of those certain real properties located at _____________________ which is more particularly described in Exhibit "A" attached hereto (the "Properties").

B.    Pursuant to that certain Lease dated August 1, 2010, as amended by that certain First Amendment to Lease dated August 31, 2010, by that certain Second Amendment to Lease dated August 14, 2015 and by that certain Third Amendment to Lease dated October 2015 (as amended, the “ Master Lease ”), the Master Lessor leased the Properties to Sublessor.

C.    Sublessor and Sublessee have entered into, or are contemplating entering into, a Sublease for the Properties. The sublease by and between Sublessor and Sublessee shall be referred to herein as the "Sublease."

E.    In addition, in the event that Sublessor defaults under the Master Lease, Master Lessor agrees to recognize the Sublease and not disturb Sublessee's Sublease provided that Sublessee attorns to Master Lessor with respect to the Sublease in accordance with the terms and conditions set forth herein.

NOW, THEREFORE, the parties agree as follows:

1. ATTORNMENT. If Sublessor fails to timely cure any default under the Master Lease and the Master Lease is terminated, Master Lessor shall notify Sublessee in writing of such termination (the "Termination Notice"). Upon receipt of such written notice from Master Lessor, subject to the other terms and conditions set forth herein, Sublessee shall attorn to Master Lessor and perform all of Sublessor's obligations under the Lease with respect to the Properties for the benefit of Master Lessor as if Master Lessor was the landlord under the Sublease.

2. CONDITIONS NECESSARY TO EFFECTIVENESS OF AGREEMENT . This Agreement shall not be binding upon the Master Lessor upon the existence of any of the following conditions at the time of Sublessor’s default: a. If any Facility operated by Sublessee under the Master Sublease is not certified and in compliance with all Medicare, Medicaid, and other third-party payor certification requirements;

b. If the bed tax liability related to any Facility has not been paid and is not fully current;

c. If the capital repairs required to be performed by Sublessor pursuant to its Master Sublease with Sublessee have not been completed.

d. If Sublessee is in default under the Master Sublease.



4

Exhibit 10.4


Master Lessor was the landlord under the Sublease may waive any of these conditions at his sole discretion.

3. SUBLESSEE'S LIABILITY TO SUBLESSOR. From the date Sublessee attorns to Master Lessor, as provided in this Agreement, Sublessee shall not be further liable to Sublessor for performance of its obligations under the Sublease, and Sublessor shall immediately deposit with Master Lessor any security deposit and other prepaid sums that Sublessee has paid to Sublessor pursuant to the Lease that have not been delivered to master Lessor.

4. MASTER LESSOR'S RECOGNITION AND SUBLESSEE'S ATTORNMENT . Master Lessor and Sublessee, from and after the date of recognition and attornment, shall have the same rights and remedies against each other as Sublessor and Sublessee have against each other under the Lease. Notwithstanding the foregoing, Master Lessor shall not be (i) liable for any prior default of any landlord under the Sublease (including Sublessor); or (ii) subject to any offsets or defenses which have accrued prior to the date the Sublease becomes a direct lease between Master Lessor and Sublessee. Master Lessor shall not be bound by any prepaid rent, security deposit or other prepaid sum that Sublessee has paid in advance to Maser Lessor, except to the extent such sum is paid over by Sublessor to Master Lessor.

Master Lessor shall not be bound by any obligations of Sublessor set forth in the Master Sublease at Sections 9.3, 9.4, 9.5, or 10.2.

Notwithstanding any provision of the Master Sublease, upon attornment, Sublessee shall be bound by the following provisions of the Master Lease: 1(b)(iii), 6(c), 27, and 30(a).
5. MISCELLANEOUS.
5.1
     NO EFFECT ON MASTER LEASE . Nothing in this Agreement shall be construed to affect or otherwise modify in any manner the provisions of the Master Lease between MasterLessor and Sublessor, or to waive any right that Masterlessor may now or hereafter have against Sublessor by reason of or in connection with the Master Lease.
5.2
     ATTORNEYS' FEES . Should any action or proceeding be commenced to enforce any of the provisions of this Agreement or in connection with its meaning, the prevailing party in such action shall be awarded, in addition to any other relief it may obtain, its reasonable costs and expenses, not limited to taxable costs and reasonable attorneys' fees.
5.3
     NOTICE. All notices which may or are required to be sent under this Agreement shall be in writing and shall be sent by first-class certified U.S. mail, postage prepaid, return receipt requested, and sent to the party at the address appearing below or such other address as any party shall hereafter inform the other party by written notice given as set forth above: Sublessee:        
                                     

with a copy to:    


Sublessor:                                 




EXHIBIT “B”
CERTAIN DEFINITIONS
For purposes of this Sublease, the following terms and words shall have the specified meanings:

“ Affiliate ” shall mean with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“ Control ” shall mean, as applied to any Person, the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise.




5

Exhibit 10.4

“ Environmental Activities ” shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from any portion of the Premises or located on or present on or under any portion of the Premises.

“ Facility Mortgage ” shall mean any mortgage, deed of trust or other security agreement or lien encumbering the Premises or any portion thereof and securing an indebtedness of Sublessor or any Affiliate of Sublessor or any ground, building or similar Sublease or other title retention agreement to which the Premises or any portion thereof is subject from time to time.

“ Facility Mortgagee ” shall mean the holder or beneficiary of a Facility Mortgage and any other rights of the lender, credit party or Sublessor under the applicable Facility Mortgage Documents.

“ Facility Mortgage Documents ” shall mean with respect to each Facility Mortgage and Facility Mortgagee, the applicable Facility Mortgage, loan or credit agreement, Sublease, note, collateral assignment instruments, guarantees, indemnity agreements and other documents or instruments evidencing, securing or otherwise relating to the loan made, credit extended, Sublease or other financing vehicle pursuant thereto.

“ Hazardous Materials ” shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to any portion of the Premises or to Persons on or about any portion of the Premises or cause any portion of the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards not disposed of in accordance with applicable law; (f) radon gas; and (g) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of any portion of the Premises or the owners and/or occupants of property adjacent to or surrounding any portion of the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time.

“ Hazardous Materials Claims ” shall mean any and all enforcement, clean up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against any portion of the Premises, Sublessor or Sublessee relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

“ Hazardous Materials Laws ” shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters.

“ Person ” shall mean any individual, partnership, association, corporation, limited liability company or other entity.

































6

Exhibit 10.4



6

EXHIBIT “C”

Non-Disturbance and Attornment Agreement

RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO :

____________________________________


Attn: _______________________________



NON-DISTURBANCE, RECOGNITION AND ATTORNMENT AGREEMENT


This Non-Disturbance, Recognition and Attornment Agreement (this "Agreement") is made and entered into this _______ day of ________ by and among Mr. William Foster, as Master Lessor ("Master Lessor"), ADK Georgia, LLC , a Georgia limited liability company, as Sublessor ("Sublessor") and OS Tybee, LLC, SB Tybee, LLC and JV Jeffersonville, LLC., all Georgia limited liability companies, as Sublessees ( collectively "Sublessee").


R E C I T A L S

A.      Master Lessor is the owner in fee of those certain real properties located at _____________________ which is more particularly described in Exhibit "A" attached hereto (the "Properties").

B.      Pursuant to that certain Lease dated August 1, 2010, as amended by that certain First Amendment to Lease dated August 31, 2010, by that certain Second Amendment to Lease dated August 14, 2015 and by that certain Third Amendment to Lease dated October 2015 (as amended, the “ Master Lease ”), the Master Lessor leased the Properties to Sublessor.

C.      Sublessor and Sublessee have entered into, or are contemplating entering into, a Sublease for the Properties. The sublease by and between Sublessor and Sublessee shall be referred to herein as the "Sublease."

E.      In addition, in the event that Sublessor defaults under the Master Lease, Master Lessor agrees to recognize the Sublease and not disturb Sublessee's Sublease provided that Sublessee attorns to Master Lessor with respect to the Sublease in accordance with the terms and conditions set forth herein.

NOW, THEREFORE, the parties agree as follows:

1.
Attornment. If Sublessor fails to timely cure any default under the Master Lease and the Master Lease is terminated, Master Lessor shall notify Sublessee in writing of such termination (the "Termination Notice"). Upon receipt of such written notice from Master Lessor, subject to the other terms and conditions set forth herein, Sublessee shall attorn to Master Lessor and perform all of Sublessor's obligations under the Lease with respect to the Properties for the benefit of Master Lessor as if Master Lessor was the landlord under the Sublease.

2.
Conditions necessary to effectiveness of agreement . This Agreement shall not be binding upon the Master Lessor upon the existence of any of the following conditions at the time of Sublessor’s default: a. If any Facility operated by Sublessee under the Master Sublease is not certified and in compliance with all Medicare, Medicaid, and other third-party payor certification requirements;

b. If the bed tax liability related to any Facility has not been paid and is not fully current;

c. If the capital repairs required to be performed by Sublessor pursuant to its Master Sublease with Sublessee have not been completed.

d. If Sublessee is in default under the Master Sublease.



7

Exhibit 10.4


Master Lessor was the landlord under the Sublease may waive any of these conditions at his sole discretion.

3.
Sublessee's Liability to Sublessor. From the date Sublessee attorns to Master Lessor, as provided in this Agreement, Sublessee shall not be further liable to Sublessor for performance of its obligations under the Sublease, and Sublessor shall immediately deposit with Master Lessor any security deposit and other prepaid sums that Sublessee has paid to Sublessor pursuant to the Lease that have not been delivered to master Lessor.

