Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2012

 

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)

 

 

1145 Hembree Road, Roswell, GA 30076

(Address of principal executive offices)

 

(678) 869-5116

(Registrant’s telephone number, including area code)

 

5057 Troy Road, Springfield, OH 45502-9032

(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   x    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   x    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   x

 

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

 

As of June 30, 2012:  13,696,538 shares of common stock with no par value were outstanding.

 

 

Table of Contents

 

AdCare Health Systems, Inc.

Form 10-Q

Table of Contents

 

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)	4
	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2012 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II.	Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
Signatures		38

 

2

Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in 000s)

 

		June 30,			December 31,
		2012			2011
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	9,373		$	7,364
Restricted cash and cash equivalents		3,624			1,883
Accounts receivable, net of allowance of $2,460 and $1,346		26,964			18,759
Prepaid expenses and other		668			663
Assets of disposal group held for sale		38			47
Total current assets		40,667			28,716
Restricted cash and investments		5,812			4,870
Property and equipment, net		147,093			105,143
Intangible assets — bed licenses		2,464			1,189
Intangible assets — lease rights, net		7,925			8,460
Goodwill		906			906
Escrow deposits for acquisitions		1,513			3,172
Lease deposits		1,725			1,685
Deferred loan costs, net		5,733			4,818
Other assets		71			122
Total assets		$	213,909		$	159,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of notes payable and other debt		$	9,401		$	4,567
Revolving credit facilities and lines of credit		1,900			7,343
Accounts payable		16,601			12,075
Accrued expenses		11,424			9,858
Liabilities of disposal group held for sale		143			240
Total current liabilities		39,469			34,083
Notes payable and other debt, net of current portion:
Senior debt, net of discounts		116,603			87,771
Convertible debt, net of discounts		15,035			14,614
Revolving credit facilities		7,064			1,308
Other debt		12,880			1,400
Derivative liability		1,127			1,889
Other liabilities		1,729			2,437
Deferred tax liability		87			86
Total liabilities		193,994			143,588
Commitments and contingencies (Note 14)		—			—
Stockholders’ equity:
Preferred stock, no par value; 1,000 shares authorized; no shares issued or outstanding		—			—
Common stock and additional paid-in capital, no par value; 29,000 shares authorized; 13,697 and 12,193 shares issued and outstanding		39,647			35,047
Accumulated deficit		(18,240		)	(18,713		)
Total stockholders’ equity		21,407			16,334
Noncontrolling interest in subsidiaries		(1,492		)	(841		)
Total equity		19,915			15,493
Total liabilities and stockholders’ equity		$	213,909		$	159,081

 

See notes to consolidated financial statements

 

3

---

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in 000s, except per share data)

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
Revenues:
Patient care revenues		$	54,642		$	33,872		$	104,450		$	64,404
Management revenues		363			484			726			982
Total revenues		55,005			34,356			105,176			65,386
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)		42,227			27,104			82,350			52,279
General and administrative		4,929			3,167			8,860			6,091
Facility rent expense		2,050			1,947			4,115			3,850
Depreciation and amortization		1,761			705			3,258			1,352
Salary retirement and continuation costs		—			622			—			622
Total expenses		50,967			33,545			98,583			64,194
Income from Operations		4,038			811			6,593			1,192
Other Income (Expense):
Interest expense, net		(3,366		)	(1,852		)	(6,320		)	(3,288		)
Acquisition costs, net of gains		(524		)	(622		)	(817		)	357
Derivative gain (loss)		353			(2,588		)	763			(3,938		)
Loss on extinguishment of debt		—			(77		)	—			(77		)
Other income (expense)		(13		)	(19		)	(29		)	587
Total other expense, net		(3,550		)	(5,158		)	(6,403		)	(6,359		)
Income (Loss) from Continuing Operations Before Income Taxes		488			(4,347		)	190			(5,167		)
Income Tax Expense		(45		)	(124		)	(99		)	(210		)
Income (Loss) from Continuing Operations		443			(4,471		)	91			(5,377		)
Loss from discontinued operations		(160		)	(91		)	(269		)	(126		)
Net Income (Loss)		283			(4,562		)	(178		)	(5,503		)
Net Loss Attributable to Noncontrolling Interests		396			165			651			341
Net Income (Loss) Attributable to AdCare Health Systems		$	679		$	(4,397	)	$	473		$	(5,162	)
Net Income (Loss) per Common Share — Basic:
Continuing Operations		$	0.06		$	(0.49	)	$	0.06		$	(0.58	)
Discontinued Operations		(0.01		)	(0.01		)	(0.02		)	(0.01		)
		$	0.05		$	(0.50	)	$	0.04		$	(0.59	)
Net Income (Loss) per Common Share — Diluted:
Continuing Operations		$	0.06		$	(0.49	)	$	0.06		$	(0.58	)
Discontinued Operations		(0.01		)	(0.01		)	(0.02		)	(0.01		)
		$	0.05		$	(0.50	)	$	0.04		$	(0.59	)

