Notes to Consolidated Financial Statements
June 30, 2020
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NOTE 1.
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ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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Description of Business
Regional Health Properties, Inc., a Georgia corporation (“Regional Health” or “Regional” and, together with its subsidiaries, 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 in turn operate the facilities. The operators of the Company’s facilities provide a range of healthcare services to their 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.
As of June 30, 2020, the Company owned, leased, or managed for third parties 24 facilities, primarily in the Southeast United States. Of the 24 facilities, the Company: (i) leased 10 skilled nursing facilities (which the Company owns), and subleased nine skilled nursing facilities (which the Company leases), to third-party tenants; (ii) leased two assisted living facilities (which the Company owns) to third-party tenants; and (iii) managed, on behalf of third-party owners, two skilled nursing facilities and one independent living facility. See Note 6 – Leases, herein, and Note 7 – Leases in Part II, Item 8, “Financial Statements and Supplemental Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2020 (the “Annual Report”), for a more detailed description of the Company’s leases.
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.
Regional Health is successor to, and a former wholly owned subsidiary of, AdCare Health Systems, Inc. (“AdCare”). On September 29, 2017, AdCare merged (the “Merger”) with and into Regional Health, which was formed as a subsidiary of AdCare for the purpose of the Merger, with Regional Health continuing as the surviving corporation in the Merger. For a description of the Merger, see Part II, Item 8, “Financial Statements and Supplemental Data”, Note 1 – Summary of Significant Accounting Policies included in the Annual Report.
When used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), unless otherwise specifically stated or the context otherwise requires, the terms:
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•
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“Board” or “Board of Directors” refers to the Board of Directors of AdCare with respect to the period prior to the Merger and to the Board of Directors of Regional Health with respect to the period after the Merger;
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•
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“common stock” refers to AdCare’s common stock with respect to the period prior to the Merger and to Regional Health’s common stock with respect to the period after the Merger;
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•
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“Series A Preferred Stock” refers to AdCare’s 10.875% Series A Cumulative Redeemable Preferred Stock with respect to the period prior to the Merger and to Regional Health’s 10.875% Series A Cumulative Redeemable Preferred Stock with respect to the period after the Merger; and
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•
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“Charter” refers to the Amended and Restated Articles of Incorporation of Regional Health.
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Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulation 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 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, 2020 and 2019 are not necessarily indicative of the results that may be expected for the fiscal year. The consolidated balance sheet at December 31, 2019 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.
8
You should read the unaudited consolidated financial statements in this Quarterly Report together with the historical audited consolidated financial statements of the Company for the year ended December 31, 2019, included in the Annual Report. See Part II, Item 8, “Financial Statements and Supplementary Data”, Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of all significant accounting policies. During the three and six months ended June 30, 2020, there were no material changes to the Company’s policies.
Risks and Uncertainties
On March 11, 2020, the World Health Organization declared the outbreak of the respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, also known as COVID-19, a global pandemic. The COVID-19 pandemic has led governments and other authorities in the United States to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The COVID-19 pandemic and the measures to protect its spread have adversely affected our business in the quarter ended June 30, 2020, and we expect it will continue to adversely affect our business in the quarter ending September 30, 2020 and beyond, for a variety of reasons, including those discussed below and elsewhere in this Quarterly Report.
Our tenants’ operations have been, and we expect will continue to be, materially and adversely affected by the COVID-19 pandemic due to, among other things, decreased occupancy and increased operating costs (including costs due to the implementation of additional safety protocols and procedures, purchases of personal protective equipment, increased staffing to allow facilities to adhere to social distancing and infection control protocols, and premium pay and incentive pay for the staff), which may affect our tenants’ ability to make rental payments to us pursuant to their lease agreements.
The COVID-19 pandemic may also lead to temporary closures of nursing facilities, operated by our tenants, which also may affect our tenants’ ability to make their rental payments to us pursuant to their respective lease agreements. In addition, our tenants’ operations could be further disrupted if any of their employees, or the employees of their vendors, have, or are suspected of having, COVID-19. This could cause, and in some cases has already caused, our tenants or their vendors to experience staffing shortages, and this could potentially require our tenants and their vendors to close parts of or entire facilities, distribution centers, or other buildings to disinfect any affected areas.
We could also be adversely affected if government authorities impose upon our tenants, or their vendors, certain restrictions due to the COVID-19 pandemic. These restrictions may be in the form of mandatory closures, requested voluntary closures, bans on new admissions, restricted operations, or restrictions on the importation of necessary equipment or supplies which may adversely affect our tenants’ operations and their ability to make rental payments to us moving forward. In addition, family members may elect to keep nursing facility residents at home during the COVID-19 pandemic, thus reducing our tenants’ revenue. Currently, a number of our tenants have stopped admitting new patients due to rising COVID-19 infections resulting in decreased revenues.
As a result of the COVID-19 pandemic, our tenants may face lawsuits for alleged negligence associated with their responses to the emergency. The costs associated with defending, settling, or paying damages from such claims could negatively impact our tenants’ operating budgets and affect their ability to meet their obligations under our leases. Further, we may be subject to increased lawsuits arising out of our alleged actions or the alleged actions of our tenants for which they have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such pending or future litigation could materially adversely affect us.
If our tenants are unable to make rental payments to us pursuant to their lease obligations, whether due to the tenants’ decrease in revenues or otherwise, then, in some cases, we may be forced to restructure tenants’ long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place.
While the Company has received approximately 85% of its expected monthly rental receipts from tenants through July 31, 2020, there are a number of uncertainties the Company faces as it considers the potential impact of COVID-19 on its business, including the length of census disruption, elevated COVID-19 operating costs related to personal protection equipment, cleaning supplies, virus testing and increased overtime due to staff illness and the extent to which federal and state funding support will offset these incremental costs for our tenants. We also do not know the number of facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases and the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) has required additional reporting by operators, we may not receive accurate information on the number of cases, which could result in a delay in reporting. We expect to see continued increased clinical protocols for infection control within facilities and increased monitoring of employees, guests and other individuals entering facilities; however, we do not yet know if future reimbursement rates will be sufficient to cover the increased costs of enhanced infection control and monitoring.
9
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition and Allowances
Triple-Net Leased Properties. 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 collectability is probable. 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 straight-line rent receivable on our consolidated balance sheets. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company’s facilities, rental income for the affected facilities is thus recognized only upon cash collection, and any accumulated straight-line rent receivable is thus reversed in the period in which the Company deems rent collection to no longer be probable. Rental revenues for one facility in North Carolina (until operator transition on March 1, 2019) was recorded on a cash basis during the three months ended March 31, 2019. For additional information with respect to such facilities, see Note 6 – Leases.
Revenue from Contracts with Customers. The Company recognizes management fee revenues as services are provided. The Company has one contract to manage three facilities (the “Management Contract”), with payment for each month of service received in full on a monthly basis. The maximum penalty for service contract nonperformance under the Management Contract is $50,000 per year, payable after the end of the year. Further, the Company recognizes interest income from loans and investments, using the effective interest method when collectability is probable. The Company applies the effective interest method on a loan-by-loan basis.
Allowances. The Company assesses the collectability of its rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectability of rent receivables and working capital loans to tenants 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 or payments on a working capital loan, then the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. Payments received on impaired loans are applied against the allowance. If the Company changes its assumptions or estimates regarding the collectability of future rent payments required by a lease or required from a working capital loan to a tenant, then the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates. See Note 6 – Leases.
As of June 30, 2020 and December 31, 2019, the Company reserved for approximately $0.6 million and $0.6 million, respectively, of uncollected receivables. Accounts receivable, net, totaled $2.2 million at June 30, 2020 and $1.0 million at December 31, 2019.
Pre-Paid Expenses and Other
As of June 30, 2020 and December 31, 2019, the Company had $0.5 million and $0.2 million, respectively, in pre-paid expenses and other, primarily for directors’ and officers’ insurance, NYSE American annual fees and mortgage insurance premiums.
Other Expenses, Net
The Company has retained professional services to assist with the restructure of the Company’s capital structure.
