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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended March 31, 2013

 

 

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 July 22, 2013:  14,788,288 shares of common stock with no par value were outstanding.

 

 

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AdCare Health Systems, Inc.

 

Form 10-Q

 

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		Page Number
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012	4
	Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)	5
	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2013 (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46
Signatures		51

 

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Forward-Looking Statements

 

This Quarterly Report on Form 10-Q 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, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this and 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. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. These statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.

 

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

 

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

 

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Part I.  Financial Information

 

Item 1.   Financial Statements

 

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in 000’s)

 

		March 31,			December 31,
		2013			2012
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	9,870		$	15,937
Restricted cash and investments		1,594			1,742
Accounts receivable, net of allowance of $4,668 and $3,729		27,976			26,037
Prepaid expenses and other		2,547			489
Assets of disposal group held for sale		3,595			6,159
Total current assets		45,582			50,364
Restricted cash and investments		7,189			7,215
Property and equipment, net		150,826			151,064
Intangible assets - bed licenses		2,471			2,471
Intangible assets - lease rights, net		6,595			6,844
Goodwill		5,023			5,023
Escrow deposits for acquisitions		400			—
Lease deposits		1,694			1,720
Deferred loan costs, net		5,751			6,137
Other assets		3,633			3,611
Total assets		$	229,164		$	234,449
LIABILITIES AND EQUITY
Current liabilities:
Current portion of notes payable and other debt		$	14,318		$	6,941
Revolving credit facilities and lines of credit		1,525			1,498
Current portion of convertible debt, net of discount		15,620			10,948
Accounts payable		17,268			19,503
Accrued expenses		15,602			13,730
Liabilities of disposal group held for sale		3,644			3,662
Total current liabilities		67,977			56,282
Notes payable and other debt, net of current portion:
Senior debt		104,645			112,160
Bonds, net of discounts		16,067			16,088
Revolving credit facilities		8,166			7,706
Convertible debt		7,500			12,009
Other debt		237			864
Derivative liability		1,481			3,630
Other liabilities		1,481			1,394
Deferred tax liability		104			104
Total liabilities		207,658			210,237
Commitments and contingency (Note 16)
Preferred stock, no par value; 1,000 shares authorized; 450 shares issued and outstanding		9,159			9,159
Stockholders’ equity:
Common stock and additional paid-in capital, no par value; 29,000 shares authorized; 14,701 and 14,659 issued and outstanding		41,994			41,644
Accumulated deficit		(28,617		)	(25,753		)
Total stockholders’ equity		13,377			15,891
Noncontrolling interest in subsidiaries		(1,030		)	(838		)
Total equity		12,347			15,053
Total liabilities and equity		$	229,164		$	234,449

 

See accompanying notes to unaudited consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

		Three Months Ended March 31,
		2013			2012
Revenues:
Patient care revenues		$	57,132		$	42,953
Management revenues		510			524
Total revenues		57,642			43,477
Expenses:
Cost of services (exclusive of facility rent, depreciation and amortization)		49,066			36,280
General and administrative expenses		4,928			3,954
Audit committee investigation expense		1,134			—
Facility rent expense		1,892			1,914
Depreciation and amortization		1,829			1,569
Total expense		58,849			43,717
Loss from Operations		(1,207		)	(240		)
Other Income (Expense):
Interest expense, net		(3,436		)	(2,500		)
Acquisition costs, net of gains		(97		)	(293		)
Derivative gain		2,136			410
Loss on extinguishment of debt		(2		)	—
Other expense		—			(14		)
Total other expense, net		(1,399		)	(2,397		)
Loss from Continuing Operations Before Income Taxes		(2,606		)	(2,637		)
Income tax expense		(78		)	(1		)
Loss from Continuing Operations		(2,684		)	(2,638		)
(Loss) Income from Discontinued Operations, net of tax		(66		)	226
Net Loss		(2,750		)	(2,412		)
Net Loss Attributable to Noncontrolling Interests		192			144
Net Loss Attributable to AdCare Health Systems, Inc.		(2,558		)	(2,268		)
Preferred stock dividend		(306		)	—
Net Loss Attributable to AdCare Health Systems, Inc. Common Stockholders		$	(2,864	)	$	(2,268	)
Net (loss) income per Common Share attributable to AdCare Health Systems, Inc.
Common Stockholders -
Basic:
Continuing Operations		$	(0.19	)	$	(0.20	)
Discontinued Operations		(0.01		)	0.01
		$	(0.20	)	$	(0.19	)
Net (loss) income per Common Share attributable to AdCare Health Systems, Inc.
Common Stockholders -
Diluted:
Continuing Operations		$	(0.19	)	$	(0.20	)
Discontinued Operations		(0.01		)	0.01
		$	(0.20	)	$	(0.19	)
Weighted Average Common Shares Outstanding:
Basic		14,683			12,225
Diluted		14,683			12,225