4.
Master lessor's Recognition and Sublessee's Attornment . Master Lessor and Sublessee, from and after the date of recognition and attornment, shall have the same rights and remedies against each other as Sublessor and Sublessee have against each other under the Lease. Notwithstanding the foregoing, Master Lessor shall not be (i) liable for any prior default of any landlord under the Sublease (including Sublessor); or (ii) subject to any offsets or defenses which have accrued prior to the date the Sublease becomes a direct lease between Master Lessor and Sublessee. Master Lessor shall not be bound by any prepaid rent, security deposit or other prepaid sum that Sublessee has paid in advance to Maser Lessor, except to the extent such sum is paid over by Sublessor to Master Lessor.

Master Lessor shall not be bound by any obligations of Sublessor set forth in the Master Sublease at Sections 9.3, 9.4, 9.5, or 10.2.

Notwithstanding any provision of the Master Sublease, upon attornment, Sublessee shall be bound by the following provisions of the Master Lease: 1(b)(iii), 6(c), 27, and 30(a).
5.
Miscellaneous.

1. No Effect on Master Lease . Nothing in this Agreement shall be construed to affect or otherwise modify in any manner the provisions of the Master Lease between MasterLessor and Sublessor, or to waive any right that Masterlessor may now or hereafter have against Sublessor by reason of or in connection with the Master Lease.
2. Attorneys' Fees . Should any action or proceeding be commenced to enforce any of the provisions of this Agreement or in connection with its meaning, the prevailing party in such action shall be awarded, in addition to any other relief it may obtain, its reasonable costs and expenses, not limited to taxable costs and reasonable attorneys' fees.
3. Notice. All notices which may or are required to be sent under this Agreement shall be in writing and shall be sent by first-class certified U.S. mail, postage prepaid, return receipt requested, and sent to the party at the address appearing below or such other address as any party shall hereafter inform the other party by written notice given as set forth above: Sublessee:         
                                    

with a copy to:     


Sublessor:                                 



7

Sublessor:                                 

All notices delivered as set forth above shall be deemed effective three (3) days from the date deposited in the U.S. mail.
4. Successors. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors in interest, heirs and assigns and any subsequent owner of the Property.
5. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the state in which the Property is located.
6. No Modification Unless in Writing. This Agreement contains all of the agreements and understandings between the parties regarding the subject matter hereof, and supersedes any and all prior agreements and understandings between Master Lessor, Sublessee and Sublessor with respect to the subject matter hereof. This Agreement shall not be amended, changed or modified in any way unless in writing executed by the party against whom the amendment is sought to be enforced. Master Lessor, Sublessee and Sublessor shall not be deemed to have waived or released any of their rights hereunder



8

Exhibit 10.4

unless the waiver or release is in writing executed by the party against whom the waiver or release is sought to be enforced.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

SUBLESSOR:

______________________________________________

By:     
Name:     
Title:     


SUBLESSOR:

______________________________________________

By:     
Name:     
Title:     


SUBLESSEE:

______________________________________________


By:     
Name:     
Title:     




9

Exhibit 10.4


EXHIBIT “D”
FINANCIAL, MANAGEMENT AND REGULATORY REPORTS
REPORT
DUE DATE
Monthly financial reports concerning the Business at the Facilities consisting of:
(1) a reasonably detailed income statement showing, among other things, gross revenues;
(2) total patient days;
(3) occupancy; and
(4) payor mix.
(All via e-mail to _______________________)
Thirty (30) days  after the end of each calendar month
Quarterly consolidated or combined financial statements  
of Sublessee
(via e-mail to financials@adcarehealth.com)
Thirty (30) days after the end of each of the first three quarters of the fiscal year of Sublessee and such Guarantor
Annual consolidated or combined financial statements  
of Sublessee audited by a reputable certified public accounting firm
(via e-mail to financials@adcarehealth.com)
One hundred twenty (120) days  after the fiscal year end of Sublessee and such Guarantor
Regulatory reports with respect to the Facilities , as follows:
(1) all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Sublessee as to any portion of the Premises and any portion of the Business, including state department of health licensing surveys;
(2) Medicare and Medicaid certification surveys; and
(3) life safety code reports.
Two (2) business days  after receipt
Reports of regulatory violations ,
by written notice of the following:
(1) any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including Medicare or Medicaid;
(2) any suspension, termination or restriction placed upon Sublessee or any portion of the Premises, the operation of any portion of the Business or the ability to admit residents or patients; or
(3) any violation of any other permit, approval or certification in connection with any portion of the Premises or any portion of the Business, by any federal, state or local authority, including Medicare or Medicaid.
Two(2) business days after  receipt
Cost Reports
Fifteen (15) days after filing





Exhibit 10.4

EXHIBIT “E”
FAIR MARKET VALUE

“ Fair Market Value ” means the fair market value of the Premises and/or Facilities or applicable portion thereof on a specified date as agreed to by the parties, or failing such agreement within ten (10) days of such date, as established pursuant the following appraisal process. Each party shall within ten (10) days after written demand by the other party select one MAI Appraiser to participate in the determination of Fair Market Value. For all purposes under this Sublease, the Fair Market Value shall be the fair market value of the Premises and/or Facilities or applicable portion thereof unencumbered by this Sublease. Within ten (10) days of such selection, the MAI Appraisers so selected by the parties shall select a third (3 rd ) MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Fair Market Value of the Premises and/or Facilities or applicable portion thereof within thirty (30) days of the selection of the third appraiser. Sublessee shall pay the fees and expenses of any MAI Appraiser it retains pursuant to this Exhibit. Sublessor shall pay the fees and expenses of any MAI Appraiser it retains pursuant to this Exhibit. Each party shall pay half the fees and expenses of the third MAI Appraiser selected by the respective MAI Appraisers selected by each of the parties.

If either party fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the fair market value of the Premises and/or Facilities or applicable portion thereof in accordance with the provisions of this Exhibit and the Fair Market Value so determined shall be binding upon the parties. If the MAI Appraisers selected by the parties are unable to agree upon a third (3 rd ) MAI Appraiser within the time period set forth in the foregoing paragraph, either party shall have the right to apply to the presiding judge of the court of original trial jurisdiction in the county in which the Premises and/or Facilities or applicable portion thereof are located to name the third (3 rd ) MAI Appraiser. The cost of such application to the presiding judge shall be equally shared by the parties.

Within five (5) days after completion of the third (3 rd ) MAI Appraiser’s appraisal, all three (3) MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the fair market value of the Premises and/or Facilities or applicable portion thereof. If a majority are unable to determine the fair market value at such meeting, the three (3) appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Fair Market Value. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be such Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding.

“ MAI Appraiser ” shall mean an appraiser licensed or otherwise qualified to do business in the state(s) where the Premises or applicable portion thereof are located and who has substantial experience in performing appraisals of facilities similar to the Premises or applicable portion thereof and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Sublessor.




Exhibit 10.4

EXHIBIT “F”NOTE



$1,000,000.00                                    Atlanta, Georgia
As of June__ 2016


PROMISSORY NOTE


FOR VALUE RECEIVED, OS TYBEE, LLC , a Georgia limited liability company (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability company (“ SB Tybee ”) JV JEFFERSONVILLE, LLC , a Georgia limited liability company (“ JV Jeffersonville ”) , (hereinafter collectively referred to as “Maker”), jointly and severally, promise to pay to the order of ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation (hereinafter, together with any other holder hereof, referred to as “Holder”), or to such other party or parties as Holder from may from time to time designate in writing, the principal sum of up to ONE MILLION AND 00/100 DOLLARS ($1,000,000.00), together with simple interest accruing on the unpaid balance of this Note at a rate equal to Thirteen and one-half percent (13.5%) per annum (the “Interest Rate”).

The principal amount of this Note shall be disbursed by Holder to Maker in five (5) tranches in such amounts as Maker shall request in writing at least 30 days prior to the funding date. Any borrowings in excess of $350,000 per Facility are subject to approval by ADK Georgia, LLC, a subsidiary for Holder ("ADK") and Maker's landlord under a Master Sublease dated as of June 2016 (the "Sublease"). In no event shall Maker be entitled to make a draw if a notice of default is pending with respect to its Sublease, Security Agreement or Deposit Control Account with ADK Capitalized terms used herein that are not otherwise defined shall have the meanings assigned to such Terms in the Sublease.

The entire principal sum of this Note together with all accrued and unpaid interest is due and payable one year from the date the first tranche is funded hereunder (the “Maturity Date”). Notwithstanding the foregoing, Maker shall make monthly payments of the Interest Rate only on the then outstanding current balance of the Note in arrears on the first day of each calendar month.

The principal amount of the Note may be prepaid in whole from time to time and at any time without premium or penalty.

If the payment obligation under this Note is not paid when due, Maker will be obligated to pay the Holder’s costs of collection, including reasonable attorney fees actually incurred. Any payment which is not paid within five (5) days of the date due (including that which may become due upon acceleration as hereinafter provided) will be subject to a 5% late fee and will bear interest at the rate which is five percent (5%) per annum in excess of the Interest Rate (the “Default Rate”), from the date of the payment is due until paid.




Exhibit 10.4

If Maker fails to pay when due any amount payable hereunder and such failure continues for five (5) days after written notice thereof from Maker, then the entire unpaid principal balance of this Note, together with accrued interest thereon, will, at the option of Holder, be immediately due and payable, and Holder may proceed forthwith to collect the same regardless of the stipulated date of maturity, TIME BEING OF THE ESSENCE HEREOF FOR ALL PURPOSES. Neither Holder’s failure to exercise this right of acceleration of the maturity of the indebtedness evidenced hereby, nor Holder’s acceptance of one or more past due installments, nor Holder’s granting of any indulgences from time to time, will constitute a novation of this contract or a waiver of the right of Holder thereafter to insist upon strict compliance with the terms of this Note.

No extension of time for the payment of this Note or any installment due hereunder will release, discharge, modify or change the liability of the Maker or any endorser under this Note.

This Note may not be assigned to or assumed by any other party, without the express written consent of the Holder.

