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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 September 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)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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 October 31, 2012:  14,658,361 shares of common stock with no par value were outstanding.

 

 

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AdCare Health Systems, Inc.

Form 10-Q

Table of Contents

 

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September  30, 2012 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
Part II.	Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signatures		46

 

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Part I.  Financial Information

 

Item 1.  Financial Statements

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in 000s)

 

		September 30,			December 31,
		2012			2011
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	9,884		$	7,364
Restricted cash and cash equivalents		2,825			1,883
Accounts receivable, net of allowance of $3,099 and $1,346		30,397			18,759
Prepaid expenses and other		892			663
Assets of disposal group held for sale		—			47
Total current assets		43,998			28,716
Restricted cash and investments		5,748			4,870
Property and equipment, net		166,708			105,143
Intangible assets — bed licenses, net		2,558			1,189
Intangible assets — lease rights, net		7,658			8,460
Goodwill		906			906
Escrow deposits for acquisitions		812			3,172
Lease deposits		1,704			1,685
Deferred loan costs, net		6,630			4,818
Other assets		169			122
Total assets		$	236,891		$	159,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of notes payable and other debt		$	11,991		$	4,567
Revolving credit facilities and lines of credit		1,363			7,343
Accounts payable		20,324			12,075
Accrued expenses		12,615			9,858
Liabilities of disposal group held for sale		—			240
Total current liabilities		46,293			34,083
Notes payable and other debt, net of current portion:
Senior debt, net of discounts		134,003			87,771
Convertible debt, net of discounts		22,746			14,614
Revolving credit facilities		9,076			1,308
Other debt		887			1,400
Derivative liability		3,231			1,889
Other liabilities		1,728			2,437
Deferred tax liability		99			86
Total liabilities		218,063			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; 14,657 and 12,802 shares issued and outstanding		41,002			35,047
Accumulated deficit		(19,943		)	(18,713		)
Total stockholders’ equity		21,059			16,334
Noncontrolling interest in subsidiaries		(2,231		)	(841		)
Total equity		18,828			15,493
Total liabilities and stockholders’ equity		$	236,891		$	159,081

 

See accompanying notes to condensed consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in 000s, except per share data)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Revenues:
Patient care revenues		$	61,342		$	40,192		$	165,793		$	104,596
Management revenues		428			330			1,154			1,312
Total revenues		61,770			40,522			166,947			105,908
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)		49,164			32,637			131,514			84,916
General and administrative		4,328			3,267			13,188			9,358
Facility rent expense		2,080			1,937			6,196			5,787
Depreciation and amortization		2,112			836			5,370			2,188
Salary retirement and continuation costs		38			—			38			622
Total expenses		57,722			38,677			156,306			102,871
Income from Operations		4,048			1,845			10,641			3,037
Other Income (Expense):
Interest expense, net		(3,992		)	(2,223		)	(10,312		)	(5,511		)
Acquisition costs, net of gains		(342		)	(1,147		)	(1,160		)	(789		)
Derivative gain (loss)		(2,105		)	4,745			(1,342		)	807
Loss on extinguishment of debt		—			(58		)	—			(136		)
Other income (expense)		271			(20		)	242			567
Total other income (expense), net		(6,168		)	1,297			(12,572		)	(5,062		)
Income (Loss) from Continuing Operations Before Income Taxes		(2,120		)	3,142			(1,931		)	(2,025		)
Income Tax Expense		(118		)	(204		)	(217		)	(414		)
Income (Loss) from Continuing Operations		(2,238		)	2,938			(2,148		)	(2,439		)
Loss from discontinued operations		(202		)	(158		)	(472		)	(285		)
Net Income (Loss)		(2,440		)	2,780			(2,620		)	(2,724		)
Net Loss Attributable to Noncontrolling Interests		738			748			1,390			1,090
Net Income (Loss) Attributable to AdCare Health Systems		$	(1,702	)	$	3,528		$	(1,230	)	$	(1,634	)
Net Income (Loss) per Common Share — Basic:
Continuing Operations		$	(0.10	)	$	0.33		$	(0.05	)	$	(0.14	)
Discontinued Operations		(0.01		)	(0.01		)	(0.03		)	(0.03		)
		$	(0.11	)	$	0.32		$	(0.08	)	$	(0.17	)
Net Income (Loss) per Common Share — Diluted:
Continuing Operations		$	(0.10	)	$	0.28		$	(0.05	)	$	(0.14	)
Discontinued Operations		(0.01		)	(0.01		)	(0.03		)	(0.03		)
		$	(0.11	)	$	0.27		$	(0.08	)	$	(0.17	)