 

See accompanying notes to unaudited consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in 000’s)

(Unaudited)

 

				Common
				Stock and
		Common		Additional
		Stock		Paid-in			Accumulated			Noncontrolling
		Shares		Capital			Deficit			Interests			Total
Balances, December 31, 2012		14,659		$	41,644		$	(25,753	)	$	(838	)	$	15,053
Stock-based compensation expense		—		260			—			—			260
Exercises of options and warrants		29		30			—			—			30
Issuance of stock for converted debt		13		60			—			—			60
Preferred stock dividend		—		—			(306		)	—			(306		)
Net loss		—		—			(2,558		)	(192		)	(2,750		)
Balances, March 31, 2013		14,701		$	41,994		$	(28,617	)	$	(1,030	)	$	12,347

 

See accompanying notes to unaudited consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000’s)

(Unaudited)

 

		Three Months Ended March 31,
		2013			2012
Cash flows from operating activities:
Net loss		$	(2,750	)	$	(2,412	)
Loss (Income) from discontinued operations, net of tax		66			(226		)
Loss from continuing operations		(2,684		)	(2,638		)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		1,829			1,569
Stock-based compensation expense		260			190
Lease expense in excess of cash		87			157
Amortization of deferred financing costs		525			334
Amortization of debt discounts		193			213
Derivative gain		(2,136		)	(410		)
Loss on debt extinguishment		2			—
Deferred tax expense		—			9
Gain on disposal of assets		—			(2		)
Provision for bad debts		1,387			890
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable		(4,159		)	(2,930		)
Prepaid expenses and other		(2,000		)	(75		)
Other assets		4			(111		)
Accounts payable and accrued expenses		534			3,719
Net cash (used in) provided by operating activities - continuing operations		(6,158		)	915
Net cash provided by operating activities - discontinued operations		45			590
Net cash (used in) provided by operating activities		(6,113		)	1,505
Cash flows from investing activities:
Proceeds from sale of property and equipment		—			3
Change in restricted cash and investments and escrow deposits for acquisitions		(336		)	435
Acquisitions		—			(7,919		)
Purchase of property and equipment		(1,342		)	(414		)
Net cash used in investing activities - continuing operations		(1,678		)	(7,895		)
Net cash provided by investing activities - discontinued operations		2,443			79
Net cash provided by (used in) investing activities		765			(7,816		)
Cash flows from financing activities:
Proceeds from debt		2,372			8,300
Repayment on notes payable		(1,282		)	(1,184		)
Change in lines of credit		487			(556		)
Debt issuance costs		(142		)	(183		)
Exercise of warrants and options		30			23
Proceeds from stock issuances, net		—			3,641
Dividends paid on preferred stock		(306		)	—
Net cash flows provided by financing activities - continuing operations		1,159			10,041
Net cash flows (used in) provided by financing activities - discontinued operations		(1,878		)	86
Net cash flows (used in) provided by provided by financing activities		(719		)	10,127
Net Change in Cash		(6,067		)	3,816
Cash, Beginning		15,937			7,364
Cash decrease due to deconsolidation of variable interest entities		—			(180		)
Cash, Ending		$	9,870		$	11,000
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest		$	2,696		$	2,554
Income taxes		$	—		$	—
Conversions of debt to equity		$	49		$	—
Acquisitions in exchange for debt and equity instruments		$	—		$	5,000
Warrants issued for financing costs		$	—		$	276