Maker covenants and agrees that until all principal and interest due under this Note has been paid in full that it and its affiliated entities shall not pledge the accounts receivable relating to any of the facilities (collectively, the “Facilities”) identified in Lease as all such receivables and assets of Maker are pledged to Holder pursuant to a deposit control or similar agreement of even date herewith. Maker agrees to execute a deposit account instruction and service agreement and a security agreement in favor of Holder, which is reasonably satisfactory to Holder, as a condition to Holder funding any payments hereunder. Maker further agrees to execute and comply with the terms of the Security Agreement which it executes concurrent with the execution of this Note to secure its obligations hereunder. A default under the Sublease, the Security Agreement or the Deposit Control Agreement constitutes a default under this Note.

The terms of this Note are binding upon and inure to the benefit of the parties, and their respective legal representatives, successors and assigns. This instrument is governed by the laws of the State of Georgia without regard to conflicts of laws principles.

IN WITNESS WHEREOF, Maker has executed and delivered this Note effective as of the day and year first above written.

    OS TYBEE LLC,
a Georgia limited liability company

By:    __________________________
Name:    __________________________
Title:    __________________________

SB TYBEE LLC,
a Georgia limited liability company

By:    __________________________



Exhibit 10.4

Name:    __________________________
Title:    __________________________
                        
JV JEFFERSONILLE, LLC
a Georgia limited liability company

By:    __________________________





Exhibit 10.4

EXHIBIT “G”


DEPOSIT ACCOUNT INSTRUCTION AND SERVICE AGREEMENT

This DEPOSIT ACCOUNT INSTRUCTION AND SERVICE AGREEMENT (this “ Agreement ”) is entered into as of April __, 2016 by and among OS TYBEE, LLC , a Georgia limited liability company (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability company (“ SB Tybee ”) and JV JEFFERSONVILLE, LLC , a Georgia limited liability company (“ JV Jeffersonville ”), ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation (“ Secured Lender ”), and ________________________ (“ Bank ”) with respect to the following:
Background :
A.
Bank maintains for Company and its subsidiaries the deposit accounts listed in Exhibit A (collectively, the “ Accounts ”).

B.
Pursuant to that certain Security Agreement dated as of _________ by and between Secured Lender and Company (the “ Security Agreement ”), the Company has agreed to provide certain collateral, including, without limitation, certain accounts receivable, to Lender to secure the Borrower’s Obligations (as defined in the Security Agreement). The Security Agreement has been executed in connection with a certain Note made by Company to Secured Lender.

C.
Company, Secured Lender and Bank are entering into this Agreement to provide for the disposition of funds on deposit in the Accounts from time to time.

Agreement :
NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter set forth, the parties agree as follows:
1.
Balance Transfers . From and after the date first set forth above (the “ Effective Date ”), and continuing on each day that is not a Saturday, Sunday or a legal holiday observed by Bank (a “ Business Day ”), Bank shall transfer all available balances in the Accounts to Secured Lender at its account specified below (the “ Collections Account ”):
Bank Name:        
Bank Address:        
ABA No.:        
Account Name:    
Account No.:        
Beneficiary’s Name:    AdCare Health Systems, Inc.




Exhibit 10.4

Funds shall be “available” if such funds are, in the reasonable determination of Bank, not subject to a hold, dispute or legal process preventing their withdrawal and subject to Bank’s funds availability policies applicable to the Accounts.

2.
Other Withdrawals and Instructions . Company shall not make any other withdrawals from the Accounts, and notwithstanding anything to the contrary in the agreement(s) between Bank and Company governing the Accounts (collectively, the “ Deposit Agreement ”), Bank will comply with the instructions herein directing the disposition of funds in the Accounts without further consent of Company, even if such instructions are contrary to any of Company’s instructions or demands or result in Bank dishonoring items which might be presented for payment. Bank has not entered into, and will not enter into while this Agreement is effective, any agreement with any person or entity pursuant to which Bank is obligated to comply with instructions from such person or entity as to the disposition of funds in the Accounts.
3.
Security Interests and Liens . Company represents and warrants to Secured Lender and Bank that it has not assigned or granted a security interest in the Accounts except to Secured Lender. Company represents and warrants to Secured Lender and Bank that it has not assigned or granted a security interest in any accounts receivables except to Secured Lender.
4.
Fees and Overdrafts . Company shall be responsible for those usual and customary service charges, transfer fees, and account maintenance fees (collectively, “ Fees ”) of Bank in connection with the Accounts that would otherwise exist in the absence of this Agreement. Secured Lender shall not have any responsibility or liability for the payment of any Fees. Company shall also be responsible for (a) any checks, ACH entries, wire transfers, merchant card transactions, or other paper or electronic items which were deposited or credited to the Accounts that are returned, reversed, refunded, adjusted or charged back for insufficient funds or for any other reason (“ Returned Items ”) and (b) all obligations and liabilities connected with the Accounts that arise out of any treasury management services provided by Bank, its subsidiaries or affiliates, including but not limited to, ACH, merchant card, zero balance account, sweeps, controlled disbursement or payroll (“ Overdrafts ”). If there are insufficient funds in the Accounts to cover any Fees, Returned Items or Overdrafts, Company agrees to immediately reimburse Bank for the amount of such shortfall.
5.
Representations and Warranties of Bank . Bank represents and warrants to Secured Lender that (a) Bank is an organization engaged in the business of banking and (b) Bank maintains the Accounts as demand deposit accounts in the ordinary course of Bank’s business.
6.
Setoff . Except for Fees, Returned Items and Overdrafts, Bank hereby agrees that Bank will not exercise or claim any right of setoff or security interest or banker’s lien against the Accounts or any Receipts on deposit therein, and Bank hereby further waives any such right or lien that it may have against any Receipts deposited in the Accounts except for Fees, Returned Items and Overdrafts.
7.
Limits of Bank’s Liability .



Exhibit 10.4

(a)
Bank will not be liable to Company or Secured Lender for any expense, claim, loss, damage or cost (“ Damages ”) arising out of or relating to its performance under this Agreement other than those Damages that result directly from its acts or omissions constituting gross negligence or intentional misconduct. IN NO EVENT WILL BANK BE LIABLE FOR ANY INDIRECT DAMAGES, LOST PROFITS, SPECIAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES WHICH ARISE OUT OF OR IN CONNECTION WITH THE SERVICES CONTEMPLATED BY THIS AGREEMENT EVEN IF BANK HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES.
(b)
Notwithstanding any of the other provisions in this Agreement, in the event of the commencement of a case pursuant to Title 11 of the United States Code, filed by or against Company, or in the event of the commencement of any similar case under then applicable federal or state law providing for the relief of debtors or the protection of creditors by or against Company, Bank may act as Bank deems necessary to comply with all applicable provisions of governing statutes (and shall use commercially reasonable efforts to inform Secured Lender of such acts) and shall not be in violation of this Agreement as a result.
(c)
Bank shall be permitted to comply with any writ, levy order or other similar judicial or regulatory order or process concerning the Accounts and shall not be in violation of this Agreement for so doing.
8.
Indemnity and Reimbursement .
(a)
Company will indemnify Bank, its officers, directors, employees, and agents against claims, liabilities, damages, and expenses arising out of this Agreement or the Accounts including reasonable attorneys’ fees and disbursements and the reasonable estimate of the allocated costs and expenses of Bank’s in-house legal counsel and staff), except to the extent such claims, liabilities, or expenses are caused by Bank’s gross negligence or willful misconduct.
(b)
Company further agrees to pay to Bank, upon receipt of Bank’s invoice, all reasonable costs, expenses and attorneys’ fees (including allocated costs for in-house legal services) incurred by Bank in connection with the enforcement of this Agreement and any instrument or agreement required hereunder, including but not limited to any such costs, expenses and fees arising out of the resolution of any conflict, dispute, motion regarding entitlement to rights or rights of action, or other action to enforce Secured Lender’s rights in a case arising under Title 11 of the United States Code.
9.
Termination .



Exhibit 10.4

(a)
Termination by Secured Lender . Secured Lender may terminate this Agreement by providing notice substantially in the form of Attachment I to the Company and Bank that all of the Borrower’s Obligations to Secured Lender are paid in full.
(b)
Termination by Company . The Company may terminate, amend, waive, rescind, or revoke the instructions contained in this Agreement (“ Modification ” ) with regard to the Governmental Accounts listed on Exhibit A only, upon not less than ten (10) business days’ prior written notice to Secured Lender and Bank in substantially the form attached hereto as Attachment II , and with respect to any Modification, Bank shall (a) use its commercially reasonable efforts to obtain from Company a certification that Company has given Secured Lender advance written notice of such Modification, and (b) use its commercially reasonable efforts to independently give Secured Lender prompt notification of such Modification. Any such Modification shall not be effective until ten (10) business days after Bank’s receipt of the same.
(c)
Termination by Bank . This Agreement may be terminated by Bank at any time upon not less than thirty (30) calendar days’ prior written notice delivered to Company and Secured Lender. Upon termination of this Agreement, Bank will transmit to such deposit accounts as Company may direct all funds, if any, then on deposit in the Accounts (after deduction for any amounts otherwise reimbursable to Bank as provided under Section 4 above).
10.
Notices . Any notice or document required or permitted to be delivered hereunder shall be in writing and shall be effective upon delivery if personally delivered or sent by overnight courier, or three (3) Business Days after mailing if mailed via US Mail. All notices shall be personally delivered, delivered by overnight courier or sent by United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective addresses set forth on the signature pages, or at such other address as they may have theretofore specified by written notice delivered in accordance herewith. Any party hereto, at any time, by written notice given to the other in accordance with this Section, may designate a different address to which such communications shall thereafter be directed.
11.
Deposit Account Information . Bank shall provide Secured Lender with (a) whether by Internet access or otherwise, on-line screen access to daily activity in the Accounts, and (b) copies of the regular monthly bank statements and such other information relating to the Accounts as is provided to Company. Upon Company’s request (which request need be made only once and not on a recurring basis), Bank shall provide Company with, whether by Internet access or otherwise, on-line screen access to daily activity in the Collections Accounts. Bank’s liability for failing to provide any account statement will not exceed Bank’s cost of providing the statement. Company authorizes Bank to provide to Secured Lender,