 

See notes to consolidated financial statements

 

4

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in 000s)

(Unaudited)

 

		Common Stock Shares		Common Stock and Additional Paid-in Capital			Accumulated Deficit			Noncontrolling Interests			Total
Balance, January 1, 2012		12,193		$	35,047		$	(18,713	)	$	(841	)	$	15,493
Nonemployee warrants for services		—		390			—			—			390
Stock based compensation expense		—		347			—			—			347
Public stock offering, net		1,165		3,768			—			—			3,768
Exercises of options and warrants		69		95			—			—			95
Issuance of restricted stock		270		—			—			—			—
Net income (loss)		—		—			473			(651		)	(178		)
Balance, June 30, 2012		13,697		$	39,647		$	(18,240	)	$	(1,492	)	$	19,915

 

See notes to consolidated financial statements

 

5

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000s)

(Unaudited)

 

		Six Months Ended June 30,
		2012			2011
Cash flows from operating activities:
Net Loss		$	(178	)	$	(5,503	)
Net Loss from discontinued operations		269			126
Net Income (loss) from continuing operations		91			(5,377		)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization		3,258			1,352
Warrants issued for services		—			297
Stock based compensation expense		347			467
Provision for leases in excess of cash		291			379
Amortization of deferred financing costs		975			407
Amortization of debt discounts		429			445
Derivative (gain) loss		(763		)	3,938
Loss on debt extinguishment		—			77
Deferred tax expense		1			95
(Gain) loss on disposal of assets		(2		)	126
Gain on acquisitions		—			(1,104		)
Provision for bad debts		1,233			351
Other noncash items		29			45
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable		(9,306		)	(3,538		)
Prepaid expenses and other		(4		)	278
Other assets		50			(29		)
Accounts payable and accrued expenses		5,081			3,010
Net cash provided by operating activities — continuing operations		1,710			1,219
Net cash (used in) provided by operating activities — discontinued operations		(426		)	14
Net cash provided by operating activities		1,284			1,233
Cash flows from investing activities:
Proceeds from property and equipment		3			—
Change in restricted cash and investments		(485		)	(110		)
Acquisitions		(8,849		)	(5,793		)
Purchase of property and equipment		(2,569		)	(1,943		)
Net cash used in investing activities		(11,900		)	(7,846		)
Cash flows from financing activities:
Proceeds from debt		11,515			4,830
Debt issuance costs		(205		)	(175		)
Change in line of credit		312			4,287
Exercise of warrants and options		95			219
Proceeds from stock issuances, net		3,768			—
Repayment of notes payable		(2,763		)	(709		)
Net cash provided by financing activities — continuing operations		12,722			8,452
Net cash used in financing activities — discontinued operations		(97		)	(89		)
Net cash provided by financing activities		12,625			8,363
Net Change in Cash		2,009			1,750
Cash, Beginning		7,364			3,911
Cash, Ending		$	9,373		$	5,661
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	4,630		$	2,438
Income Taxes		$	46		$	—
Supplemental Disclosure of Non-cash Activities:
Acquisitions in exchange for debt and equity instruments		$	32,720		$	17,384
Warrants issued for financings costs		$	390		$	330
Other assets acquired in exchange for debt		$	3,490		$	3,427

 

See notes to consolidated financial statements.

 

6

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States.  These statements include the accounts of AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”).  Controlled subsidiaries include AdCare’s majority owned subsidiaries and variable interest entities (“VIE”) in which AdCare has control as primary beneficiary.  A “primary beneficiary” is the party in a VIE that has both of the following characteristics:  (a.) The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b.) The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

The Company delivers skilled nursing, assisted living and home health services through wholly owned separate operating subsidiaries.  All inter-company accounts and transactions were eliminated in the consolidation.  The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and notes required for complete annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”).  In the opinion of the Company’s management, all adjustments considered for a fair presentation are included and are of a normal recurring nature.  Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is similar to basic earnings per share except net income or loss is adjusted by the impact of the assumed issuance of common shares upon conversion or exercise of convertible securities and the weighted-average number of common shares outstanding includes potentially dilutive securities, such as options, warrants, non-vested shares, and additional shares issuable under convertible notes outstanding during the period when such potentially dilutive securities are not anti-dilutive. Potentially dilutive securities from options, warrants and non-vested shares 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.