 

See accompanying notes to unaudited consolidated financial statements

 

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ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2013 and 2012

 

NOTE 1.         DESCRIPTION OF BUSINESS

 

AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”), owns and operates skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. The Company, through wholly owned separate operating subsidiaries, as of March 31, 2013, operates 49 facilities comprised of 45 skilled nursing facilities, three assisted living facilities and one independent living/senior housing facility totaling approximately 4,900 beds. The Company’s facilities provide a range of health care services to their patients and residents including, but not limited to, skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of March 31, 2013, of the total 49 facilities, the Company owned and operated 26 facilities, leased and operated 11 facilities, and managed 12 facilities (including one consolidated variable interest entity). As part of the Company’s strategy to focus on the growth of skilled nursing facilities, the Company decided in the fourth quarter of 2011 to exit the home health business; therefore, this business is reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of the home health business in 2012. Additionally, in the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio and executed a sublease arrangement to exit the skilled nursing business in Jeffersonville, Georgia. The six Ohio assisted living facilities and the Jeffersonville, Georgia skilled nursing facility had an aggregate of 313 units in service. These seven facilities are also reported as discontinued operations (see Note 11 — Discontinued Operations ). The Company sold the assets of four of the six Ohio assisted living facilities in December 2012, one in February 2013, and one in May, 2013.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs’”) to the FASB’s Accounting Standards Codification (“ASC”).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three months ended March 31, 2013 and 2012, are not necessarily indicative of the results that may be expected for the fiscal year.  The balance sheet at December 31, 2012, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

 

You should read these consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2012 included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on July 8, 2013.

 

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

 

NOTE 2.         SIGNIFICANT ACCOUNTING POLICIES

 

See Note 1 to our Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, for a description of all significant accounting policies.

 

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.  These

 

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reclassifications included separating bonds, net of discounts, within Notes payable and other debt within the total liabilities to define the Company’s debt instruments in further detail for March 31, 2013 and December 31, 2012.  Reclassifications were made to March 31, 2012 Statement of Operations to reflect the same facilities in discontinued operations for both periods presented.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Patient Care Receivables and Revenues

 

Patient care accounts receivable and revenues for the Company are recorded in the month in which the services are provided.

 

The Company provides services to certain patients under contractual arrangements with third-party payors, primarily under federal Medicare and state Medicaid programs. Amounts paid under these contractual arrangements are subject to review and final determination by the appropriate government authority or its agent. In the opinion of management, adequate provision was made in the consolidated financial statements for any adjustments resulting from the respective government authorities’ review.

 

For residents under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.

 

Potentially uncollectible patient accounts are provided for on the allowance method based upon management’s evaluation of outstanding accounts receivable at period-end and historical experience. Uncollected accounts that are written off are charged against the allowance. As of March 31, 2013 and December 31, 2012, management recorded an allowance for uncollectible accounts of $4.7 million and $3.7 million, respectively.

 

Management Fee Receivables and Revenues

 

Management fee receivables and revenue are recorded in the month that services are provided. As of March 31, 2013 and 2012, there was no allowance for uncollectible management fee receivables.

 

Fair Value Measurements and Financial Instruments

 

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

 

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

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

Level 3 — Significant unobservable inputs

 

The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, notes payable and other debt, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments 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

 

The Company considers the applicability and impact of all ASUs. For the three months ended March 31, 2013 and through the date of this report, all ASUs issued, effective and not yet effective, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

 

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NOTE 3.         EARNINGS PER SHARE

 

Basic earnings per common share is computed using the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is computed using the weighted-average number of common and dilutive common equivalent shares from stock options, warrants and convertible promissory notes using the treasury stock method.  For all periods presented, diluted net loss per share is the same as basic net loss per share, as the inclusion of equivalent shares from outstanding common stock options, warrants and convertible promissory notes would be anti-dilutive.