Exhibit 10.4

whether by internet access or otherwise, any other information concerning the Accounts that Bank may agree to provide to Secured Lender at Secured Lender’s request.
12.
Miscellaneous .
This Agreement shall be binding on and shall inure to the benefit of the parties and their respective successors and assigns, but neither Company nor Bank shall be entitled to assign or delegate any of its rights or duties under this Agreement without mutual agreement of the parties.
(a)
This Agreement shall be binding on and shall inure to the benefit of the parties and their respective successors and assigns, but neither Company nor Bank shall be entitled to assign or delegate any of its rights and/or duties under this Agreement without mutual agreement of the parties.
(b)
Secured Lender may assign its rights and duties under this Agreement in connection with a transfer of the Note and all of its interests in the Borrower’s Obligations by written notice to Bank and Company and such assignment shall be effective as to Company and Bank upon written notice to same.
(c)
This Agreement may be executed in any number of several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. A signature delivered by facsimile transmission or other electronic means shall be deemed the equivalent of an original signature for all purposes.
(d)
This Agreement shall be governed by the laws of the State of Maryland without regard to principles or conflicts of laws.
(e)
This Agreement may be amended only by a written instrument executed by Secured Lender, Bank and Company acting through their respective duly authorized representatives.
(f)
Company acknowledges that the agreements made by it and the authorizations granted by it in this Agreement are irrevocable and that the authorizations granted in this Agreement are powers coupled with an interest.
(g)
COMPANY, AGENT AND BANK HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY JUDICIAL PROCEEDING ARISING OUT OF, OR RELATING TO, THIS AGREEMENT OR SERVICES RENDERED IN CONNECTION WITH THIS AGREEMENT.
[SIGNATURES ON FOLLOWING PAGES]




Exhibit 10.4


Name in Which Account is Maintained
Account Numbers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBIT A

Accounts




 


Exhibit 10.4

EXHIBIT H

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the "Agreement") is made and entered into, effective on the date set forth below, by and among OS TYBEE, LLC , a Georgia limited liability Debtor (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability Debtor (“ SB Tybee ”) and JV JEFFERSONVILLE, LLC , a Georgia limited liability Debtor (“ JV Jeffersonville ”) (OS Tybee, SB Tybee and JV Jeffersonville are sometimes collectively referred to as “ Debtors ”), and ADK GEORGIA, LLC, a Georgia limited liability Debtor (" Secured Party "), with reference to the following facts:

RECITALS:

A. Contemporaneously with the execution of this Agreement, Debtor is borrowing funds from Secured Party or its parent entity pursuant to the terms of that certain Promissory Note for borrowings of up to $1,000,000 dated of even date herewith (the "Note").
 
B. Debtor has agreed to grant to Secured Party a first-priority security interest in all of the cash, accounts receivable, assets, FF&E, records, goodwill, contracts, agreements and properties, both tangible and intangible, owned or leased by the Debtor that are used in connection with the ownership, operation or development of the Debtor's business operation in accordance with the terms and conditions set forth herein.

AGREEMENTS:

NOW, THEREFORE , the parties hereto, intending to be legally bound, do hereby agree as follows:

1. GRANT OF SECURITY INTEREST.

1.1.
     DEBTORS' PLEDGE . As collateral security for all of the Obligations (as defined in Section 2 hereof), Debtors' hereby pledges and assigns to Secured Party and grants to Secured Party a continuing security interest in the following:

1.1.1.
     All cash, accounts receivable, assets, and properties, both tangible and intangible, owned or leased by the Debtors that are used in connection with the ownership, operation or development of the Debtors' business to the extent Debtors have an interest therein (Debtors acknowledges that pursuant to the terms of its sublease with Secured Party all FF&E and personal property at the Debtors' facilities belongs to Secured Party and Debtors have no ownership interest therein); and

1.1.2.
     All profits, income, property, and any and all other proceeds arising from or on account of the above-described property, whether now owned or hereafter acquired by the Debtors and howsoever its interest therein may arise or appear (whether by ownership, security interest claim or otherwise).

1.2.
     DEFINITION OF COLLATERAL. The assets and properties described in Sections 1.1 and 1.2, above, shall be referred to collectively as the “Collateral.”


 


Exhibit 10.4

2. SECURITY FOR OBLIGATIONS
 
2.1.
     The security interest created by this Agreement in the Collateral constitutes continuing collateral security for:

2.1.1.
     The payment of all principal of, interest on, late payments under, and prepayment penalties or premiums (if any) with respect to, the Note;
 
2.1.2.
     The performance and discharge of each and every obligation of Debtorscontained herein or in any other document executed in connection with the Note; and

2.1.3.
     Each and every amendment, renewal, increase or extension of any of the foregoing.

All of the foregoing items listed in this Section 2.1 are collectively referred to as the "Obligations."

2.2.
     The security interests granted herein are granted as security only and shall not subject Secured Party to, or transfer or in any way affect or modify, any obligation or liability of Debtor or the Debtor with respect to any of the Collateral or any transaction in connection therewith.
 
3. REPRESENTATIONS AND WARRANTIES

Debtors represent and warrant to Secured Party that:

3.1.
     Debtors and/or the Debtor are and will be at all times the legal and beneficial owner of the Collateral free and clear of any lien, security interest or other charge or encumbrance, except for the security interest created by this Agreement.
 
3.2.
     The exercise by Secured Party of its rights and remedies hereunder in accordance with and subject to the terms hereof will not contravene any law or governmental regulation currently existing or any contractual restriction in either case binding on or affecting Debtor or the Debtor, or any of their respective properties, and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of Debtor's or the Debtor’s other properties or the acceleration of any indebtedness.

3.3.
     No authorization or approval or other action by any governmental authority or regulatory body or any other person is required to be obtained by Debtor or the Debtor for the pledge hereunder by Debtor of, or the grants by Debtors of the security interest created in, the Collateral under this Agreement.

3.4.
     This Agreement creates a valid security interest in favor of Secured Party in the Collateral.


 


Exhibit 10.4

3.5.
     No financing statement covering the Collateral or any part thereof has been filed by Debtor with any filing officer, and no security agreement covering the Collateral or any part thereof has been made other than with Secured Party, and no security interest, other than the security interest granted to Secured Party, has attached or been perfected in the Collateral or in any part thereof.

4. COVENANTS AS TO THE COLLATERAL
 
So long as any of the Obligations shall remain outstanding, Debtors will, unless Secured Party shall otherwise consent in writing:

4.1.
     Keep adequate records concerning the Collateral and permit Secured Party or any agents or representatives thereof at any reasonable time, upon reasonable prior notice, and from time to time to examine and make copies of and abstracts from such records;
 
4.2.
     At its expense, defend Secured Party's right, title and special property and security interest in and to the Collateral against the claims of any person;

4.3.
     At its expense, at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or that Secured Party may reasonably request in order to (a) perfect and protect the security interest created or purported to be created hereby, (b) enable Secured Party to exercise and enforce his rights and remedies hereunder in respect of the Collateral, (c) otherwise effect the purposes of this Agreement;

4.4.
     Not create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any Collateral;

4.5.
     At its expense and in such manner and form as Secured Party may require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be necessary or desirable, or that Secured Party may request, in order to create, preserve, perfect or validate any security interest granted herein or to enable Secured Party to exercise and enforce its rights in accordance with the terms hereof with respect to any of the Collateral. To the extent permitted by applicable law, Debtor hereby authorizes Secured Party to execute and file, in the name of Debtors or otherwise, Uniform Commercial Code (the “Code”) financing statements (which may be carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement relating to this Agreement) which Secured Party in its sole discretion may deem necessary or appropriate to further perfect the security interests created herein; and

4.6.
     Not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral.

5. ADDITIONAL PROVISIONS CONCERNING THE COLLATERAL .

5.1.
     Debtors hereby authorize Secured Party to file, without the signature of Debtor or the Debtor

 


Exhibit 10.4

where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral.
 
5.2.
     Debtors hereby irrevocably appoint Secured Party as Debtors' attorney-in-fact and proxy, with full authority in the place and stead of Debtors, and in their names or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement.

5.3.
     If Debtors fail to perform any agreement or obligation contained herein, Secured Party may perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor and/or the Debtor pursuant to Section 7 hereof.

5.4.
     Secured Party shall have no duty or liability to preserve rights pertaining thereto and shall be relieved of all responsibility for the Collateral, and Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Secured Party accords his own property.

6. COVENANTS AS TO THE DEBTORS' OPERATIONS

6.1.
     AFFIRMATIVE COVENANTS. From and after the Effective Date of this Agreement and so long as any of the Obligations remain outstanding, Debtors will, unless Secured Party otherwise consents in writing:

6.1.1.
     Use its best efforts to preserve and grow the Debtor's business and its relationships with and the goodwill of the customers and others having business dealings with the Debtors;

6.1.2.
     Cause the Debtor to perform all of the Debtor’s obligations under contracts, leases and documents relating to or affecting its business or its assets, except such obligations as the Debtor in good faith reasonably disputes;

6.1.3.
     Cause the Debtor to pay the Debtor’s debts, obligations and trade payables only when and as they become due;

6.1.4.
     Permit Secured Party access to the Debtor’s books and records, including financial records, upon five (5) days advance written notice for the purpose of auditing Debtor’s performance of its obligations hereunder. In the event such an audit reveals that Debtor has materially breached any covenant or agreement hereunder, Debtor shall immediately reimburse Secured Party for the costs and expenses incurred by Secured Party in conducting such audit.