10
Leases and Leasehold Improvements
The Company leases certain facilities and equipment in the normal course of business. At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating lease or capital lease. As of June 30, 2020, all of the Company’s leased facilities are accounted for as operating leases. For operating leases that contain scheduled rent increases, the Company records rent expense on a straight-line basis over the term of the lease. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term.
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) ASU 2016-02, Leases, as codified in ASC 842, using the non-comparative transition option pursuant to ASU 2018-11. The Company recognized both right of use assets and lease liabilities for leases in which we lease land, real property or other equipment, electing the practical expedient to maintain the prior operating lease classification. Effective January 1, 2019, we will assess any new contracts or modification of contracts in accordance with ASC 842 to determine the existence of a lease and its classification. We are reporting revenues and expenses for real estate taxes and insurance, prospectively where the lessee has not made those payments directly to a third party in accordance with their respective leases with us.
The following table summarizes real estate tax recognized on our consolidated statements of operations for the three and six months ended June 30, 2020 and 2019:
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Three Months Ended June 30,
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For the Six Months Ended June 30,
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(Amounts in 000’s)
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2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Rental revenues
|
|
$
|
119
|
|
|
$
|
106
|
|
|
$
|
245
|
|
|
$
|
229
|
|
|
Other operating expenses
|
|
$
|
119
|
|
|
$
|
106
|
|
|
$
|
245
|
|
|
$
|
229
|
|
Additionally, we now expense certain leasing costs, other than leasing commissions, as they are incurred. Current GAAP provides for the deferral and amortization of such costs over the applicable lease term. Adoption of ASU 2016-02 has not had a material effect on the Company’s consolidated financial statements, other than the initial balance sheet impact of recognizing the right-of-use assets and the right-of-use lease liabilities. Upon adoption, we recognized operating lease assets of $39.8 million on our consolidated balance sheet for the period ended March 31, 2019, which represents the present value of minimum lease payments associated with such leases. Also upon adoption, we recognized operating lease liabilities of $41.5 million on our consolidated balance sheet for the period ended March 31, 2019. The present value of minimum lease payments was calculated on each lease using a discount rate that approximated our incremental borrowing rate and the current lease term and upon adoption we utilized a discount rate of 7.98% for the Company’s leases. See Note 6– Leases for the Company’s operating leases.
Self-Insurance
The Company is self-insured against professional and general liability claims since it discontinued its healthcare operations during 2014 and 2015 in connection with its transition from an owner and operator of healthcare properties to a healthcare property holding and leasing company (the “Transition”). See Part II, Item 8, “Financial Statements and Supplementary Data”, Note 15 – Commitments and Contingencies in the Annual Report for more information. The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions, including estimated settlement amounts and legal fees and other expenses anticipated to be incurred in such settlement, as applicable; and (v) the venues in which the actions have been filed or will be adjudicated. The Company believes that most of the professional and general liability actions are defensible and intends to defend them through final judgment unless settlement is more advantageous to the Company. Accordingly, the self-insurance reserve reflects the Company’s estimate of settlement amounts for the pending actions, if applicable, and legal costs of settling or litigating the pending actions, as applicable. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve may not be sufficient to cover the settlement amounts actually incurred in settling the pending actions, or the legal costs actually incurred in settling or litigating the pending actions. See Note 7 – Accrued Expenses.
In addition, the Company maintains certain other insurance programs, including commercial general liability, property, casualty, directors’ and officers’ liability, crime and employment practices liability.
11
Extinguishment of Debt
The Company recognizes extinguishment of debt when the criteria for a troubled debt restructure are not met and the change in the debt terms is considered substantial. The Company calculates the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt (including deferred finance fees) and recognizes a gain or loss on the income statement of the period of extinguishment.
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 that the net income or loss is adjusted by the impact of the weighted-average number of shares of common stock outstanding including potentially dilutive securities (such as options, warrants and non-vested common stock) when such securities are not anti-dilutive. Potentially dilutive securities from options, warrants and unvested restricted 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.
Securities outstanding that were excluded from the computation, because they would have been anti-dilutive were as follows:
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June 30,
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(Share amounts in 000’s)
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2020
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2019
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|
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Stock options
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|
|
15
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|
|
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15
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Warrants - employee
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49
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|
|
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49
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|
Warrants - non employee
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|
|
9
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|
|
|
36
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|
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Total anti-dilutive securities
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|
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73
|
|
|
|
100
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The weighted average contractual terms in years for these securities, with no intrinsic value, are 3.9 years for the stock options and 3.5 years for the warrants.
See Part II, Item 8, “Financial Statements and Supplementary Data”, Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of the other accounting pronouncements the Company is currently evaluating.
Overview
The Company is undertaking measures to grow its operations, streamline its cost infrastructure and otherwise increase liquidity by: (i) refinancing or repaying debt to reduce interest costs and mandatory principal repayments, with such repayment to be funded through potentially expanding borrowing arrangements with certain lenders or potentially raising capital through the issuance of securities after restructuring of the Company’s capital structure; (ii) increasing future lease revenue through acquisitions and investments in existing properties; (iii) modifying the terms of existing leases; (iv) replacing certain tenants who default on their lease payment terms; and (v) reducing other and general and administrative expenses.
Management anticipates access to several sources of liquidity, including cash on hand, cash flows from operations, and debt refinancing during the twelve months from the date of this filing. At June 30, 2020, the Company had $4.3 million in unrestricted cash. During the six months ended June 30, 2020, the Company generated positive cash flow from continuing operations of $0.8 million and anticipates continued positive cash flow from operations during the twelve months from the date of this filing, however this anticipation is subject to the uncertainties of the COVID-19 pandemic. At June 30, 2020, one operator accounted for approximately $1.1 million of rent arrears recorded in “Accounts receivable, net of allowance” on our consolidated balance sheets for which the Company has deemed an allowance is not currently warranted as the Company has a uniform commercial code lien on the operator’s sufficient receivables. The Company continues to monitor collectability and negotiations are ongoing between the operator and the Company for resolution and collection of the receivables. The Company is current with all of its debt and other financial obligations. The Company is taking advantage of various stimulus measures made available to it through the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) recently enacted by Congress in response to the COVID-19 pandemic which allows for, among other things, a deferral of debt service payments on U.S. Department of Agriculture (“USDA”) loans to maturity, an allowance for debt service payments to be made out of replacement reserve accounts for U.S. Department of Housing and Urban Development (“HUD”) loans as well as allowing for debt service payments to be made by the U.S. Small Business Administration (“SBA”) on all SBA loans. For further information see Note 8 – Notes Payable and Other Debt.
12
Series A Preferred Dividend Suspension
On June 8, 2018, the Board indefinitely suspended quarterly dividend payments with respect to the Series A Preferred Stock. As of June 30, 2020, as a result of the suspension of the dividend payment on the Series A Preferred Stock commencing with the fourth quarter 2017 dividend period, the Company has $23.4 million of undeclared preferred stock dividends in arrears. The Board plans to revisit the dividend payment policy with respect to the Series A Preferred Stock on an ongoing basis. The Board believes that the dividend suspension will provide the Company with additional funds to meet, in part, its ongoing liquidity needs. As the Company has failed to pay cash dividends on the outstanding Series A Preferred Stock in full for more than four dividend periods, the annual dividend rate on the Series A Preferred Stock for the fifth and future missed dividend periods has increased to 12.875%, which is equivalent to $3.22 per share each year, commencing on the first day after the missed fourth quarterly payment (October 1, 2018) and continuing until the second consecutive dividend payment date following such time as the Company has paid all accumulated and unpaid dividends on the Series A Preferred Stock in full in cash.
Debt
As of June 30, 2020, the Company had $55.1 million, net of $1.5 million deferred financing and unamortized discounts, in indebtedness. The Company anticipates net principal repayments of approximately $2.0 million (excluding approximately $0.1 million from modest payment deferment programs) during the next twelve-month period which include approximately $1.9 million of routine debt service amortization, and a $0.1 million payment of bond debt.
Debt Covenant Compliance
As of June 30, 2020, the Company was not in default of the various covenants for the Company’s outstanding credit related instruments.