 

		Three Months Ended March 31,
		2013								2012
(Amounts in 000’s, except per share data)		Income (loss)			Shares		Per Share			Income (loss)			Shares		Per Share
Continuing Operations:
Loss from continuing operations		$	(2,684	)						$	(2,638	)
Net loss attributable to noncontrolling interests		192								144
Basic loss from continuing operations		$	(2,492	)	14,683		$	(0.17	)	$	(2,494	)	12,225		$	(0.20	)
Preferred stock dividend		(306		)	14,683		$	(0.02	)	—			—		$	—
Effect of dilutive securities: Stock options, warrants outstanding and convertible debt (a)
Diluted loss from continuing operations		$	(2,798	)	14,683		$	(0.19	)	$	(2,494	)	12,225		$	(0.20	)
Discontinued Operations:
Basic (loss) income from discontinued operations		(66		)	14,683		$	(0.01	)	226			12,225		$	0.01
Diluted (loss) income from discontinued operations		(66		)	14,683		$	(0.01	)	226			12,225		$	0.01
Net Loss Attributable to AdCare:
Basic loss		(2,864		)	14,683		$	(0.20	)	(2,268		)	12,225		$	(0.19	)
Diluted loss		(2,864		)	14,683		$	(0.20	)	(2,268		)	12,225		$	(0.19	)

 

(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:

 

(Amounts in 000’s)		March 31, 2013		December 31, 2012
Outstanding Stock Options		1,402		1,351
Outstanding Warrants - employee		1,806		1,806
Outstanding Warrants - nonemployee		1,904		1,961
Convertible Debt shares issuable(a)		7,124		7,140
Total anti-dilutive securities		12,236		12,258

 

(a) The number of shares issuable upon conversion of convertible promissory notes is 120% of the aggregate principal amount of the convertible promissory notes divided by the current conversion price, which is the number required to be reserved for issuance by the Company under the applicable registration rights agreement.

 

NOTE 4.          LIQUIDITY AND PROFITABILITY

 

For the three months ended and as of March 31, 2013, we had a net loss of $2.8 million and negative working capital of $22.4 million. At March 31, 2013, we had $9.9 million in cash and cash equivalents and $171.7 million in indebtedness, including current maturities and discontinued operations, of which $35.1 million is current debt (including the Company’s outstanding convertible promissory notes with a principal amount in the aggregate of $11.6 million and $4.5 million which mature in October 2013 and March 2014, respectively, and approximately $3.7 million of mortgage notes included in liabilities of disposal group that were assumed by the buyer in May 2013). Our ability to achieve profitable operations is dependent on continued growth in revenue and controlling costs.

 

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We anticipate that scheduled debt service (excluding outstanding subordinated convertible promissory notes and approximately $7.0 million of bullet maturities due February 2014 that the Company believes will be refinanced on a longer term basis but including principal, interest, collateral and capital improvement fund or other escrow deposits) will total approximately $17.7 million and cash outlays for acquisition costs, maintenance capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $4.2 million for the 12 months ending March 31, 2014.  In recent periods, we 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. Although, we anticipate the conversion to common stock of the Company’s outstanding subordinated convertible promissory notes with a principal amount in the aggregate of $11.6 million and $4.5 million that mature in October 2013 and March 2014, respectively, we believe that our anticipated cash flow and committed funding sources would allow us to pay these notes in cash. These promissory notes are convertible at the option of the holder into shares of common stock of the Company at $3.73 per share and $4.80 per share, respectively. The closing price of the common stock exceeded $4.00 per share from January 1, 2013 through July 23, 2013, except for the last three trading days in March 2013. As discussed further below, if we were required to pay these subordinated convertible promissory notes in cash and were unable to refinance the $7.0 million of bullet maturities due February 2014, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, or delay, modify, or abandon its expansion plans due to our limited liquidity in such an event.