6.2.
     NEGATIVE COVENANTS. From and after the Effective Date of this Agreement, and for

 


Exhibit 10.4

so long as any Obligation remains outstanding, Debtors will not, without the prior written consent of Secured Party:

6.2.1.
     Approve any amendment to the Articles of Incorporation or the Bylaws of the Debtors;

6.2.2.
     Permit the Debtors to issue, reserve for issuance, grant, sell or authorize the issuance of any shares of capital stock or other securities or subscriptions, options, warrants, calls rights or commitments of any kind relating to the shares of capital stock of the Debtors or any of its affiliates, or grant any option, warrant or right to purchase any bonds, debentures, notes or other corporate securities;

6.2.3.
     Permit the Debtors to subdivide or in any way reclassify any of the shares of its capital stock;

6.2.4.
     Permit the Debtors to declare, set aside or pay any dividend or other distribution or payment in respect of the outstanding shares of its capital stock, or purchase, redeem or otherwise acquire any of the shares of the capital stock of the Debtors or any of its affiliates;

6.2.5.
     Permit the Debtors to take any action, the effect of which is to cause or permit the Debtor to merge, consolidate or reorganize with or sell substantially all of its assets to any other person or entity,

6.2.6.
     Permit the Debtors to introduce any new material method of management or operation, or make any change in the conduct or operation of the Debtor’s business, other than changes made in the lawful and ordinary course of business which, individually and in the aggregate, do not materially and adversely affect the Debtor or its business;

6.2.7.
     Permit the Debtors to pay to Karen Forrister or David Lemcke a salary or other remuneration of any sort other than the approved management fees set forth in Section 6.2.15 below.;

6.2.8.
     Permit the Debtor to incur any debt or subject any of its assets to any encumbrance, except in the ordinary course of business;

6.2.9.
     Permit the Debtor to sell, lease, dispose of, or waive any substantial rights relating to, any of the property or assets of the Debtor, whether tangible or intangible, other than sales occurring in the lawful and ordinary course of business;

6.2.10.
     Permit the Debtors to conduct any bargain or liquidation sale or otherwise offer or dispose of its inventory at lower prices or on more favorable terms and conditions than those that have historically been charged or utilized by the Debtor, but this provision shall not be construed to apply to normal promotional sales to the extent such sales are consistent with the Debtor's past practices;

 


Exhibit 10.4


6.2.11.
     Permit the Debtors to voluntarily incur any obligation or liability, whether absolute, accrued, contingent or otherwise, other than (a) obligations incurred in connection with the purchase of goods and services in the ordinary course of business consistent with past practices, and (b) other obligations incurred in the lawful and ordinary course of business which individually and in the aggregate do not have a material adverse effect on the Debtor’s financial condition;

6.2.12.
     Cause or allow the loss of any insurance coverage for the Debtor’s assets or its business, unless replaced with coverage that was substantially similar (in amount and insurer) to the coverage now in effect;

6.2.13.
     Permit the Debtors to sell or dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of the Debtor that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period;

6.2.14.
     Permit the Debtors to suffer any diminution in value whether in the form of damage to reputation, loss of prospective business or the termination of material contracts such that in Secured Party's reasonable judgment, the value of the Collateral has, or is likely to, materially decline..

6.2.15.
     Enter into a management or other agreement of any sort between Debtors and, directly or indirectly, Karen Forrister or David Lemcke or any entity or affiliate with which they have a pecuniary interest of any sort for management or other services to be provided to the Debtors or its affiliates, without the express written permission of Secured Party; provided, however, that Debtors may enter into a management agreement and pay such persons or entities a management fee of 2.5% of Debtors’ revenue from the Savannah Beach Facility and then a management fee of 2.5% on its revenue from both the Oceanside and Jeffersonville Facilities at such time that such Facilities have been recertified for Medicare reimbursement by CMS and Debtors are paying rent to Secured Party for them under the master sublease between Debtors and Secured Party.

6.3.
     REPORTS. In furtherance of the covenants contained in this Section 6, the Debtor shall furnish Secured Party, within fifteen (15) days of the end of each month and twenty (20) days of the end of each quarter of year end, with a profit and loss statement of the Debtor's operations for the month or applicable period, a current balance sheet and a executive summary of all business transacted during the month or applicable period. Debtor shall revise the reports and furnish such additional information or prepare such other business summaries as Secured Party may request from time to time. Secured Party shall also have the right to conduct such audits of the Debtor's books and records that Secured Party deems necessary or appropriate to ensure compliance with the provisions of this Agreement.

7. REMEDIES UPON AN EVENT OF DEFAULT
 
If Debtors shall have breached a term of this Agreement or an event of default shall have occurred under the Note or any other document executed in connection with this Agreement then:


 


Exhibit 10.4

7.1.
     Secured Party may (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all of the rights and remedies of a secured party under the Code; and (b) without limiting the generality of the foregoing, but subject to only the notice specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or elsewhere, at such price or prices and on such other terms as Secured Party may deem commercially reasonable, for cash or on credit or for future delivery. Debtors agree that, to the extent notice of sale shall be required by law, at least 30 days' notice to Debtors of the time and place of any public sale or the time after which any private sale is to be made shall constitute "reasonable notification" to it. Secured Party shall not be obligated to make any sale of the Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned without further notice to Debtor or the Debtor.
 
7.2.
     In the event that Secured Party elects to exercise its right, if any, to sell all or any part of the Collateral pursuant to Section 7.1, above, Debtors will, at their own expense and upon request by Secured Party, do or cause to be done all such other acts and things as may be necessary to vest good title to such Collateral in the purchaser thereof in compliance with applicable law. Debtors acknowledge that a breach of any of the covenants contained in this Section 7.2 may cause irreparable injury to Secured Party, that Secured Party shall have no adequate remedy at law in respect of such breach and, as a consequence, the covenants of Debtors contained in this Section 7.2 shall be specifically enforceable against Debtor and the Debtor, and Debtors hereby waive, to the extent such waiver is enforceable under law, and shall not assert any defenses against any action for specific performance of such covenants, except for the defense that no event of default has occurred.

7.3.
     Secured Party may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of a widely distributed standard price quotations, at any private sale).

7.4.
     Upon any such sale, Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor and/or the Debtor which may be waived, and Debtor and the Debtor, to the extent permitted by law, hereby specifically waive all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted.

7.5.
     The notice (if any) of such sale required by Section 7.1, above, shall (a) in case of a public sale, state the time and place fixed for such sale, and (b)  in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale ( provided that such notice complies with law). At any such sale the Collateral may be sold in one lot at an entirety or in separate parcels, as Secured Party may determine.

7.6.
     In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of any such failure, such Collateral may again be

 


Exhibit 10.4

sold upon like notice. Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests granted herein and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction.

7.7.
     Notwithstanding the provisions of Section 7.2, above, Debtors recognize that Secured Party may deem it impracticable to effect a public sale of all or any part of the Collateral and that Secured Party may, therefore, determine to make one or more private sales of any such Collateral to a restricted group of purchasers. Debtors acknowledge that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner.
 
7.8.
     Any cash held by Secured Party as the Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied and accounted for by Secured Party as follows:

7.8.1.
     First, to the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses incurred by Secured Party in connection with (a) the administration of this Agreement, (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (c) the exercise or enforcement of any of the rights of Secured Party hereunder, or (d) the failure of Debtor and/or the Debtor to perform or observe any of the provisions hereof;

7.8.2.
     Second, at the option of Secured Party, to the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral;

7.8.3.
     Third, to the reimbursement of Secured Party for the amount of any obligations of Debtor and/or the Debtor paid or discharged by Secured Party pursuant to the provisions of this Agreement, and of any reasonable expenses of Secured Party payable by Debtor and/or the Debtor hereunder;

7.8.4.
     Fourth, ratably to the satisfaction of the Obligations, first to accrued interest and then to principal;

7.8.5.
     Fifth, to the payment of any other amounts required by applicable law (including, without limitation, Section 9-504(1)(c) of the Code or any successor or similar applicable statutory provision); and

7.8.6.
     Sixth, the surplus proceeds, if any, to Debtor and the Debtor, ratably, or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct.


 


Exhibit 10.4

7.9.
     In the event that the proceeds of any such sale, collection or realization are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon at the maximum rate then permitted by law from the date of sale, collection or realization, together with the costs of collection and the reasonable fees of any attorneys employed by Secured Party to collect such deficiency.

7.10.
     Upon written demand to Debtor from Secured Party, Debtor shall be deemed to have sold the Debtor and shall be bound by the provisions of the covenant not to compete attached hereto as EXHIBIT A, without any further action on the part of Debtor or Secured Party; provided, however, that Debtor shall execute any additional documents that Secured Party requests to give effect to this paragraph.

8. INDEMNITY AND EXPENSES

8.1.
     Debtors shall indemnify and hold harmless Secured Party from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from the gross negligence or willful misconduct of Secured Party.
 
8.2.
     Debtors will upon demand pay to Secured Party the amount of any and all costs and expenses, including the fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with (a) the custody (including escrow expenses), preservation, use or preparation of, or the sale of, collection or other realization upon, any Collateral; (b) the exercise or enforcement of any of the rights of Secured Party hereunder; (c) the failure by Debtor or the Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct; and (d) the amount of any taxes which Secured Party may be or may have been required to pay by reason of the security interests herein granted or to free the Collateral from any liens thereon, except expenses resulting from Secured Party's gross negligence or willful misconduct. Any such amount not paid on demand shall bear interest at sixteen and three quarters percent (16.75%) per annum or the maximum amount permitted by law, whichever is less.

9. MISCELLANEOUS

9.1.
     This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together constitute one and the same instrument, binding on all the parties hereto.

9.2.
     Any notices permitted or required hereunder shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivery of a legible copy was made personally or by facsimile transmission, or (b) or the first (1 st ) business day following the date of delivery to an over-night courier for next-day delivery with charges prepaid or charged to the account of the person giving such notice, or (c) on the third (3 rd ) business day after the date on which mailed by registered or certified mail, return receipt requested, addressed to the party for whom intended at the address set forth on the signature page of this Agreement or such other address, notice of which is given as provided herein.