 

		Three Months Ended June 30,
		2012								2011
(Amounts in 000s, except per share  data)		Income (loss)			Shares (1)		Per Share			Income (loss)			Shares (1)		Per Share
Continuing Operations:
Income (loss) from continuing operations		$	443							$	(4,471	)
Net loss attributable to noncontrolling interests		396								165
Basic income (loss) from continuing operations		$	839		13,467		$	0.06		$	(4,306	)	8,847		$	(0.49	)
Effect from options, warrants and non-vested shares		—			447					—			—
Effect from assumed issuance of convertible shares (2)		—			—					—			—
Diluted net income (loss)from continuing operations		$	839		13,914		$	0.06		$	(4,306	)	8,847		$	(0.49	)
Discontinued Operations:
Basic loss from discontinued operations		$	(160	)	13,467		$	(0.01	)	$	(91	)	8,847		$	(0.01	)
Diluted loss from discontinued operations		$	(160	)	13,467		$	(0.01	)	$	(91	)	8,847		$	(0.01	)
Net Income (Loss) Attributable to AdCare:
Basic net income (loss)		$	679		13,467		$	0.05		$	(4,397	)	8,847		$	(0.50	)
Diluted net income (loss)		$	679		13,914		$	0.05		$	(4,397	)	8,847		$	(0.50	)

 

7

---

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited) (Continued)

 

		Six Months Ended June 30,
		2012								2011
(Amounts in 000s, except per share  data)		Income (loss)			Shares (1)		Per Share			Income (loss)			Shares (1)		Per Share
Continuing Operations:
Income (loss) from continuing operations		$	91							$	(5,377	)
Net loss attributable to noncontrolling interests		651								341
Basic income (loss) from continuing operations		$	742		12,834		$	0.06		$	(5,036	)	8,806		$	(0.58	)
Effect from options, warrants and non-vested shares		—			562					—			—
Effect from assumed issuance of convertible shares (2)		—			—					—			—
Diluted net income (loss) from continuing operations		$	742		13,396		$	0.06		$	(5,036	)	8,806		$	(0.58	)
Discontinued Operations:
Basic loss from discontinued operations		$	(269	)	12,834		$	(0.02	)	$	(126	)	8,806		$	(0.01	)
Diluted loss from discontinued operations		$	(269	)	12,834		$	(0.02	)	$	(126	)	8,806		$	(0.01	)
Net Income (Loss) Attributable to AdCare:
Basic net income (loss)		$	473		12,834		$	0.04		$	(5,162	)	8,806		$	(0.59	)
Diluted net income (loss)		$	473		13,396		$	0.04		$	(5,162	)	8,806		$	(0.59	)

 

(1) The weighted average shares outstanding includes retroactive adjustments from the stock dividend issued on October 1, 2011.

(2) The impact of the conversion of the 2010 and 2011 convertible notes were excluded as the impact would be anti-dilutive.

 

Intangible Assets and Goodwill

 

There have been no required impairment adjustments to intangible assets and goodwill during the six months ended June 30, 2012.

 

Intangible assets consist of the following:

 

		June 30, 2012									December 31, 2011
		Gross						Net			Gross						Net
		Carrying			Accumulated			Carrying			Carrying			Accumulated			Carrying
Amounts in (000s)		Amount			Amortization			Amount			Amount			Amortization			Amount
Lease Rights		$	9,545		$	1,620		$	7,925		$	9,545		$	1,085		$	8,460
Bed Licenses (included in property and equipment)		34,664			1,056			33,608			26,149			533			25,616
Bed Licenses - Separable		2,464			—			2,464			1,189			—			1,189
Totals		$	46,673		$	2,676		$	43,997		$	36,883		$	1,618		$	35,265

 

8

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited) (Continued)

 

Intangible Assets and Goodwill

 

For the six months ended June 30, 2012, amortization expense was approximately $523,000 for bed licenses included in property and equipment.  There was no amortization of bed licenses for the six months ended June 30, 2011.   For the six months ended June 30, 2012 and 2011, amortization expense was $535,000 and $442,000, respectively, for lease rights.  Estimated amortization expense for each of the following years ending December 31 is as follows:

 

(Amounts in 000s)		Lease Rights			Bed Licenses
2012 (remainder)		$	534		$	601
2013		1,069			1,202
2014		1,010			1,202
2015		885			1,202
2016		885			1,202
Thereafter		3,542			28,199
		$	7,925		$	33,608

 

Compensated Absences

 

In 2012, the Company removed the ability for employees to accumulate earned but unused vacation beyond the current calendar year.  As a result, vacation time previously accumulated must be used by the employee by December 31, 2012 or it will be forfeited.  Management has estimated the potential forfeitures and has adjusted the vacation accrual accordingly.