Evaluation of the Company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of the Company’s consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. The Company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In applying applicable accounting guidance, management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company’s obligations due over the next twelve months as well as the Company’s recurring business operating expenses.
The Company concludes that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance.
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NOTE 3.
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CASH AND RESTRICTED CASH
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The following presents the Company's cash and restricted cash:
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(Amounts in 000’s)
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|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Cash
|
|
$
|
4,295
|
|
|
$
|
4,383
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
Cash collateral
|
|
|
66
|
|
|
|
124
|
|
|
HUD and other replacement reserves
|
|
|
1,650
|
|
|
|
2,251
|
|
|
Escrow deposits
|
|
|
849
|
|
|
|
963
|
|
|
Restricted investments for debt obligations
|
|
|
317
|
|
|
|
317
|
|
|
Total restricted cash
|
|
|
2,882
|
|
|
|
3,655
|
|
|
Total cash and restricted cash
|
|
$
|
7,177
|
|
|
$
|
8,038
|
|
13
Cash collateral—In securing mortgage financing from certain lending institutions, the Company and certain of its wholly-owned subsidiaries are required to deposit cash to be held as collateral in accordance with the terms of such loan agreements.
HUD and other replacement reserves—The regulatory agreements entered into in connection with the financing secured through HUD require monthly escrow deposits for replacement and improvement of the HUD project assets
Escrow deposits—In connection with financing secured through the Company’s lenders, several wholly-owned subsidiaries of the Company are required to make monthly escrow deposits for taxes and insurance.
Restricted cash for other debt obligations—In compliance with certain financing and insurance agreements, the Company and certain wholly-owned subsidiaries of the Company are required to deposit cash held as collateral by the lender or in escrow with certain designated financial institutions.
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NOTE 4.
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PROPERTY AND EQUIPMENT
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The following table sets forth the Company’s property and equipment:
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(Amounts in 000’s)
|
|
Estimated
Useful
Lives (Years)
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Buildings and improvements
|
|
5-40
|
|
|
$
|
65,486
|
|
|
$
|
65,533
|
|
|
Equipment and computer related
|
|
2-10
|
|
|
|
5,384
|
|
|
|
5,601
|
|
|
Land
|
|
|
—
|
|
|
|
2,779
|
|
|
|
2,779
|
|
|
Construction in process
|
|
|
—
|
|
|
|
216
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
73,865
|
|
|
|
73,971
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(20,337
|
)
|
|
|
(19,299
|
)
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
53,528
|
|
|
$
|
54,672
|
|
The following table summarizes total depreciation and amortization expense for the three and six months ended June 30, 2020 and 2019:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Amounts in 000’s)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Depreciation
|
|
$
|
544
|
|
|
$
|
604
|
|
|
$
|
1,094
|
|
|
$
|
1,335
|
|
|
Amortization
|
|
|
225
|
|
|
|
237
|
|
|
|
451
|
|
|
|
529
|
|
|
Total depreciation and amortization expense
|
|
$
|
769
|
|
|
$
|
841
|
|
|
$
|
1,545
|
|
|
$
|
1,864
|
|
|
NOTE 5.
|
INTANGIBLE ASSETS AND GOODWILL
|
Intangible assets consist of the following:
|
(Amounts in 000’s)
|
|
Bed licenses
(included
in property
and
equipment)(a)
|
|
|
Bed Licenses -
Separable
|
|
|
Lease
Rights
|
|
|
Total
|
|
|
Balances, December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
14,276
|
|
|
$
|
2,471
|
|
|
$
|
4,758
|
|
|
$
|
21,505
|
|
|
Accumulated amortization
|
|
|
(3,339
|
)
|
|
|
—
|
|
|
|
(4,296
|
)
|
|
|
(7,635
|
)
|
|
Net carrying amount
|
|
$
|
10,937
|
|
|
$
|
2,471
|
|
|
$
|
462
|
|
|
$
|
13,870
|
|
|
Amortization expense
|
|
|
(207
|
)
|
|
|
—
|
|
|
|
(244
|
)
|
|
|
(451
|
)
|
|
Balances, June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
14,276
|
|
|
|
2,471
|
|
|
|
4,758
|
|
|
|
21,505
|
|
|
Accumulated amortization
|
|
|
(3,546
|
)
|
|
|
—
|
|
|
|
(4,540
|
)
|
|
|
(8,086
|
)
|
|
Net carrying amount
|
|
$
|
10,730
|
|
|
$
|
2,471
|
|
|
$
|
218
|
|
|
$
|
13,419
|
|
|
(a)
|
Non-separable bed licenses are included in property and equipment as is the related accumulated amortization expense (see Note 4 – Property and Equipment).
|
14
The following table summarizes amortization expense for the three and six months ended June 30, 2020 and 2019:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Amounts in 000’s)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Bed licenses
|
|
$
|
103
|
|
|
$
|
115
|
|
|
$
|
207
|
|
|
$
|
286
|
|
|
Lease rights
|
|
|
122
|
|
|
|
122
|
|
|
|
244
|
|
|
|
243
|
|
|
Total amortization expense
|
|
$
|
225
|
|
|
$
|
237
|
|
|
$
|
451
|
|
|
$
|
529
|
|
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
|
|
|
2020(a)
|
|
$
|
208
|
|
|
$
|
60
|
|
|
2021
|
|
|
414
|
|
|
|
24
|
|
|
2022
|
|
|
414
|
|
|
|
24
|
|
|
2023
|
|
|
414
|
|
|
|
23
|
|
|
2024
|
|
|
414
|
|
|
|
18
|
|
|
Thereafter
|
|
|
8,866
|
|
|
|
69
|
|
|
Total expected amortization expense
|
|
$
|
10,730
|
|
|
$
|
218
|
|
|
(a)
|
Estimated amortization expense for the year ending December 31, 2020, includes only amortization to be recorded after June 30, 2020.
|
The following table summarizes the carrying amount of goodwill:
|
(Amounts in 000’s)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Goodwill - balances, December 31, prior year
|
|
$
|
1,585
|
|
|
$
|
2,105
|
|
|
Assets sold
|
|
|
—
|
|
|
|
(520
|
)
|
|
Net carrying amount
|
|
$
|
1,585
|
|
|
$
|
1,585
|
|
The Company does not amortize indefinite-lived intangibles, which consist of separable bed licenses and goodwill.
Operating Leases
The Company leases nine skilled nursing facilities from unaffiliated owners under non-cancelable leases, all of which have rent escalation clauses and provisions requiring payment of real estate taxes, insurance and maintenance costs by the lessee. Each of the skilled nursing facilities that are leased by the Company are subleased to and operated by third-party tenants. The Company also leases certain office space located in Atlanta, Georgia and Suwanee, Georgia. The Atlanta office space is subleased to a third-party entity.
As of June 30, 2020, the Company is in compliance with all operating lease financial covenants.
Subleased Facilities
The weighted average remaining lease term for our nine subleased facilities is 7.3 years.
Covington Prime Lease. One of the Company’s facilities is leased under an agreement dated August 26, 2002, as subsequently amended (the “Covington Prime Lease”), by and between the Company and Covington Realty, LLC (“Covington”). On January 11, 2019, the Company and Covington entered into a forbearance agreement (the “Covington Forbearance Agreement”), whereby the Company and Covington agreed that: (i) the term of the lease shall be extended from April 30, 2025 until April 30, 2029 (the “Term”); (ii) the base rent was reduced by approximately $0.8 million over the remainder of the prior lease term; and (iii) the Company shall receive relief from approximately $0.5 million of outstanding lease amounts (the “Rent Due”) as of December 31, 2018. Without waiving any default by the Company or Covington’s rights and remedies, and subject to specified terms and conditions for so long as the Company or the Company’s subtenant are not in default under the lease and the sublease, as the case may be, Covington (including its subsidiaries, affiliates, successors and assigns) will forbear from pursuing its rights against the Company for so long as neither the Company nor its subtenant is not in default under the existing lease, as amended on January 11, 2019, or the new sublease, on the final day of the third, fourth and fifth years following the
15
execution of the new sublease. Covington will release and forever quit claim specified portions of the Rent Due as follows: one-third at the end of year three of the new sublease, one-third at the end of year four of the new sublease, and one-third at the end of year five of the new sublease. The forbearance period under the Covington Forbearance Agreement shall terminate as of the expiration of the Term. At Covington’s option in its sole and absolute business discretion, the Covington Forbearance Agreement and the forbearance period thereunder can be terminated upon the occurrence of certain specified events such as, the Company files a petition for bankruptcy or takes advantage of any other debtor relief law, or an involuntary petition for bankruptcy is filed against the Company, or any other judicial action is taken with respect to the Company by any creditor of the Company or the Company breaches or defaults in performance of any covenant or agreement contained in the Covington Forbearance Agreement. Upon termination of the forbearance period under the Covington Forbearance Agreement, for any reason, Covington may take all steps it deems necessary or desirable to enforce its lease rights as permitted by law or equity.