 


Exhibit 10.4

9.2.1.
     Any party, in its sole discretion and for any reason, may reject the decision of the arbitration panel and seek adjudication of the dispute by giving written notice of its intention to do so within thirty (30) days after receipt of the written decision of the arbitrators and commencing appropriate legal proceedings to obtain adjudication of the dispute within thirty (30) days after the date on which it gives such notice.

9.2.2.
     Any party who rejects the decision of an arbitration panel and seeks to have a dispute submitted to adjudication by litigation following an arbitration proceeding as provided by Section 9.3.3, below, shall be obligated to pay the costs and reasonable attorneys fees incurred by the other party in such arbitration proceeding.

9.2.3.
     Any judicial action or proceeding commenced pursuant to this Section 9.3 shall be commenced and conducted in a state or federal court of competent jurisdiction situated in the county or judicial district in which the defendant in such action or proceeding has its corporate headquarters.

9.3.
     No waiver of any right hereunder shall be effective for any purpose unless in writing and signed by the party possessing said right. Any such written waiver shall not be construed to waive any subsequent right or other term or provision of this Agreement.

9.4.
     This Agreement shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators, assigns and legal representatives of each of them.

9.5.
     The parties agree that each party and its counsel have reviewed and revised this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendments of exhibits thereto. As used in this Agreement, the masculine, feminine and neuter gender and the singular or plural number shall each be deemed to include the other whenever the context indicates or requires.

9.6.
     This Agreement (a) constitutes the entire understanding of the parties concerning the matters set forth herein, and supersedes all prior and contemporaneous understandings, whether oral or written, concerning such matters, and (b) may not be modified or amended, except by an instrument signed by the party against whom enforcement of any such amendment may be sought.

9.7.
     If any action is commenced to construe or enforce this Agreement or the rights and duties created hereunder, then the party prevailing in that action shall be entitled to recover its attorneys' fees in that action and the costs and fees of enforcing any judgment entered therein.

9.8.
     The effective date of this Agreement shall be the date first written above.

IN WITNESS WHEREOF , the parties hereto have executed this Agreement, effective on the date set forth above.


 


Exhibit 10.4

DEBTORS


OS TYBEE, LLC,
a Georgia limited liability company

By: __________________________
Name: __________________________
Title: __________________________  

SB TYBEE, LLC,
a Georgia limited liability company

By: __________________________
Name: __________________________
Title: __________________________

JV JEFFERSONVILLE, LLC,
a Georgia limited liability company

By: __________________________
Name: __________________________
Title: __________________________  
SECURED PARTY



ADK Georgia, LLC,
a Georgia limited liability company

By: __________________________
Name: __________________________
Title: __________________________  





 



C.






















 


Exhibit 10.4


SCHEDULE 10.2
CAPITAL IMPROVEMENTS
Savannah Beech
Laundry - Repairing 2 washers and one dryer
 
Completed
 
Savannah Beech
6 PTAC’s not working
$5,500
Still need 6 for vacant rooms
 
Savannah Beech
Sprinkler heads needed in closets
$9,000
They have not been officially sited yet but will be on the next annual survey.
 
Savannah Beech
Hot water tank Laundry
$4,200
Repaired at this time. Don’t believe it will last to long
 
Both Savannah Beech and Oceanside
Dining room Tables
$4,500
6 Dining room Tables with chipped and ruff edges
 
Both Savannah Beech & Oceanside
60 New mattresses
Complete
68 have been received and disturbed.
 
Both Savannah Beech and Oceanside
Bedside cabinets, over the bed tables
$7,500
Over the bed tables have been ordered and received. Not every room has a bedside cabinet. Approximately 50 needed.
 
 
 
 
 
 









 


Exhibit 10.4


                            


                            

SCHEDULE 10.2
CAPITAL IMPROVEMENTS
Savannah Beech
 
Laundry – Repairing 2 washers and one dryer
 
Completed
 
Savannah Beech
6 PTAC’s not working
$5,500
Still need 6 for vacant rooms
 
Savannah Beech
Sprinkler heads needed in closets
$9,000
They have not been officially sited yet but will be on the next annual survey.
 
Savannah Beech
Hot water tank Laundry
$4,200
Repaired at this time. Don’t believe it will last to long
 
Both Savannah Beech and Oceanside

Dining room Tables

$4,500
6 Dining room Tables with chipped and ruff edges
 
Both Savannah Beech & Oceanside
60 New mattresses

Complete
68 have been received and disturbed.
 
Both Savannah Beech and Oceanside
Bedside cabinets, over the bed tables

$7,500

Over the bed tables have been ordered and received. Not every room has a bedside cabinet. Approximately 50 needed.
 
 
 
 
 
 




Exhibit 10.5


1

$1,000,000.00 July 6, 2016
PROMISSORY NOTE
FOR VALUE RECEIVED, OS TYBEE, LLC , a Georgia limited liability company (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability company (“ SB Tybee ”) JV JEFFERSONVILLE, LLC , a Georgia limited liability company (“ JV Jeffersonville ”) , (hereinafter collectively referred to as “Maker”), jointly and severally, promise to pay to the order of ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation (hereinafter, together with any other holder hereof, referred to as “Holder”), or to such other party or parties as Holder may from time to time designate in writing, the principal sum of up to ONE MILLION AND 00/100 DOLLARS ($1,000,000.00), together with simple interest accruing on the unpaid balance of this Note at a rate equal to Thirteen and one-half percent (13.5%) per annum (the “Interest Rate”).
The principal amount of this Note shall be disbursed by Holder to Maker in five (5) tranches in such amounts as Maker shall request in writing at least 30 days prior to the funding date. Any borrowings in excess of $350,000 per Facility are subject to approval by ADK Georgia, LLC, a subsidiary for Holder ("ADK") and Maker's landlord under a Master Sublease dated as of June 2016 (the "Sublease"). In no event shall Maker be entitled to make a draw if a notice of default is pending with respect to its Sublease, Security Agreement or Deposit Control Account with ADK Capitalized terms used herein that are not otherwise defined shall have the meanings assigned to such Terms in the Sublease.
The entire principal sum of this Note together with all accrued and unpaid interest is due and payable one year from the date the first tranche is funded hereunder (the “Maturity Date”). Notwithstanding the foregoing, Maker shall make monthly payments of the Interest Rate only on the then outstanding current balance of the Note in arrears on the first day of each calendar month.
The principal amount of the Note may be prepaid in whole from time to time and at any time without premium or penalty.
If the payment obligation under this Note is not paid when due, Maker will be obligated to pay the Holder’s costs of collection, including reasonable attorney fees actually incurred. Any payment which is not paid within five (5) days of the date due (including that which may become due upon acceleration as hereinafter provided) will be subject to a 5% late fee and will bear interest at the rate which is five percent (5%) per annum in excess of the Interest Rate (the “Default Rate”), from the date of the payment is due until paid.
If Maker fails to pay when due any amount payable hereunder and such failure continues for five (5) days after written notice thereof from Maker, then the entire unpaid principal balance of this Note, together with accrued interest thereon, will, at the option of Holder, be immediately due and payable, and Holder may proceed forthwith to collect the same regardless of the stipulated date of maturity, TIME BEING OF THE ESSENCE HEREOF FOR ALL PURPOSES. Neither Holder’s failure to exercise this right of acceleration of the maturity of the indebtedness evidenced hereby, nor Holder’s acceptance of one or more past due installments, nor Holder’s granting of any indulgences from time to time, will constitute a novation of this contract or a waiver of the right of Holder thereafter to insist upon strict compliance with the terms of this Note.
No extension of time for the payment of this Note or any installment due hereunder will release, discharge, modify or change the liability of the Maker or any endorser under this Note.
This Note may not be assigned to or assumed by any other party, without the express written consent of the Holder.
Maker covenants and agrees that until all principal and interest due under this Note has been paid in full that it and its affiliated entities shall not pledge the accounts receivable relating to any of the facilities (collectively, the “Facilities”) identified in Lease as all such receivables and assets of Maker are pledged to Holder pursuant to a deposit control or similar agreement of even date herewith. Maker agrees to execute a deposit account instruction and service agreement and a security agreement in favor of Holder, which is reasonably satisfactory to Holder, as a condition to Holder funding any payments hereunder. Maker further


Exhibit 10.5

agrees to execute and comply with the terms of the Security Agreement which it executes concurrent with the execution of this Note to secure its obligations hereunder. A default under the Sublease, the Security Agreement or the Deposit Control Agreement constitutes a default under this Note.
The terms of this Note are binding upon and inure to the benefit of the parties, and their respective legal representatives, successors and assigns. This instrument is governed by the laws of the State of Georgia without regard to conflicts of laws principles.
[Signatures begin on the following page.] 3



Exhibit 10.5

IN WITNESS WHEREOF, Maker has executed and delivered this Note effective as of the day and year first above written.
OS TYBEE LLC,
a Georgia limited liability company
By:
Name:
Title:
SB TYBEE LLC,
a Georgia limited liability company
By:
Name:
Title:
JV JEFFERSONVILLE, LLC,
a Georgia limited liability company
By:
Name:
Title:









Exhibit 10.6



 

SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into, as of this 6 th day of July 2016, by and among OS TYBEE, LLC , a Georgia limited liability Debtor (“ OS Tybee ”), SB TYBEE, LLC , a Georgia limited liability Debtor (“ SB Tybee ”) and JV JEFFERSONVILLE, LLC , a Georgia limited liability Debtor (“ JV Jeffersonville ”) (OS Tybee, SB Tybee and JV Jeffersonville are sometimes collectively referred to as “ Debtors ”), and ADK GEORGIA, LLC, a Georgia limited liability Debtor (" Secured Party "), with reference to the following facts:
RECITALS:
A. Contemporaneously with the execution of this Agreement, Debtor is borrowing funds from Secured Party or its parent entity pursuant to the terms of that certain Promissory Note for borrowings of up to $1,000,000 dated of even date herewith (the "Note").