 

See accompanying notes to condensed consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in 000s)

(Unaudited)

 

		Common Stock Shares		Common Stock and Additional Paid-in Capital			Accumulated Deficit			Total  Stockholders’  Equity			Noncontrolling Interests			Total Equity
Balance, January 1, 2012		12,802		$	35,047		$	(18,713	)	$	16,334		$	(841	)	$	15,493
Common stock dividend adjustment		88
Nonemployee warrants for services		—		441			—			441			—			441
Stock based compensation expense				615			—			615			—			615
Public stock offering, net		1,165		3,837			—			3,837			—			3,837
Exercises of options and warrants		95		137			—			137			—			137
Stock issued in acquisition		187		750						750						750
Issuance of restricted stock		320		175			—			175			—			175
Net loss		—		—			(1,230		)	(1,230		)	(1,390		)	(2,620		)
Balance, September 30, 2012		14,657		$	41,002		$	(19,943	)	$	21,059		$	(2,231	)	$	18,828

 

See accompanying notes to condensed consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000s)

(Unaudited)

 

		Nine Months Ended September 30,
		2012			2011
Cash flows from operating activities:
Net Loss		$	(2,620	)	$	(2,724	)
Net Loss from discontinued operations		472			285
Net Loss from continuing operations		(2,148		)	(2,439		)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization		5,370			2,188
Non cash settlement gain		(361		)	—
Warrants issued for services		1			162
Stock based compensation expense		615			579
Provision for leases in excess of cash		419			558
Amortization of deferred financing costs		1,742			599
Amortization of debt discounts		646			663
Derivative (gain) loss		1,342			(807		)
Loss on debt extinguishment		—			136
Deferred tax expense		13			163
(Gain) loss on disposal of assets		(2		)	126
Gain on acquisitions		—			(898		)
Provision for bad debts		2,021			593
Other noncash items		40			59
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable		(13,199		)	(8,305		)
Prepaid expenses and other		(229		)	(159		)
Other assets		133			(525		)
Accounts payable and accrued expenses		9,368			8,433
Net cash provided by operating activities — continuing operations		5,771			1,126
Net cash used in operating activities — discontinued operations		(648		)	(96		)
Net cash provided by operating activities		5,123			1,030
Cash flows from investing activities:
Change in restricted cash and investments		677			546
Acquisitions		(13,467		)	(11,050		)
Proceeds from sale of assets		50			—
Purchase of property and equipment		(4,191		)	(2,732		)
Net cash used in investing activities		(16,931		)	(13,236		)
Cash flows from financing activities:
Proceeds from debt		13,261			7,313
Debt issuance costs		(740		)	(389		)
Change in line of credit		1,600			5,770
Exercise of warrants and options		137			6,798
Proceeds from stock issuances, net		3,837			—
Repayment of notes payable		(3,620		)	(1,013		)
Net cash provided by financing activities — continuing operations		14,475			18,479
Net cash used in financing activities — discontinued operations		(147		)	(134		)
Net cash provided by financing activities		14,328			18,345
Net Change in Cash		2,520			6,139
Cash, Beginning		7,364			3,911
Cash, Ending		$	9,884		$	10,050
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	7,633		$	4,246
Income Taxes		$	217		$	197
Supplemental Disclosure of Non-cash Activities:
Acquisitions in exchange for debt and equity instruments		$	46,605		$	48,826
Warrants issued for financing costs		$	439		$	330
Restricted stock issued for financing costs		$	175		$	—
Other assets acquired in exchange for debt		$	4,908		$	5,063

 

See accompany notes to condensed consolidated financial statements.