Bonterra/Parkview Master Lease. The Company and certain of its subsidiaries terminated the Company’s lease and sublease of two skilled nursing facilities, an 115-bed skilled nursing facility located in East Point, Georgia and an 184-bed skilled nursing facility located in Atlanta, Georgia (the “Omega Facilities”), by mutual consent of the Company and the lessor (affiliate of Omega Healthcare) and the sublessees (affiliates of Wellington Health Services) of each of the Omega Facilities (the “Omega Lease Termination”). Prior to the Omega Lease Termination which was effective January 15, 2019, the Omega Facilities were leased under a single indivisible agreement (the “Bonterra/Parkview Master Lease”), which leases were due to expire August 2025 and which Omega Facilities the Company subleased to third party subtenants. Effective January 15, 2019, the Company’s leases for the Omega Facilities were terminated by mutual consent of the Company and the lessor of the Omega Facilities. For further information, see Note 9 - Discontinued Operations and Dispositions.
Wellington. Two of the Company’s eight Georgia facilities, leased under a prime lease, are subleased to affiliates of Wellington Health Services under agreements dated January 31, 2015, as subsequently amended (the “Wellington Subleases”). The Wellington Subleases, which are due to expire August 31, 2027, relate to the Company’s 134-bed skilled nursing facility located in Thunderbolt, Georgia (the “Tara Facility”) and an 208-bed skilled nursing facility located in Powder Springs, Georgia (the “Powder Springs Facility”). Effective February 1, 2019, the Company agreed to a 10% reduction in base rent, or in aggregate approximately an average $31,000 per month cash rent reduction for the year ended December 31, 2019, and $48,000 per month decrease in straight-line revenue, respectively for the Tara Facility and the Powder Springs Facility combined. Additionally the Company modified the annual rent escalator to 1% per year from the prior scheduled increase from 1% to 2% previously due to commence of the 1st day of the sixth lease year.
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)
|
|
Future
rental
payments
|
|
|
Accretion of
lease liability (1)
|
|
|
Operating
lease
obligation
|
|
|
2020 (2)
|
|
$
|
3,221
|
|
|
$
|
(74
|
)
|
|
$
|
3,147
|
|
|
2021
|
|
|
6,551
|
|
|
|
(520
|
)
|
|
|
6,031
|
|
|
2022
|
|
|
6,691
|
|
|
|
(1,002
|
)
|
|
|
5,689
|
|
|
2023
|
|
|
6,823
|
|
|
|
(1,465
|
)
|
|
|
5,358
|
|
|
2024
|
|
|
6,958
|
|
|
|
(1,912
|
)
|
|
|
5,046
|
|
|
Thereafter
|
|
|
19,832
|
|
|
|
(7,471
|
)
|
|
|
12,361
|
|
|
Total
|
|
$
|
50,076
|
|
|
$
|
(12,444
|
)
|
|
$
|
37,632
|
|
|
(1)
|
Weighted average discount rate 7.98%.
|
|
(2)
|
Estimated minimum lease payments for the year ending December 31, 2020 include only payments to be paid after June 30, 2020.
|
Leased and Subleased Facilities to Third-Party Operators
As of June 30, 2020, the Company leased or subleased 21 facilities (12 owned by the Company and nine leased to the Company), to third-party tenants on a triple net basis, meaning that the lessee (i.e., the third-party tenant 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. The weighted average remaining lease term for our facilities is 7.4 years.
16
Aspire. On November 30, 2018, the Company subleased five facilities located in Ohio to affiliates (collectively, “Aspire Sublessees”) of Aspire Regional Partners, Inc. (“Aspire”) management, formerly affiliated with MSTC Development Inc., pursuant to separate sublease agreements (the “Aspire Subleases”), whereby the Aspire Sublessees took possession of, and commenced operating, the facilities (the “Aspire Facilities”) as subtenant. The Aspire Subleases became effective on December 1, 2018 and are structured as triple net leases. The Company agreed to indemnify Aspire against any and all liabilities imposed on them as arising from the former operator, capped at $8.0 million. The Company has assessed the fair value of the indemnity agreements as not material to the financial statements at June 30, 2020.
Symmetry. Affiliates (the “Symmetry Tenants”) of Healthcare Management, LLC (“Symmetry” or “Symmetry Healthcare”) leased the following facilities from the Company, pursuant to separate lease agreements which expire in 2030 (the “Symmetry Leases”): (i) the Company’s 106-bed, skilled nursing facility located in Sylvia, North Carolina (the “Mountain Trace Facility”); (ii) the Company’s 96-bed, skilled nursing facility located in Sumter, South Carolina (the “Sumter Facility”); and (iii) the Company’s 84-bed, skilled nursing facility located in Georgetown, South Carolina (the “Georgetown Facility”). On June 27, 2018, the Company notified Blue Ridge of Sumter, LLC, the tenant with respect to the Sumter Facility (the “Sumter Tenant”), and Blue Ridge on the Mountain, LLC, the tenant with respect to the Mountain Trace Facility (the “Mountain Trace Tenant”), that continued breach of the payment terms of the applicable Symmetry Lease would constitute an event of default. The Symmetry Tenants had alleged that the Company was in material breach of each of the Symmetry Leases with regard to deferred maintenance and were withholding rental payments on the basis of such allegations.
On January 28, 2019, the Company reached a final agreement pursuant to an agreement signed on September 20, 2018, with the Symmetry Tenants with respect to the Symmetry Leases, pursuant to which the Symmetry Tenants agreed to a payment plan for the rent arrears and the Company agreed to a reduction in annualized rent of approximately $0.6 million, and waived approximately $0.2 million in rent arrears, upon which the Symmetry Tenants recommenced monthly rent payments of $0.1 million starting with the September 1, 2018 amounts due under the Symmetry Leases. There is no assurance that the Company will be able to obtain payment of all unpaid rents. During the year ended December 31, 2019, the Company expensed approximately $0.4 million allowance against the outstanding balance of payment plan receivables. On February 28, 2019, the Company and the Mountain Trace Tenant mutually terminated the lease with respect to the Mountain Trace Facility and operations at the facility were transferred to Vero Health X, LLC (“Vero Health”). During the three month’s ended June 30, 2020, the Company released approximately $0.1 million of the unpaid rent allowance.
Vero Health. On February 28, 2019, the Company entered into a lease agreement (the “Vero Health Lease”) with Vero Health, providing that Vero Health would take possession of and operate the Mountain Trace Facility located in North Carolina. The Vero Health Lease became effective, upon the termination of the prior Mountain Trace Tenant mutual lease termination on March 1, 2019. The Vero Health Lease is for an initial term of 10 years, with renewal options, is structured as a triple net lease and rent for the Mountain Trace Facility is approximately $0.5 million per year, with an annual 2.5 % rent escalation clause.
Peach Health. On June 18, 2016, the Company entered into a Master Sublease Agreement, as amended on March 30, 2018 (the “Peach Health Sublease”), with affiliates of Peach Health Group, LLC (“Peach Health”) (the affiliates collectively, “Peach Health Sublessee”), which provided that Peach Health Sublessee would take possession of and operate three facilities located in Georgia (the “Peach Facilities”) as subtenant.