B. Debtor has agreed to grant to Secured Party a first-priority security interest in all of the cash, accounts receivable, assets, FF&E, records, goodwill, contracts, agreements and properties, both tangible and intangible, owned or leased by the Debtor that are used in connection with the ownership, operation or development of the Debtor's business operation in accordance with the terms and conditions set forth herein.

AGREEMENTS:
NOW, THEREFORE , the parties hereto, intending to be legally bound, do hereby agree as follows:
1. GRANT OF SECURITY INTEREST.

1.1. DEBTORS' PLEDGE . As collateral security for all of the Obligations (as defined in Section 2 hereof), Debtors' hereby pledges and assigns to Secured Party and grants to Secured Party a continuing security interest in the following:

1.1.1. All cash, accounts receivable, assets, and properties, both tangible and intangible, owned or leased by the Debtors that are used in connection with the ownership, operation or development of the Debtors' business to the extent Debtors have an interest therein (Debtors acknowledges that pursuant to the terms of its sublease with Secured Party all FF&E and personal property at the Debtors' facilities belongs to Secured Party and Debtors have no ownership interest therein); and

1.1.2. All profits, income, property, and any and all other proceeds arising from or on account of the above-described property, whether now owned or hereafter acquired by the Debtors and howsoever its interest therein may arise or appear (whether by ownership, security interest claim or otherwise).

1.2. DEFINITION OF COLLATERAL. The assets and properties described in
 


Exhibit 10.6


Sections 1.1 and 1.2, above, shall be referred to collectively as the “Collateral.”

2. SECURITY FOR OBLIGATIONS

2.1. The security interest created by this Agreement in the Collateral constitutes continuing collateral security for:

2.1.1. The payment of all principal of, interest on, late payments under, and prepayment penalties or premiums (if any) with respect to, the Note;

2.1.2. The performance and discharge of each and every obligation of Debtors contained herein or in any other document executed in connection with the Note; and

2.1.3. Each and every amendment, renewal, increase or extension of any of the foregoing.

All of the foregoing items listed in this Section 2.1 are collectively referred to as the "Obligations."
2.2. The security interests granted herein are granted as security only and shall not subject Secured Party to, or transfer or in any way affect or modify, any obligation or liability of Debtor or the Debtor with respect to any of the Collateral or any transaction in connection therewith.

3. REPRESENTATIONS AND WARRANTIES . Debtors represent and warrant to Secured Party that:

3.1. Debtors and/or the Debtor are and will be at all times the legal and beneficial owner of the Collateral free and clear of any lien, security interest or other charge or encumbrance, except for the security interest created by this Agreement.

3.2. The exercise by Secured Party of its rights and remedies hereunder in accordance with and subject to the terms hereof will not contravene any law or governmental regulation currently existing or any contractual restriction in either case binding on or affecting Debtor or the Debtor, or any of their respective properties, and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of Debtor's or the Debtor’s other properties or the acceleration of any indebtedness.

3.3. No authorization or approval or other action by any governmental authority or regulatory body or any other person is required to be obtained by Debtor or the Debtor for the pledge hereunder by Debtor of, or the grants by Debtors of the security interest created in, the Collateral under this Agreement.

3.4. This Agreement creates a valid security interest in favor of Secured Party in the Collateral.
 


Exhibit 10.6


3.5. No financing statement covering the Collateral or any part thereof has been filed by Debtor with any filing officer, and no security agreement covering the Collateral or any part thereof has been made other than with Secured Party, and no security interest, other than the security interest granted to Secured Party, has attached or been perfected in the Collateral or in any part thereof.

4. COVENANTS AS TO THE COLLATERAL.

So long as any of the Obligations shall remain outstanding, Debtors will, unless Secured Party shall otherwise consent in writing:
4.1. Keep adequate records concerning the Collateral and permit Secured Party or any agents or representatives thereof at any reasonable time, upon reasonable prior notice, and from time to time to examine and make copies of and abstracts from such records;

4.2. At its expense, defend Secured Party's right, title and special property and security interest in and to the Collateral against the claims of any person;

4.3. At its expense, at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or that Secured Party may reasonably request in order to (a) perfect and protect the security interest created or purported to be created hereby, (b) enable Secured Party to exercise and enforce his rights and remedies hereunder in respect of the Collateral, (c) otherwise effect the purposes of this Agreement;

4.4. Not create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any Collateral;

4.5. At its expense and in such manner and form as Secured Party may require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be necessary or desirable, or that Secured Party may request, in order to create, preserve, perfect or validate any security interest granted herein or to enable Secured Party to exercise and enforce its rights in accordance with the terms hereof with respect to any of the Collateral. To the extent permitted by applicable law, Debtor hereby authorizes Secured Party to execute and file, in the name of Debtors or otherwise, Uniform Commercial Code (the “Code”) financing statements (which may be carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement relating to this Agreement) which Secured Party in its sole discretion may deem necessary or appropriate to further perfect the security interests created herein; and

4.6. Not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral.

5. ADDITIONAL PROVISIONS CONCERNING THE COLLATERAL .

5.1. Debtors hereby authorize Secured Party to file, without the signature of Debtor or
 


Exhibit 10.6


the Debtor where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral.

5.2. Debtors hereby irrevocably appoint Secured Party as Debtors' attorney-in-fact and proxy, with full authority in the place and stead of Debtors, and in their names or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement.

5.3. If Debtors fail to perform any agreement or obligation contained herein, Secured Party may perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor and/or the Debtor pursuant to Section 7 hereof.

5.4. Secured Party shall have no duty or liability to preserve rights pertaining thereto and shall be relieved of all responsibility for the Collateral, and Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Secured Party accords his own property.

6. COVENANTS AS TO THE DEBTORS' OPERATIONS

6.1. AFFIRMATIVE COVENANTS. From and after the Effective Date of this Agreement and so long as any of the Obligations remain outstanding, Debtors will, unless Secured Party otherwise consents in writing:

6.1.1. Use its best efforts to preserve and grow the Debtor's business and its relationships with and the goodwill of the customers and others having business dealings with the Debtors;

6.1.2. Cause the Debtor to perform all of the Debtor’s obligations under contracts, leases and documents relating to or affecting its business or its assets, except such obligations as the Debtor in good faith reasonably disputes;

6.1.3. Cause the Debtor to pay the Debtor’s debts, obligations and trade payables only when and as they become due;

6.1.4. Permit Secured Party access to the Debtor’s books and records, including financial records, upon five (5) days advance written notice for the purpose of auditing Debtor’s performance of its obligations hereunder. In the event such an audit reveals that Debtor has materially breached any covenant or agreement hereunder, Debtor shall immediately reimburse Secured Party for the costs and expenses incurred by Secured Party in conducting such audit.

6.2. NEGATIVE COVENANTS. From and after the Effective Date of this Agreement, and for so long as any Obligation remains outstanding, Debtors will not, without the prior written consent of Secured Party:
 


Exhibit 10.6


6.2.1. Approve any amendment to the Articles of Incorporation or the Bylaws of the

Debtors;
6.2.2. Permit the Debtors to issue, reserve for issuance, grant, sell or authorize the issuance of any shares of capital stock or other securities or subscriptions, options, warrants, calls rights or commitments of any kind relating to the shares of capital stock of the Debtors or any of its affiliates, or grant any option, warrant or right to purchase any bonds, debentures, notes or other corporate securities;

6.2.3. Permit the Debtors to subdivide or in any way reclassify any of the shares of its

capital stock;
6.2.4. Permit the Debtors to declare, set aside or pay any dividend or other distribution or payment in respect of the outstanding shares of its capital stock, or purchase, redeem or otherwise acquire any of the shares of the capital stock of the Debtors or any of its affiliates;

6.2.5. Permit the Debtors to take any action, the effect of which is to cause or permit the Debtor to merge, consolidate or reorganize with or sell substantially all of its assets to any other person or entity,

6.2.6. Permit the Debtors to introduce any new material method of management or operation, or make any change in the conduct or operation of the Debtor’s business, other than changes made in the lawful and ordinary course of business which, individually and in the aggregate, do not materially and adversely affect the Debtor or its business;

6.2.7. Permit the Debtors to pay to Karen Forrister or David Lemcke a salary or other remuneration of any sort other than the approved management fees set forth in Section 6.2.15 below.;

6.2.8. Permit the Debtor to incur any debt or subject any of its assets to any encumbrance, except in the ordinary course of business;

6.2.9. Permit the Debtor to sell, lease, dispose of, or waive any substantial rights relating to, any of the property or assets of the Debtor, whether tangible or intangible, other than sales occurring in the lawful and ordinary course of business;

6.2.10. Permit the Debtors to conduct any bargain or liquidation sale or otherwise offer or dispose of its inventory at lower prices or on more favorable terms and conditions than those that have historically been charged or utilized by the Debtor, but this provision shall not be construed to apply to normal promotional sales to the extent such sales are consistent with the Debtor's past practices;
 


Exhibit 10.6


6.2.11. Permit the Debtors to voluntarily incur any obligation or liability, whether absolute, accrued, contingent or otherwise, other than (a) obligations incurred in connection with the purchase of goods and services in the ordinary course of business consistent with past practices, and (b) other obligations incurred in the lawful and ordinary course of business which individually and in the aggregate do not have a material adverse effect on the Debtor’s financial condition;

6.2.12. Cause or allow the loss of any insurance coverage for the Debtor’s assets or its business, unless replaced with coverage that was substantially similar (in amount and insurer) to the coverage now in effect;

6.2.13. Permit the Debtors to sell or dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of the Debtor that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period;

6.2.14. Permit the Debtors to suffer any diminution in value whether in the form of damage to reputation, loss of prospective business or the termination of material contracts such that in Secured Party's reasonable judgment, the value of the Collateral has, or is likely to, materially decline.