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1.                           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed 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 or notes required for complete annual financial statements and should be read in conjunction with the AdCare Health Systems, Inc.’s  audited consolidated financial statements and notes included in AdCare Health Systems, Inc.’s  Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”).  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.

 

All inter-company accounts and transactions were eliminated in the consolidation.  In the opinion of the Company’s management, all adjustments considered for a fair presentation are included and are of a normal recurring nature.  The preparation of interim financial statements requires management to make estimates and assumptions that affect certain reported amounts. Operating results for the three and nine months ended September 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 or exercisable  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 September 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		$	(2,238	)						$	2,938
Net loss attributable to noncontrolling interests		738								748
Basic income (loss) from continuing operations		$	(1,500	)	14,508		$	(0.10	)	$	3,686		11,275		$	0.33
Effect from options, warrants and non-vested shares		—			—					—			1,111
Effect from assumed issuance of convertible shares (2)		—			—					—			938
Diluted net income (loss)from continuing operations		$	(1,500	)	14,508		$	(0.10	)	$	3,686		13,324		$	0.28
Discontinued Operations:
Basic loss from discontinued operations		$	(202	)	14,508		$	(0.01	)	$	(158	)	11,275		$	(0.01	)
Diluted loss from discontinued operations		$	(202	)	14,508		$	(0.01	)	$	(158	)	11,275		$	(0.01	)
Net Income (Loss) Attributable to AdCare:
Basic net income (loss)		$	(1,702	)	14,508		$	(0.11	)	$	3,528		11,275		$	0.32
Diluted net income (loss)		$	(1,702	)	14,508		$	(0.11	)	$	3,528		13,324		$	0.27

 

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		Nine Months Ended September 30,
		2012								2011
(Amounts in 000s, except per share data)		Income (loss)			Shares (1)		Per Share			Income (loss)			Shares (1)		Per Share
Continuing Operations:
Loss from continuing operations		$	(2,148	)						$	(2,439	)
Net loss attributable to noncontrolling interests		1,390								1,090
Basic loss from continuing operations		$	(758	)	13,820		$	(0.05	)	$	(1,349	)	9,923		$	(0.14	)
Effect from options, warrants and non-vested shares		—			—					—			—
Effect from assumed issuance of convertible shares (2)		—			—					—			—
Diluted loss from continuing operations		$	(758	)	13,820		$	(0.05	)	$	(1,349	)	9,923		$	(0.14	)
Discontinued Operations:
Basic loss from discontinued operations		$	(472	)	13,820		$	(0.03	)	$	(285	)	9,923		$	(0.03	)
Diluted loss from discontinued operations		$	(472	)	13,820		$	(0.03	)	$	(285	)	9,923		$	(0.03	)
Net Income (Loss) Attributable to AdCare:
Basic loss		$	(1,230	)	13,820		$	(0.08	)	$	(1,634	)	9,923		$	(0.17	)
Diluted loss		$	(1,230	)	13,820		$	(0.08	)	$	(1,634	)	9,923		$	(0.17	)

 

(1) The weighted average shares outstanding include retroactive adjustments for the stock dividends paid on October 22, 2012 and October 1, 2011 (See Note 10).

(2) The impact of the conversion of the subordinated convertible notes issued in 2010, 2011 and 2012 were excluded in those periods where the impact would be anti-dilutive.