In connection with the Peach Health Sublease, the Company extended a line of credit to Peach Health Sublessee for up to $1.0 million for operations at the Peach Facilities (the “Peach Line”), with an initial interest rate of 13.5% per annum, which increases by 1% per annum. The Peach Line had a maturity date one year from the date of the first disbursement and is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable. On April 6, 2017, the Company modified certain terms of the Peach Line in connection with Peach Health Sublessee securing a $2.5 million revolving working capital loan from a third party lender (the “Peach Working Capital Facility”), subsequently capped at $1.75 million, which matured April 5, 2020. The Peach Working Capital Facility was secured by Peach Health Sublessee’s eligible accounts receivable, and all collections on the eligible accounts receivable are remitted to a lockbox controlled by the lender and was guaranteed by Regional. Payment of principal and interest under the Peach Line was previously governed by certain financial covenants limiting distributions under the Peach Working Capital Facility. The modifications of the Peach Line included: (i) reducing the loan balance to $0.8 million and restricting further borrowings; (ii) extending the maturity date to October 1, 2020 and adding a six month extension option by Peach Health Sublessee, subject to certain conditions; (iii) increasing the interest rate from 13.5% per annum by 1% per annum; and (iv) establishing a four-year amortization schedule. During May 2020, Peach Health Sublessee, having fully repaid their Peach Working Capital Facility according to its terms, recommenced monthly required payments toward the Peach Line outstanding balance.
17
At June 30, 2020, approximately $1.3 million was outstanding on the Peach Line.
Future minimum lease receivables, at June 30, 2020, from the Company’s facilities leased and subleased to third party tenants for each of the next five years ending December 31, are as follows:
|
|
|
(Amounts
in 000's)
|
|
|
2020 (a)
|
|
$
|
7,907
|
|
|
2021
|
|
|
16,100
|
|
|
2022
|
|
|
17,273
|
|
|
2023
|
|
|
17,588
|
|
|
2024
|
|
|
17,448
|
|
|
Thereafter
|
|
|
53,319
|
|
|
Total
|
|
$
|
129,635
|
|
|
(a)
|
Estimated minimum lease receivables for the year ending December 31, 2020 include only payments to be paid after June 30, 2020.
|
For further details regarding the Company’s leased and subleased facilities to third-party operators, including a full summary of the Company’s leases to third-parties and which comprise the future minimum lease receivables of the Company, see Part II, Item 8, “Financial Statements and Supplementary Data”, Note 7 - Leases and Note 10 – Acquisitions and Dispositions included in the Annual Report.
Accrued expenses and other consist of the following:
|
(Amounts in 000’s)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Accrued employee benefits and payroll-related
|
|
$
|
211
|
|
|
$
|
239
|
|
|
Real estate and other taxes
|
|
|
783
|
|
|
|
883
|
|
|
Self-insured reserve (1)
|
|
|
266
|
|
|
|
453
|
|
|
Accrued interest
|
|
|
345
|
|
|
|
208
|
|
|
Unearned rental revenue
|
|
|
48
|
|
|
|
46
|
|
|
Other accrued expenses
|
|
|
827
|
|
|
|
784
|
|
|
Total accrued expenses
|
|
$
|
2,480
|
|
|
$
|
2,613
|
|
|
(1)
|
The Company self-insures against professional and general liability cases incurred prior to the Transition and uses a third party administrator and outside counsel to manage and defend the claims (see Note 12 - Commitments and Contingencies).
|
18
|
NOTE 8.
|
NOTES PAYABLE AND OTHER DEBT
|
See Part II, Item 8, “Financial Statements and Supplementary Data”, 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:
|
(Amounts in 000’s)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Senior debt—guaranteed by HUD
|
|
$
|
31,570
|
|
|
$
|
31,996
|
|
|
Senior debt—guaranteed by USDA
|
|
|
13,163
|
|
|
|
13,298
|
|
|
Senior debt—guaranteed by SBA
|
|
|
640
|
|
|
|
650
|
|
|
Senior debt—bonds
|
|
|
6,500
|
|
|
|
6,616
|
|
|
Senior debt—other mortgage indebtedness
|
|
|
3,705
|
|
|
|
3,777
|
|
|
Other debt
|
|
|
1,016
|
|
|
|
539
|
|
|
Subtotal
|
|
|
56,594
|
|
|
|
56,876
|
|
|
Deferred financing costs
|
|
|
(1,307
|
)
|
|
|
(1,364
|
)
|
|
Unamortized discount on bonds
|
|
|
(142
|
)
|
|
|
(149
|
)
|
|
Notes payable and other debt
|
|
$
|
55,145
|
|
|
$
|
55,363
|
|
The following is a detailed listing of the debt facilities that comprise each of the above categories:
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate (a)
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Senior debt - guaranteed by HUD (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Pavilion Care Center
|
|
Orix Real Estate Capital
|
|
12/01/2027
|
|
Fixed
|
|
|
4.16
|
%
|
|
$
|
1,056
|
|
|
$
|
1,105
|
|
|
Hearth and Care of Greenfield
|
|
Orix Real Estate Capital
|
|
08/01/2038
|
|
Fixed
|
|
|
4.20
|
%
|
|
|
1,963
|
|
|
|
1,992
|
|
|
Woodland Manor
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
|
3.75
|
%
|
|
|
5,032
|
|
|
|
5,094
|
|
|
Glenvue
|
|
Midland State Bank
|
|
10/01/2044
|
|
Fixed
|
|
|
3.75
|
%
|
|
|
7,811
|
|
|
|
7,909
|
|
|
Autumn Breeze
|
|
KeyBank
|
|
01/01/2045
|
|
Fixed
|
|
|
3.65
|
%
|
|
|
6,791
|
|
|
|
6,876
|
|
|
Georgetown
|
|
Midland State Bank
|
|
10/01/2046
|
|
Fixed
|
|
|
2.98
|
%
|
|
|
3,437
|
|
|
|
3,480
|
|
|
Sumter Valley
|
|
KeyBank
|
|
01/01/2047
|
|
Fixed
|
|
|
3.70
|
%
|
|
|
5,480
|
|
|
|
5,540
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,570
|
|
|
$
|
31,996
|
|
|
Senior debt - guaranteed by USDA (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coosa (d)
|
|
Metro City
|
|
09/30/2035
|
|
Prime + 1.50%
|
|
|
5.50
|
%
|
|
|
5,149
|
|
|
|
5,212
|
|
|
Mountain Trace (e)
|
|
Community B&T
|
|
02/24/2037
|
|
Prime + 1.75%
|
|
|
5.75
|
%
|
|
|
3,972
|
|
|
|
4,009
|
|
|
Southland (f)
|
|
Cadence Bank, NA
|
|
07/27/2036
|
|
Prime + 1.50%
|
|
|
6.00
|
%
|
|
|
4,042
|
|
|
|
4,077
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,163
|
|
|
$
|
13,298
|
|
|
Senior debt - guaranteed by SBA (g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southland
|
|
Cadence Bank, NA
|
|
07/27/2036
|
|
Prime + 2.25%
|
|
|
5.50
|
%
|
|
|
640
|
|
|
|
650
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
640
|
|
|
$
|
650
|
|
|
(a)
|
Represents cash interest rates as of June 30, 2020 as adjusted for interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs, which range from 0.08% to 0.53% per annum.
|
|
(b)
|
For the seven skilled nursing facilities, the Company has term loans insured 100% by HUD with financial institutions. The loans are secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the underlying facility. The loans contain customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, and failure to perform or comply with certain agreements. Upon the occurrence of certain events of default, the lenders may, after receiving the prior written approval of HUD, terminate the loans and all amounts under the loans will become immediately due and payable. In connection with entering into each loan, the Company entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions. Pursuant to the CARES Act, up to three months of debt service payments for six of the credit facilities can be made from our restricted cash reserves.
|
19
|
(c)
|
For the three skilled nursing facilities, the Company has term loans insured 70% to 80% by the USDA with financial institutions. The loans have an annual renewal fee for the USDA guarantee of 0.25% of the guaranteed portion. The loans have prepayment penalties of 1% to 2% through 2020, capped at 1% for the remainder of the first 10 years of the term and 0% thereafter.