 

NOTE 2.       LIQUIDITY AND PROFITABILITY

 

The Company had net income of approximately $679,000 and $473,000 for the three and six months ended June 30, 2012, respectively, and a net loss of $4,397,000 and $5,162,000 for the three and six months ended June 30, 2011, respectively.  The Company had positive working capital of approximately $1,198,000 at June 30, 2012.  The Company’s ability to sustain profitable operations is dependent on continued growth in revenue and controlling costs.

 

Management’s plans for increasing liquidity and profitability in future years include the following:

 

·              increasing facility occupancy and improving the occupancy mix by increasing Medicare patients;

·              acquiring additional long term care facilities with existing cash flowing operations to expand our operations, and

·              refinancing debt where possible to obtain more favorable terms.

 

Management believes that the foregoing actions, if taken by the Company, should provide the opportunity for the Company to improve liquidity and achieve profitability; however, there is no assurance that such actions will occur or, if they do occur, that they will result in improved liquidity or profitability.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3.       DISCONTINUED OPERATIONS

 

As part of the Company’s strategy to focus on the growth of its skilled nursing segment, the Company decided in the fourth quarter of 2011 to exit the home health segment of the business.  This segment represents less than 2% of total revenues for the Company over the past year.

 

As a result of the decision to exit the home health business, the assets and liabilities that are expected to be sold are reflected as assets and liabilities held for sale and are comprised of the following:

 

(Amounts in 000s)		June 30, 2012			December 31, 2011
Property and equipment, net		$	36		$	45
Other assets		2			2
Assets of disposal group held for sale		$	38		$	47
Current portion of debt		$	143		$	197
Notes payable		—			43
Liabilities of disposal group held for sale		$	143		$	240

 

9

Table of Contents

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited) (Continued)

 

NOTE 4.       SEGMENTS

 

The Company reports its operations in three segments:  Skilled Nursing Facility (“SNF”), Assisted Living Facility (“ALF”), and Corporate & Other. The SNF and ALF segments provide services to individuals needing long-term care in a nursing home or assisted living setting, and the management of those facilities. The Corporate & Other segment engages in the management of facilities and accounting and IT services. We evaluate financial performance and allocate resources primarily based upon segment operating income (loss). Segment operating results excludes interest expense and other non-operating income and expenses. The table below sets forth our segment information for the three and six months ended June 30, 2012 and 2011.

 

								Corporate
(Amounts in 000s)		SNF			ALF			& Other			Eliminations			Total
Three months ended June 30, 2012
Net revenues		$	51,230		$	3,413		$	3,131		$	(2,769	)	$	55,005
Cost of services		42,493			2,563			(60		)	(2,769		)	42,227
General and administrative		(36		)	—			4,965			—			4,929
Facility rent expense		2,000			—			50			—			2,050
Depreciation and amortization		1,369			220			172			—			1,761
Operating income/(loss)		$	5,404		$	630		$	(1,996	)	$	—		$	4,038
Three months ended June 30, 2011
Net revenues		$	31,462		$	2,410		$	2,585		$	(2,101	)	$	34,356
Cost of services		27,283			1,869			53			(2,101		)	27,104
General and administrative		—			—			3,167			—			3,167
Facility rent expense		1,902			—			45			—			1,947
Depreciation and amortization		504			161			40			—			705
Salary retirement and continuation costs		—			—			622			—			622
Operating income/(loss)		$	1,773		$	380		$	(1,342	)	$	—		$	811
Six months ended June 30, 2012
Net revenues		$	97,775		$	6,674		$	5,981		$	(5,254	)	$	105,176
Cost of services		82,770			4,920			(86		)	(5,254		)	82,350
General and administrative		—			—			8,860			—			8,860
Facility rent expense		4,026			—			89			—			4,115
Depreciation and amortization		2,485			430			343			—			3,258
Operating income/(loss)		$	8,494		$	1,324		$	(3,225	)	$	—		$	6,593
Total assets		$	154,971		$	29,371		$	29,567		$	—		$	213,909
Six months ended June 30, 2011
Net revenues		$	59,653		$	4,751		$	5,297		$	(4,315	)	$	65,386
Cost of services		52,607			3,854			133			(4,315		)	52,279
General and administrative		—			—			6,091			—			6,091
Facility rent expense		3,805			—			45			—			3,850
Depreciation and amortization		963			313			76			—			1,352
Salary retirement and continuation costs		—			—			622			—			622
Operating income/(loss)		$	2,278		$	584		$	(1,670	)	$	—		$	1,192
Total assets		$	68,317		$	21,518		$	26,103		$	—		$	115,938

 

10