 

Intangible Assets and Goodwill

 

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

 

Intangible assets consist of the following:

 

		September 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		$	1,887		$	7,658		$	9,545		$	1,085		$	8,460
Bed Licenses (included in property and equipment)		41,061			1,412			39,649			26,149			533			25,616
Bed Licenses - Separable		2,558			—			2,558			1,189			—			1,189
Totals		$	53,164		$	3,299		$	49,865		$	36,883		$	1,618		$	35,265

 

For the nine months ended September 30, 2012, amortization expense was approximately $0.9 million for bed licenses included in property and equipment.  For the nine months ended September 30, 2012 and 2011, amortization expense was $0.8 million and $0.7 million, respectively, for lease rights.  Estimated amortization expense for each of the following years ending December 31 is as follows:

 

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(Amounts in 000s)		Lease Rights			Bed Licenses
2012 (remainder)		$	267		$	358
2013		1,069			1,433
2014		1,010			1,433
2015		885			1,433
2016		885			1,433
Thereafter		3,542			33,559
		$	7,658		$	39,649

 

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 operating income of approximately $4.0 million and $10.6 million for the three and nine months ended September 30, 2012, respectively, compared to operating income of approximately $1.8 million and $3.0 million for the three and nine months ended September 30, 2011, respectively. The Company had a net loss of approximately $1.7 million and $1.2 million for the three and nine months ended September 30, 2012, respectively, and net income of $3.5 million and a net loss of $1.6 million for the three and nine months ended September 30, 2011, respectively.  The Company had negative working capital of approximately $2.3 million at September 30, 2012. Approximately $3.0 million of the negative working capital ratio is related to short term debt under a VIE which the Company does not guarantee.  (See Note 12).  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 quality mix by increasing Medicare patients and further optimizing our newly acquired facilities;

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

·               refinancing debt where possible on longer terms 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 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. During the quarter ended September 30, 2012, the Company sold all the equipment of the home health segment for approximately $50,000 and discontinued providing services resulting in an immaterial gain on sale.

 

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 nine months ended September 30, 2012 and 2011.

 

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								Corporate
(Amounts in 000s)		SNF			ALF			& Other			Eliminations			Total
Three months ended September 30, 2012
Net revenues		$	57,978		$	3,364		$	3,505		$	(3,077	)	$	61,770
Cost of services		49,812			2,441			(12		)	(3,077		)	49,164
General and administrative		—			—			4,328			—			4,328
Facility rent expense		2,039			—			41			—			2,080
Depreciation and amortization		1,590			224			298			—			2,112
Salary retirement and continuation costs		—			—			38			—			38
Operating income/(loss)		$	4,537		$	699		$	(1,188	)	$	—		$	4,048
Three months ended September 30, 2011
Net revenues		$	37,729		$	2,463		$	2,349		$	(2,019	)	$	40,522
Cost of services		32,887			1,885			(116		)	(2,019		)	32,637
General and administrative		—			—			3,267			—			3,267
Facility rent expense		1,906			—			31			—			1,937
Depreciation and amortization		631			158			47			—			836
Operating income/(loss)		$	2,305		$	420		$	(880	)	$	—		$	1,845
Nine months ended September 30, 2012
Net revenues		$	155,753		$	10,038		$	9,487		$	(8,331	)	$	166,947
Cost of services		132,582			7,362			(99		)	(8,331		)	131,514
General and administrative		—			—			13,188			—			13,188
Facility rent expense		6,065			—			131			—			6,196
Depreciation and amortization		4,075			654			641			—			5,370
Salary retirement and continuation costs		—			—			38			—			38
Operating income/(loss)		$	13,031		$	2,022		$	(4,412	)	$	—		$	10,641
Total assets		$	169,546		$	29,181		$	38,164		$	—		$	236,891
Nine months ended September 30, 2011
Net revenues		$	97,382		$	7,214		$	7,646		$	(6,334	)	$	105,908
Cost of services		85,495			5,740			15			(6,334		)	84,916
General and administrative		—			—			9,358			—			9,358
Facility rent expense		5,711			—			76			—			5,787
Depreciation and amortization		1,595			470			123			—			2,188
Salary retirement and continuation costs		—			—			622			—			622
Operating income/(loss)		$	4,581		$	1,004		$	(2,548	)	$	—		$	3,037
Total assets		$	105,620		$	21,490		$	31,176		$	—		$	158,286

 

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