|
|
(d)
|
Pursuant to the CARES Act, the monthly principal and interest payments due May 1, 2020 through September 1, 2020 for the loan for that certain 122-bed skilled nursing facility commonly known as Coosa, located in Glencoe, Alabama, are deferred (a part of the “USDA Payment Program”). Monthly payments commencing October 1, 2020 will be applied to current interest, then deferred interest until the deferred interest is paid in full. Upon expiration of the deferral period, the payments will be re-amortized over the remaining term of the loan.
|
|
(e)
|
Pursuant to the CARES Act, the monthly principal and interest payments due May 1, 2020 through August 1, 2020 for the Mountain Trace facility loan are deferred. Monthly payments commencing September 1, 2020 will be applied to current interest, then deferred interest until the deferred interest is paid in full, payments will be re-amortized over the extended term of the loan.
|
|
(f)
|
Pursuant to the CARES Act, the monthly principal and interest payments due May 1, 2020 through October 1, 2020 for the loan for that certain 126-bed skilled nursing facility commonly known as Southland, located in Dublin, Georgia, are deferred (a part of the “USDA Payment Program”). Monthly payments will recommence November 1, 2020 and the payments will be re-amortized over the remaining term of the loan.
|
|
(g)
|
For the one facility, the Company has a term loan with a financial institution, which is insured 75% by the SBA. Six monthly debt payments, commencing March 1, 2020, are being funded by the SBA.
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate (a)
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Senior debt - bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eaglewood Bonds Series A
|
|
City of Springfield, Ohio
|
|
05/01/2042
|
|
Fixed
|
|
|
7.65
|
%
|
|
$
|
6,379
|
|
|
$
|
6,379
|
|
|
Eaglewood Bonds Series B
|
|
City of Springfield, Ohio
|
|
05/01/2021
|
|
Fixed
|
|
|
8.50
|
%
|
|
|
121
|
|
|
|
237
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,500
|
|
|
$
|
6,616
|
|
|
(a)
|
Represents cash interest rates as of June 30, 2020. The rates exclude amortization of deferred financing of approximately 0.15% per annum.
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Lender
|
|
Maturity
|
|
Interest Rate (a)
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Senior debt - other mortgage indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meadowood
|
|
Exchange Bank of Alabama
|
|
05/01/2022
|
|
Fixed
|
|
|
4.50
|
%
|
|
|
3,705
|
|
|
|
3,777
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,705
|
|
|
$
|
3,777
|
|
|
(a)
|
Represents cash interest rates as of June 30, 2020 as adjusted for interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs of 0.30% per annum.
|
|
(Amounts in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
Maturity
|
|
Interest Rate
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Other debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Insurance Funding
|
|
03/01/2021
|
|
Fixed
|
|
|
2.38
|
%
|
|
$
|
281
|
|
|
$
|
27
|
|
|
Key Bank
|
|
08/25/2021
|
|
Fixed
|
|
|
0.00
|
%
|
|
|
495
|
|
|
|
495
|
|
|
Greater Nevada Credit Union - PPP Loan
|
|
04/16/2022
|
|
Fixed
|
|
|
1.00
|
%
|
|
|
229
|
|
|
|
—
|
|
|
Marlin Covington Finance
|
|
03/11/2021
|
|
Fixed
|
|
|
20.17
|
%
|
|
|
11
|
|
|
|
17
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,016
|
|
|
$
|
539
|
|
PPP Loan
On June 29, 2020, the Company received the proceeds of a promissory note dated April 16, 2020 (the “PPP Loan Agreement”), entered into between Adcare Administrative Services, LLC (“Borrower”), a wholly owned subsidiary of the Company, and Greater Nevada Credit Union, as lender (the “Lender). Lender made this loan pursuant to the Paycheck Protection Program (the “PPP”), created by Section 1102 of the CARES Act and governed by the CARES Act, Section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the SBA implementing the PPP and acting as guarantor, or any other applicable loan program requirements, as defined in 13 CFR § 120.10, as amended from time to time. Pursuant to the PPP Loan Agreement, the Lender made a loan to the Borrower with an aggregate principal amount of $228,700 (the “PPP Loan”), which is recorded in “Other debt, net” in the Company’s consolidated balance sheets.
20
The maturity date of the PPP Loan is April 16, 2022, which is two years from the PPP Loan Agreement date. The interest accrues from the date of disbursement of the PPP Loan (the “Effective Date”). The PPP Loan bears interest at a fixed rate equal to one percent (1%) per annum and interest will accrue from the Effective Date. PPP Loan payments will be deferred for the first six months from the Effective Date. Subject to any PPP Loan forgiveness granted by the CARES Act, the Company will subsequently pay 18 fully amortized monthly consecutive principal and interest payments for all principal and all accrued interest not yet paid, with the first PPP Loan payment due on the date that is seven months after the Effective Date. The proceeds of the PPP Loan shall be used for the following purposes only: (i) payroll costs as defined by the CARES Act, (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) mortgage interest payments, (iv) rent payments, (v) utility payments, (vi) interest payments on any other debt obligations incurred before February 15, 2020, and/or (vii) refinancing a SBA Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020.
The PPP Loan and the related documentation contain customary events of default, including: (i) any representation or warranty made, or financial or other information provided, by the Borrower under the PPP Loan Agreement being false or misleading in any material respect; (ii) the failure by any Borrower to make required payments; (iii) the failure by the Borrower to perform or comply with certain agreements; and (iv) the dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law.
Should Borrower default on the PPP Loan, SBA may be required to pay Lender under the SBA guarantee. SBA may then seek recovery of these funds from Borrower and Borrower may not claim or assert against SBA any immunities or defenses available under local law to defeat, modify or otherwise limit Borrower's obligation to repay to SBA any funds advanced by Lender to Borrower. If Borrower defaults on the SBA-guaranteed loan and SBA suffers a loss, the names of the small business will be referred for listing in the Credit Alert Verification Reporting System (CAIVRS) database, which may affect their edibility for further assistance.
Pursuant to the CARES Act, the loan may be forgiven by the SBA. The amount of loan forgiveness is determined by and is subject to the sole approval of the SBA. The amount of loan forgiveness may be reduced if loan proceeds are spent inappropriately. To receive loan forgiveness, borrower must apply for loan forgiveness and provide documentation as requested by the SBA. There will be no loan forgiveness without Borrower’s submission of the proper application and documentation to Lender to include all SBA requirements. Not more than 25% of the amount forgiven can be attributable to non-payroll costs. No assurance can be provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
Debt Covenant Compliance
As of June 30, 2020, the Company had 18 credit related instruments 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 earnings before interest, taxes, depreciation, and amortization or earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, and current ratios. 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 as follows: (i) financial covenants measured against subsidiaries of the Company; and (ii) financial covenants measured against third-party operator performance. Some covenants are based on annual financial metric measurements whereas others are based on monthly and quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements.
As of June 30, 2020, the Company was not in default of any covenant requirements under its outstanding credit related instruments.
21
Scheduled Maturities
The schedule below summarizes for each of the next five years and thereafter, the scheduled gross maturities for the twelve months ended June 30 of the respective year:
|
For the twelve months ended June 30,
|
|
(Amounts in 000’s)*
|
|
|
2021
|
|
$
|
2,018
|
|
|
2022
|
|
|
5,835
|
|
|
2023
|
|
|
1,738
|
|
|
2024
|
|
|
1,821
|
|
|
2025
|
|
|
1,912
|
|
|
Thereafter
|
|
|
43,270
|
|
|
Subtotal
|
|
$
|
56,594
|
|
|
Less: unamortized discounts
|
|
|
(142
|
)
|
|
Less: deferred financing costs, net
|
|
|
(1,307
|
)
|
|
Total notes and other debt
|
|
$
|
55,145
|
|
*Excludes the impact of the USDA Payment Program, which suspends approximately $0.1 million in principal payments.
|
NOTE 9.
|
DISCONTINUED OPERATIONS AND DISPOSITIONS
|
Discontinued Operations
For discontinued operations, cost of services, primarily accruals or releases of over accruals for professional and general liability claims and bad debt expense are classified in the activities below. For a historical listing and description of the Company’s discontinued entities, see Part II, Item 8, “Financial Statements and Supplementary Data”, Note 11 – Discontinued Operations included in the Annual Report.