6.2.15. Enter into a management or other agreement of any sort between Debtors and, directly or indirectly, Karen Forrister or David Lemcke or any entity or affiliate with which they have a pecuniary interest of any sort for management or other services to be provided to the Debtors or its affiliates, without the express written permission of Secured Party; provided, however, that Debtors may enter into a management agreement and pay such persons or entities a management fee of 2.5% of Debtors’ revenue from the Savannah Beach Facility and then a management fee of 2.5% on its revenue from both the Oceanside and Jeffersonville Facilities at such time that such Facilities have been recertified for Medicare reimbursement by CMS and Debtors are paying rent to Secured Party for them under the master sublease between Debtors and Secured Party.

6.3. REPORTS. In furtherance of the covenants contained in this Section 6, the Debtor shall furnish Secured Party, within fifteen (15) days of the end of each month and twenty (20) days of the end of each quarter of year end, with a profit and loss statement of the Debtor's operations for the month or applicable period, a current balance sheet and a executive summary of all business transacted during the month or applicable period. Debtor shall revise the reports and furnish such additional information or prepare such other business summaries as Secured Party may request from time to time. Secured Party shall also have the right to conduct such audits of the Debtor's books and records that Secured Party deems necessary or appropriate to ensure compliance with the provisions of this Agreement.

7. REMEDIES UPON AN EVENT OF DEFAULT.

If Debtors shall have breached a term of this Agreement or an event of default shall have occurred under the Note or any other document executed in connection with this Agreement then 7


Exhibit 10.6


7.1. Secured Party may (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all of the rights and remedies of a secured party under the Code; and (b) without limiting the generality of the foregoing, but subject to only the notice specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or elsewhere, at such price or prices and on such other terms as Secured Party may deem commercially reasonable, for cash or on credit or for future delivery. Debtors agree that, to the extent notice of sale shall be required by law, at least 30 days' notice to Debtors of the time and place of any public sale or the time after which any private sale is to be made shall constitute "reasonable notification" to it. Secured Party shall not be obligated to make any sale of the Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned without further notice to Debtor or the Debtor.

7.2. In the event that Secured Party elects to exercise its right, if any, to sell all or any part of the Collateral pursuant to Section 7.1, above, Debtors will, at their own expense and upon request by Secured Party, do or cause to be done all such other acts and things as may be necessary to vest good title to such Collateral in the purchaser thereof in compliance with applicable law. Debtors acknowledge that a breach of any of the covenants contained in this Section 7.2 may cause irreparable injury to Secured Party, that Secured Party shall have no adequate remedy at law in respect of such breach and, as a consequence, the covenants of Debtors contained in this Section 7.2 shall be specifically enforceable against Debtor and the Debtor, and Debtors hereby waive, to the extent such waiver is enforceable under law, and shall not assert any defenses against any action for specific performance of such covenants, except for the defense that no event of default has occurred.

7.3. Secured Party may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of a widely distributed standard price quotations, at any private sale).

7.4. Upon any such sale, Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor and/or the Debtor which may be waived, and Debtor and the Debtor, to the extent permitted by law, hereby specifically waive all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted.

7.5. The notice (if any) of such sale required by Section 7.1, above, shall (a) in case of a public sale, state the time and place fixed for such sale, and (b) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale ( provided that such notice complies with law). At any such sale the Collateral may be sold in one lot at an entirety or in separate parcels, as Secured Party may determine.

7.6. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of any such failure, such Collateral may

Exhibit 10.6

again be sold upon like notice. Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests granted herein and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction.

7.7. Notwithstanding the provisions of Section 7.2, above, Debtors recognize that Secured Party may deem it impracticable to effect a public sale of all or any part of the Collateral and that Secured Party may, therefore, determine to make one or more private sales of any such Collateral to a restricted group of purchasers. Debtors acknowledge that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner.

7.8. Any cash held by Secured Party as the Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied and accounted for by Secured Party as follows:

7.8.1. First, to the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses incurred by Secured Party in connection with (a) the administration of this Agreement, (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (c) the exercise or enforcement of any of the rights of Secured Party hereunder, or (d) the failure of Debtor and/or the Debtor to perform or observe any of the provisions hereof;

7.8.2. Second, at the option of Secured Party, to the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral;

7.8.3. Third, to the reimbursement of Secured Party for the amount of any obligations of Debtor and/or the Debtor paid or discharged by Secured Party pursuant to the provisions of this Agreement, and of any reasonable expenses of Secured Party payable by Debtor and/or the Debtor hereunder;

7.8.4. Fourth, ratably to the satisfaction of the Obligations, first to accrued interest and then to principal;

7.8.5. Fifth, to the payment of any other amounts required by applicable law (including, without limitation, Section 9-504(1)(c) of the Code or any successor or similar applicable statutory provision); and

7.8.6. Sixth, the surplus proceeds, if any, to Debtor and the Debtor, ratably, or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction
dispute submitted to adjudication by litigation following an arbitration proceeding as provided by Section
shall direct.

7.9. In the event that the proceeds of any such sale, collection or realization are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon at the maximum rate then permitted by law from the date of sale, collection or

Exhibit 10.6

realization, together with the costs of collection and the reasonable fees of any attorneys employed by Secured Party to collect such deficiency.

7.10. Upon written demand to Debtor from Secured Party, Debtor shall be deemed to have sold the Debtor and shall be bound by the provisions of the covenant not to compete attached hereto as EXHIBIT A, without any further action on the part of Debtor or Secured Party; provided, however, that Debtor shall execute any additional documents that Secured Party requests to give effect to this paragraph.

8. INDEMNITY AND EXPENSES

8.1. Debtors shall indemnify and hold harmless Secured Party from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from the gross negligence or willful misconduct of Secured Party.

8.2. Debtors will upon demand pay to Secured Party the amount of any and all costs and expenses, including the fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with (a) the custody (including escrow expenses), preservation, use or preparation of, or the sale of, collection or other realization upon, any Collateral; (b) the exercise or enforcement of any of the rights of Secured Party hereunder; (c) the failure by Debtor or the Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct; and (d) the amount of any taxes which Secured Party may be or may have been required to pay by reason of the security interests herein granted or to free the Collateral from any liens thereon, except expenses resulting from Secured Party's gross negligence or willful misconduct. Any such amount not paid on demand shall bear interest at sixteen and three quarters percent (16.75%) per annum or the maximum amount permitted by law, whichever is less.

9. MISCELLANEOUS.

9.1. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together constitute one and the same instrument, binding on all the parties hereto.

9.2. Any notices permitted or required hereunder shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivery of a legible copy was made personally or by facsimile transmission, or (b) or the first (1 st ) business day following the date of
delivery to an over-night courier for next-day delivery with charges prepaid or charged to the account of the person giving such notice, or (c) on the third (3 rd ) business day after the date on


Exhibit 10.6


which mailed by registered or certified mail, return receipt requested, addressed to the party for whom intended at the address set forth on the signature page of this Agreement or such other address, notice of which is given as provided herein.

9.2.1. Any party, in its sole discretion and for any reason, may reject the decision of the arbitration panel and seek adjudication of the dispute by giving written notice of its intention to do so within thirty (30) days after receipt of the written decision of the arbitrators and commencing appropriate legal proceedings to obtain adjudication of the dispute within thirty (30) days after the date on which it gives such notice.

9.2.2. Any party who rejects the decision of an arbitration panel and seeks to have a 9.3.3, below, shall be obligated to pay the costs and reasonable attorneys' fees incurred by the other party in such arbitration proceeding.

9.2.3. Any judicial action or proceeding commenced pursuant to this Section 9.3 shall be commenced and conducted in a state or federal court of competent jurisdiction situated in the county or judicial district in which the defendant in such action or proceeding has its corporate headquarters.

9.3. No waiver of any right hereunder shall be effective for any purpose unless in writing and signed by the party possessing said right. Any such written waiver shall not be construed to waive any subsequent right or other term or provision of this Agreement.

9.4. This Agreement shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators, assigns and legal representatives of each of them.

9.5. The parties agree that each party and its counsel have reviewed and revised this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendments of exhibits thereto. As used in this Agreement, the masculine, feminine and neuter gender and the singular or plural number shall each be deemed to include the other whenever the context indicates or requires.

9.6. This Agreement (a) constitutes the entire understanding of the parties concerning the matters set forth herein, and supersedes all prior and contemporaneous understandings, whether oral or written, concerning such matters, and (b) may not be modified or amended, except by an instrument signed by the party against whom enforcement of any such amendment may be sought.

9.7. If any action is commenced to construe or enforce this Agreement or the rights and duties created hereunder, then the party prevailing in that action shall be entitled to recover its attorneys' fees in that action and the costs and fees of enforcing any judgment entered therein.

9.8. The effective date of this Agreement shall be the date first written above.

[Signatures begin on the following page.] 11


Exhibit 10.6

IN WITNESS WHEREOF , the parties hereto have executed this Agreement, effective on the date set forth above. DEBTORS:
OS TYBEE, LLC,
a Georgia limited liability company
By:
Name:
Title:
SB TYBEE, LLC,
a Georgia limited liability company
By:
Name:
Title:
JV JEFFERSONVILLE, LLC,
a Georgia limited liability company
By:
Name:
Title:
SECURED PARTY:
ADK Georgia, LLC,
a Georgia limited liability company
By:
Name:
Title:




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 June 30, 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:
August 15, 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 June 30, 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:
August 15, 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 June 30, 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:
August 15, 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 June 30, 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:
August 15, 2016
 
/s/ Allan J. Rimland
 
 
 
Allan J. Rimland
 
 
 
President, Chief Financial Officer, and Corporate Secretary