 

The Company expanded its existing credit facility with Gemino Healthcare Finance, LLC (“Gemino”): (i) in May 2013, to refinance and include one of the facilities the Company acquired in December 2012; and (ii) in June 2013, to refinance and include two additional facilities the Company also acquired in December 2012. We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis. 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 2013.

 

Based on existing cash balances, anticipated cash flows for the 12 months ending March 31, 2014, the anticipated refinancing of the $7.0 million of bullet maturities due February 2014, and new sources of capital, we believe there will be sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months. On a longer term basis, we have approximately $73.3 million of debt payments and maturities due between 2015 and 2017, excluding subordinated convertible promissory notes which are convertible into shares of common stock. We believe our long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

 

In order to satisfy these capital needs, we intend to: (i) improve our operating results by increasing facility occupancy, optimizing our payor mix by increasing the proportion of sub-acute patients within our skilled nursing facilities, continuing our cost optimization and efficiency strategies and acquiring additional long-term care facilities with existing operating cash flow; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months and provide for the continuance of our acquisition strategy. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating results, expand existing borrowing agreements, refinance current debt (including the $7.0 million of bullet maturities due February 2014), raise capital through the issuance of securities, or the subordinated convertible promissory notes due October 2013 and March 2014 are not converted into common stock and are required to be repaid by us in cash, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, or delay, modify, or abandon its expansion plans.

 

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NOTE 5.          RESTRICTED CASH AND INVESTMENTS

 

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

 

(Amounts in 000’s)		March 31, 2013			December 31, 2012
HUD escrow deposits		$	235		$	279
Principal and interest escrow		—			106
Collateral certificates of deposit		1,359			1,357
Total current portion		1,594			1,742
HUD reserve replacement		320			372
Reserves for capital improvements		1,598			1,602
Restricted investments for other debt obligations		5,271			5,241
Total noncurrent portion		7,189			7,215
Total restricted cash and investments		$	8,783		$	8,957

 

NOTE 6.          PROPERTY AND EQUIPMENT

 

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

 

(Amounts in 000’s)		Estimated Useful Lives (Years)		March 31, 2013			December 31, 2012
Buildings and improvements		5-40		$	138,226		$	137,842
Equipment		2-10		10,825			10,448
Land		—		8,469			8,469
Computer related		2-10		2,946			2,670
Construction in process		—		815			510
				161,281			159,939
Less: Accumulated depreciation and amortization expense				10,455			8,875
Property and equipment, net				$	150,826		$	151,064

 

For the three months ended March 31, 2013 and 2012, depreciation and amortization expense was approximately $1.8 million and $1.6 million, respectively.

 

During the quarter ended March 31, 2012, the Company recognized a $0.4 million impairment charge to write down the carrying value of an office building located in Rogers, Arkansas.  The office building was acquired in 2011.  The purchase price allocation for that acquisition was deemed to be final as of December 31, 2011.  Subsequent to December 31, 2011, it was determined that the acquired office building would not be utilized and the building was not in use as of March 31, 2012.  The impairment charge represents a change in fair value from value recognized in the purchase price allocation.  The impairment charge is classified as depreciation expense in the consolidated statement of operations.

 

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NOTE 7.          INTANGIBLE ASSETS AND GOODWILL

 

There have been no impairment adjustments to intangible assets and goodwill during the three months ended March 31, 2013.