The following table summarizes the activity of discontinued operations for the three and six months ended June 30, 2020 and 2019:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Amounts in 000’s)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Cost of services
|
|
$
|
(6
|
)
|
|
$
|
(132
|
)
|
|
$
|
31
|
|
|
$
|
(310
|
)
|
|
Net income (loss)
|
|
$
|
6
|
|
|
$
|
132
|
|
|
$
|
(31
|
)
|
|
$
|
310
|
|
The Company’s major classes of discontinued operation’s assets and liabilities included within the Company’s consolidated balance sheets at June 30, 2020 and December 31, 2019, respectively are: (i) “Accounts receivable, net of allowance” of $0.1 million and $0.1 million; (ii) “Accounts payable” of $2.7 million and $3.4 million; and (iii) “Accrued Expenses” of $0.8 million and $1.0 million.
Dispositions
For the three and six months ended June 30, 2020, the Company had no dispositions.
Omega
Effective January 15, 2019, the Company’s lease for the Omega Facilities, which leases were due to expire August 2025 and which Omega Facilities the Company subleased to third party subtenants, were terminated by mutual consent of the Company and the lessor of the Omega Facilities.
In connection with the Omega Lease Termination, the Company transferred approximately $0.4 million of all its integral physical fixed assets in the Omega Facilities to the lessor and on January 28, 2019 and received from the lessor gross proceeds of approximately $1.5 million, consisting of (i) a termination fee in the amount of $1.2 million and (ii) approximately $0.3 million to satisfy other net amounts due to the Company under the leases. The Company paid $1.2 million of such Omega Lease Termination proceeds to Pinecone Realty Partners II, LLC (“Pinecone”) on January 28, 2019, as required by the forbearance agreement in effect at that time, to reimburse Pinecone for approximately $0.3 million of certain unpaid expenses and partially prepay $0.9 million of one Pinecone loan made to AdCare Property Holdings, LLC.
22
The Omega Lease Termination contributed approximately $0.7 million income recorded in "Net loss attributable to Regional Health Properties, Inc. common stockholders" reported in the consolidated statement of operations for the period ended June 30, 2019.
Held for Sale
On April 15, 2019, the Company entered into a Purchase and Sale Agreement (the “PSA”) with affiliates of MED Healthcare Partners LLC (collectively “MED”), with respect to the four skilled nursing facilities owned by the Company outlined below.
Subject to the terms of the PSA, the Company agreed to sell, and MED agreed to purchase, all of the Company’s right, title and interest in: (a) that certain 182-bed skilled nursing facility commonly known as Attalla Health & Rehab, located in Attalla, Alabama; (b) that certain 100-bed skilled nursing facility commonly known as Healthcare at College Park, located in College Park, Georgia; (c) that certain 109-bed skilled nursing facility commonly known as Quail Creek Facility, located in Oklahoma City, Oklahoma; and (d) that certain 100-bed skilled nursing facility commonly known as Northwest Nursing Center, located in Oklahoma City, Oklahoma (the “Northwest Facility), (collectively, the “PSA Facilities”). In consideration therefor, MED agreed to pay to the Company the sum of approximately $28.5 million in cash. The disposition was completed in two parts (i) on August 1, 2019, when the Company received net proceeds of $0.4 million upon the repayment of the remaining Company’s three of four loans with Pinecone (the “Pinecone Credit Facility”), the Company’s loan with Congressional Bank (the “Quail Creek Credit Facility”) and associated expenses related to the transactions and (ii) on August 28, 2019, when the Company received net proceeds of $2.3 million upon the sale of the Northwest Facility.
For additional information regarding the Company’s dispositions, see Note – 10 Acquisitions and Dispositions and Note 11 – Discontinued Operations, Part II, Item 8, “Financial Statements and Supplementary Data” included in the Annual Report.
|
NOTE 10.
|
COMMON AND PREFERRED STOCK
|
Common Stock
There were no dividends paid on the common stock during the three and six months ended June 30, 2020 and 2019.
Preferred Stock
No dividends were declared or paid on the Series A Preferred Stock for the three and six months ended June 30, 2020 and 2019.
As of June 30, 2020, as a result of the suspension of the dividend payment on the Series A Preferred Stock commencing with the fourth quarter 2017 dividend period, the Company has $23.4 million of undeclared preferred stock dividends in arrears. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the Board out of funds of the Company legally available for the payment of distributions, cumulative preferential cash dividends at an annual rate equal to 10.875% of the $25.00 per share stated liquidation preference of the Series A Preferred Stock, which is equivalent to an annual rate of $2.72 per share or $1.9 million per quarter. Dividends on the Series A Preferred Stock, when and as declared by the Board, are payable quarterly in arrears, on March 31, June 30, September 30, and December 31 of each year. On June 8, 2018, the Board determined to continue suspension of the payment of the quarterly dividend on the Series A Preferred Stock indefinitely. Under the terms of the Series A Preferred Stock, dividends on the Series A Preferred Stock shall continue to accrue and accumulate regardless of whether such dividends are declared by the Board. As the Company has failed to pay cash dividends on the outstanding Series A Preferred Stock in full for four dividends periods: (i) the annual dividend rate on the Series A Preferred Stock has increased to 12.875% ,which is equivalent to an annual rate of $3.22 or $2.2 million per quarter, commencing on the first day after the missed fourth quarterly payment (October 1, 2018) continuing until the second consecutive dividend payment date following such time as the Company has paid all accumulated and unpaid dividends on the Series A Preferred Stock in full in cash; and (ii) the holders of the Series A Preferred Stock will be entitled to vote, as a single class, for the election of two additional directors to serve on the Board, as further described in the Charter.
As of June 30, 2020, the Company had 2,811,535 shares of the Series A Preferred Stock issued and outstanding.
The Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to the redemption date.
For historical information regarding the Series A Preferred Stock, the Company’s former “at-the-market” offering program and prior share repurchase programs, see Part II, Item 8, “Financial Statements and Supplementary Data”, Note 12 – Common and Preferred Stock included in the Annual Report.
23
|
NOTE 11.
|
STOCK BASED COMPENSATION
|
For the three and six months ended June 30, 2020 and 2019, the Company recognized stock-based compensation expense as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Amounts in 000’s)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Non-employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board restricted stock
|
|
$
|
12
|
|
|
$
|
21
|
|
|
$
|
24
|
|
|
$
|
48
|
|
|
Total stock-based compensation expense
|
|
$
|
12
|
|
|
$
|
21
|
|
|
$
|
24
|
|
|
$
|
48
|
|
Stock Incentive Plan
The AdCare Health Systems, Inc. 2011 Stock Incentive Plan, as amended (the “2011 Stock Incentive Plan”), was assumed by Regional Health pursuant to the Merger. As a result of the Merger, all rights to acquire shares of AdCare common stock under any AdCare equity incentive compensation plan have been converted into rights to acquire Regional Health common stock pursuant to the terms of the equity incentive compensation plans and other related documents, if any. The 2011 Stock Incentive Plan expires March 28, 2021 and provides for a maximum of 168,950 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 Compensation Committee of the Board (the “Compensation Committee”), pursuant to authority delegated to it by the Board. The Compensation Committee is responsible for determining the employees to whom awards will be made, the amounts of the awards, and the other terms and conditions of the awards. As of June 30, 2020, the number of securities remaining available for future issuance is 19,421.
In addition to the 2011 Stock Incentive 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.
For the three and six months ended June 30, 2020 and 2019, there were no issuances of common stock options or warrants.
Restricted Stock
The following table summarizes the Company’s restricted stock activity for the six months ended June 30, 2020:
|
|
|
Number of
Shares (000's)
|
|
|
Weighted Avg.