 

Intangible assets consist of the following: 

 

		Bed Licenses
		(included in
		property and			Bed Licenses -			Lease
(Amounts in 000’s)		equipment			Separable			Rights			Total
Balances, December 31, 2012:
Gross		$	38,478		$	2,471		$	9,545		$	50,494
Accumulated amortization		(1,438		)	—			(2,701		)	(4,139		)
Net carrying amount		$	37,040		$	2,471		$	6,844		$	46,355
Acquisitions		—			—			—			—
Disposals		—			—			—			—
Amortization expense		(290		)	—			(249		)	(539		)
Balances, March 31, 2013:
Gross		38,478			2,471			9,545			50,494
Accumulated amortization		(1,728		)	—			(2,950		)	(4,678		)
Net carrying amount		$	36,750		$	2,471		$	6,595		$	45,816

 

Amortization expense for bed licenses included in property and equipment was approximately $0.3 million and $0.2 million for the three months ended March 31, 2013 and 2012, respectively.  Amortization expense for lease rights was approximately $0.2 million and $0.1 million for the three months ended March 31, 2013 and 2012, 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
2013 (a)		$	962		$	748
2014		1,283			938
2015		1,283			813
2016		1,283			813
2017		1,283			813
Thereafter		30,656			2,470
Total expected amortization expense		$	36,750		$	6,595

 

(a)          Estimated amortization expense for the year ending December 31, 2013 includes only amortization to be recorded after March 31, 2013.

 

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The following table summarizes the carrying amount of goodwill at March 31, 2013 as compared with December 31, 2012:

 

		(Amounts in 000’s)
Balances, December 31, 2012:
Gross		$	5,023
Accumulated impairment losses		—
Total		$	5,023
Goodwill acquired in acquisitions		—
Disposed in sale of business, net		—
Impairment losses		—
Balances, March 31, 2013:
Gross		$	5,023
Accumulated impairment losses		—
Total		$	5,023

 

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

 

NOTE 8.          ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

(Amounts in 000’s)		March 31, 2013			December 31, 2012
Accrued payroll related		$	5,194		$	5,626
Accrued employee benefits		4,617			3,790
Real estate and other taxes		1,579			1,245
Other accrued expenses		4,212			3,069
Total accrued expenses		$	15,602		$	13,730

 

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NOTE 9.          NOTES PAYABLE AND OTHER DEBT

 

Notes payable and other debt consist of the following:

 

(Amounts in 000’s)		March 31, 2013			December 31, 2012
Senior debt - guaranteed by HUD (a)		$	7,793		$	9,699
Senior debt - guaranteed by USDA		28,218			28,370
Senior debt - guaranteed by SBA		6,130			6,189
Senior debt - bonds, net of discount		16,246			16,265
Senior debt - other mortgage indebtedness		74,988			75,188
Revolving credit facilities and lines of credit		9,691			9,204
Convertible debt issued in 2010, net of discount		11,111			10,948
Convertible debt issued in 2011		4,509			4,509
Convertible debt issued in 2012		7,500			7,500
Other debt		5,536			4,004
Total		$	171,722		$	171,876
Less: current portion		31,463			19,387
Less: portion included in liabilities of disposal group held for sale		3,644			3,662
Notes payable and other debt, net of current portion		$	136,615		$	148,827

 

(a)          The senior debt - guaranteed by HUD includes $3.6 million related to the Vandalia HUD mortgage note classified as liabilities of disposal group held for sale at March 31, 2013, that was assumed by the buyer of the Hearth & Home of Vandalia assisted living facility that the Company sold in a transaction that closed in May 2013 (See Note 18 - Subsequent Events).

 

Scheduled Maturities

 

The schedule below summarizes the scheduled maturities as of March 31, 2013 for each of the next five years and thereafter.

 

		(Amounts in 000’s)
2014		$	35,505
2015		24,962
2016		14,403
2017		41,390
2018		3,733
Thereafter		52,306
Subtotal		172,299
Less: unamortized discounts ($489 classifed as current)		(913		)
Plus: unamortized premiums ($91 classified as current)		336
Total notes and other debt		$	171,722

 

Debt Covenant Compliance

 

As of March 31, 2013, the Company (including its consolidated variable interest entity) has over twenty different credit facilities (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 subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated

 

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