Grant Date
Fair Value
|
|
|
Unvested, December 31, 2019
|
|
|
29
|
|
|
$
|
4.63
|
|
|
Vested
|
|
|
(15
|
)
|
|
$
|
5.53
|
|
|
Unvested, June 30, 2020
|
|
|
14
|
|
|
$
|
3.60
|
|
For restricted stock unvested at June 30, 2020, $24,781 in compensation expense will be recognized over the next 0.5 years.
|
NOTE 12.
|
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. As of June 30, 2020, all of the Company’s facilities leased and subleased to third-party operators and managed for third-parties are certified by CMS and are operational. See Note 6 - Leases.
24
Legal Matters
The Company is a 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.
Professional and General Liability Claims. As of June 30, 2020, the Company is a defendant in one professional and general liability action commenced on behalf of one of our former patients who received care at one of our facilities prior to the Transition. The plaintiff in this action alleges negligence due to failure to provide adequate and competent staff resulting in injuries, pain and suffering, mental anguish and malnutrition and seeks unspecified actual and compensatory damages, and unspecified punitive damages. This action is covered by insurance, except that any punitive damages awarded would not be so covered.
As of June 30, 2020, the Company is a defendant in 10 additional professional and general liability actions (including the two actions filed during the three months ended June 30, 2020 and described in the next paragraph). These 10 additional professional and general liability actions were commenced against the Company after the Transition, on behalf of former patients of our current or prior tenants. These actions generally seek unspecified compensatory and punitive damages for former patients who were allegedly injured or died due to professional negligence or understaffing at the applicable facility operated by our tenants. These actions on behalf of former patients of our current or prior tenants all relate to events which occurred after the Company transitioned the operations of the facilities in question to a third-party operator (and of which four such actions relate to events which occurred after the Company sold such facilities) and are subject to such operators’ indemnification obligations in favor of the Company.
During the three months ended June 30, 2020, the following two professional and general liability actions were filed against the Company.
|
|
•
|
On May 21, 2020, a medical negligence action was filed in the State Court of Chatham County, Georgia, by Anthony Bowman against affiliates of Peach Health and the Company, alleging wrongful death of a patient, at the facility known as Oceanside Health and Rehab operated by affiliates of Peach Health. The plaintiff is seeking unspecified compensatory damages for the actual losses and unspecified punitive damages. The Company is indemnified by affiliates of Peach Health in this action. The Company believes that this action lacks merit and the Company intends to take action most favorable to the Company. There is no guarantee that the Company will prevail in this action.
|
|
|
•
|
On June 1, 2020, a wrongful death action was filed in the State Court of Chatham County, Georgia, by Sandi Postle against affiliates of Peach Health and the Company, alleging the wrongful death of a patient at the facility known as Oceanside Health and Rehab operated by affiliates of Peach Health. The plaintiff is requesting an amount in excess of $10,000 for pain and suffering and damages and an unspecified amount of punitive damages. The Company is indemnified by affiliates of Peach Health in this action. The Company believes that this action lacks merit and the Company intends to take action most favorable to the Company. There is no guarantee that the Company will prevail in this action.
|
During the three months ended June 30, 2020, one professional and general liability action was dismissed without prejudice as detailed below.
25
On May 26, 2020, the United States District Court Eastern District of Arkansas Central Division the court dismissed without prejudice a complaint filed on January 30, 2020 by Robert E. Rack in the Circuit Court of Pulaski County, State of Arkansas, against Joseph and Rosie Schwartz (who controlled Skyline), a subsidiary of Regional, and CIBC Bancorp USA, Inc., on behalf of a deceased patient who received care at a facility known as the Woodland Hills facility located in Arkansas after the date of the Transition and after the sale of the facility to Skyline. The complaint alleged medical injury and improper care and treatment and that the Company is complicit in the medical injury and improper care because it sold the Woodland Hills facility to Skyline. The plaintiff was seeking unspecified compensatory damages for the actual losses and unspecified punitive damages.
During the three months ended March 31, 2020, the Company settled one professional and general liability action. On January 29, 2020, the Company executed a settlement, in compromise of a complaint filed in the Circuit Court of Pulaski County, in the State of Arkansas, by a former patient at one of our facilities, against the Company on May 16, 2017. The plaintiff alleged medical negligence and injury. The settlement, in exchange for dismissal of the case with prejudice, is in the total amount of $40,000, to be paid in four monthly installments commencing February 2020.
As of June 30, 2019, the Company was a defendant in a total of 16 professional and general liability actions, primarily commenced on behalf of six of our former patients and 10 of our current or prior tenant’s former patients.
The Company established a self-insurance reserve for its professional and general liability claims, included within “Accrued expenses” in the Company’s consolidated balance sheets of $0.3 million and $0.5 million at June 30, 2020 and December 31, 2019, respectively. Additionally as of June 30, 2020 and December 31, 2019, $0.2 million and $0.3 million, respectively, was reserved for settlement amounts in “Accounts payable” in the Company’s consolidated balance sheets. For additional information regarding the Company’s self-insurance reserve, see Part II, Item 8, “Financial Statements and Supplementary Data”, Note 15 – Commitments and Contingencies included in the Annual Report.
Ohio Attorney General Action. On January 15, 2020, Ohio Attorney General (the “OAG”) voluntarily dismissed with prejudice all claims pending against the Company, certain subsidiaries of the Company and certain other parties, in the action they filed on October 27, 2016, in the Court of Common Pleas, Franklin County, Ohio. The lawsuit alleged that defendants submitted improper Medicaid claims for independent laboratory services for glucose blood tests and capillary blood draws and further alleged that defendants (i) engaged in deception, (ii) willfully received Medicaid payments to which they were not entitled or in a greater amount than that to which they were entitled, and (iii) obtained payments under the Medicaid program to which they were not entitled pursuant to their provider agreements and applicable Medicaid rules and regulations. The OAG sought, among other things, triple the amount of damages proven at trial (plus interest) and not less than $5,000 and not more than $10,000 for each deceptive claim or falsification. As previously disclosed, the Company received a letter from the OAG in February 2014 offering to settle its claims against the defendants for improper Medicaid claims related to glucose blood tests and capillary blood draws for a payment of approximately $1.0 million.
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NOTE 13.
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RELATED PARTY TRANSACTIONS
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McBride Matter
During the three and six months ended June 30, 2019, the Company paid $39,082 and $78,165, respectively to Mr. McBride, the Company’s former Chief Executive Officer and a former director, pursuant to a settlement agreement.
Rimland Matter
On May 13, 2019, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”), with Allan J. Rimland, our former Chief Executive Officer, Chief Financial Officer, President and Director, who voluntarily resigned his employment effective October 17, 2017. Under the Settlement Agreement, the Company, among other things, and in lieu of any other rights or obligations under Mr. Rimland’s employment agreement, agreed to pay Mr. Rimland $85,000, a lump sum payment for a claimed breach of employment agreement and for certain compensation alleged to be due and owing in exchange for Mr. Rimland releasing the Company from all claims and liabilities, including those arising out of his employment and his employment agreement, with the Company (but excluding claims to enforce the provisions of the Settlement Agreement). The Settlement Agreement provided for two monthly payments of $25,000 paid by June 30, 2019, followed by three monthly payments of $11,667. The first payment was paid during July 2019 and the remaining two payments each month thereafter.
For additional information regarding the Company’s related party transactions, see Note – 15 Subsequent Events and Part II, Item 8, “Financial Statements and Supplementary Data”, Note 18 – Related Party Transactions included in the Annual Report.
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NOTE 14.
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SUBSEQUENT EVENTS
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The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the SEC.
Professional and General Liability
On July 27, 2020, a wrongful death action was filed in the State Court of Chatham County, Georgia, by Jerold Kaplan against affiliates of Peach Health and the Company, alleging the wrongful death of a patient at the facility known as Oceanside Health and Rehab operated by affiliates of Peach Health. The plaintiff is requesting an amount in excess of $10,000 for pain and suffering and damages and an unspecified amount of punitive damages. The Company is indemnified by affiliates of Peach Health in this action. The Company believes that this action lacks merit and the Company intends to take action most favorable to the Company. There is no guarantee that the Company will prevail in this action.
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