GBCS 10-Q
Selectis Health, Inc. (GBCS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _______ to ______
Commission
file number
(Exact name of Registrant as specified in its Charter)
| (State or other jurisdiction of | I.R.S. Employer | |
| incorporation or organization) | Identification number |
| (Address of principal executive offices) | (Zip Code) |
Issuer’s
telephone number: (
Check
whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 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 ☐
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. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller Reporting
Company |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging
growth company
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).
As of January 06, 2023, the Registrant had shares of its Common Stock outstanding.
INDEX
| 2 |
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
SELECTIS HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable, Net of allowance | ||||||||
| Prepaid Expenses and Other | ||||||||
| Investments in Debt Securities | ||||||||
| Total Current Assets | ||||||||
| Long Term Assets | ||||||||
| Restricted Cash | ||||||||
| Property and Equipment, Net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities | ||||||||
| Accounts Payable and Accrued Liabilities | $ | $ | ||||||
| Accounts Payable – Related Parties | ||||||||
| Dividends Payable | ||||||||
| Short term debt – Related Parties, Net of discount of $ | ||||||||
| Current Maturities of Long Term Debt, Net of Discount of $ | ||||||||
| Other Current Liability | ||||||||
| Total Current Liabilities | ||||||||
| Debt- Related Parties | ||||||||
| Debt, Net of discount of $ | ||||||||
| Lease Security Deposit | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and Contingencies | ||||||||
| Equity | ||||||||
| Preferred Stock: | ||||||||
| Series A - | ||||||||
| Series D - 8% Cumulative, Convertible, $ Stated Value, Non-Voting; Shares Authorized, Shares Issued and Outstanding | ||||||||
| Common Stock - $ Par Value; Shares Authorized, and Shares Issued and Outstanding at September 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional Paid-In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Selectis Health, Inc. Stockholders’ Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
SELECTIS HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Rental Revenue | $ | $ | $ | $ | ||||||||||||
| Healthcare Revenue | ||||||||||||||||
| Healthcare Grant Revenue | ||||||||||||||||
| Management Fee Revenue | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Expenses | ||||||||||||||||
| Property Taxes, Insurance and Other Operating | ||||||||||||||||
| General and Administrative | ||||||||||||||||
| Provision for Bad Debts | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ||||||||||||||
| Other (Income) Expense | ||||||||||||||||
| Loss (Gain) on Extinguishment of Debt | ||||||||||||||||
| Interest Expense, net | ||||||||||||||||
| Gain on Forgiveness of PPP Loan | ( | ) | ||||||||||||||
| Other Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Lease Termination Expense | ||||||||||||||||
| Total Other Expense | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Noncontrolling Interests | ( | ) | ||||||||||||||
| Net Loss Attributable to Selectis Health, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Series D Preferred Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Per Share Data: | ||||||||||||||||
| Net Loss per Share Attributable to Common Stockholders: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
SELECTIS HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional | Non- | Selectis Health, Inc. | |||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Controlling Interests | Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common shares issued for debt | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss on Forgiveness of Debt | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 as adjusted | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 as adjusted | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional | Non- | Selectis Health, Inc. | |||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In
Capital | Accumulated Deficit | Controlling Interests | Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ||||||||||||||||||||||||||||||
| Series D Preferred Dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ||||||||||||||||||||||||||||||
| Series D Preferred Dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Share Based Compensation – Restricted Stock Awards | - | - | ||||||||||||||||||||||||||||||||||||||
| Cashless Exercise of Warrants | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Purchase of Non-Controlling Interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net Income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Issuance of common stock for cash | - | - | ||||||||||||||||||||||||||||||||||||||
| Cashless Exercise of Warrants | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Cashless Exercise of Stock Options | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
SELECTIS HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: | ||||||||
| Gain on Forgiveness from PPP Loan | ( | ) | ||||||
| Other Income from Partial Settlement of Debt | ( | ) | ( | ) | ||||
| Depreciation and Amortization | ||||||||
| Amortization of Deferred Loan Costs and Debt Discount | ||||||||
| Provision for Bad Debt | ||||||||
| Stock Based Compensation | ||||||||
| Changes in Operating Assets and Liabilities, Net of Assets and Liabilities Acquired: | ||||||||
| Accounts and Rents Receivable | ( | ) | ( | ) | ||||
| Prepaid Expenses and Other Assets | ||||||||
| Accounts Payable and Accrued Liabilities | ( | ) | ||||||
| Lease Security Deposits | ||||||||
| Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Capital Expenditures for Property and Equipment | ( | ) | ( | ) | ||||
| Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from Issuance of Debt, Non-Related Party | ||||||||
| Payments on Debt, Non-Related Party | ( | ) | ( | ) | ||||
| Dividends Paid on Preferred Stock | ( | ) | ( | ) | ||||
| Proceeds from stock offering | ||||||||
| Purchase of Non-Controlling Interest | ( | ) | ||||||
| Debt Discount – Warrants RP | ||||||||
| Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| Net Decrease in Cash, Cash Equivalents and Restricted Cash | ( | ) | ( | ) | ||||
| Cash and Cash Equivalents and Restricted Cash at Beginning of the Period | ||||||||
| Cash and Cash Equivalents and Restricted Cash at End of the Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash Paid for Interest | ||||||||
| Cash | ||||||||
| Restricted Cash | ||||||||
| Total Cash and Cash Equivalents and Restricted Cash | ||||||||
| Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
| Dividends Declared on Series D Preferred Stock | $ | $ | ||||||
| Issuance of common stock for cashless exercise of warrants | ||||||||
| Issuance of common stock for cashless exercise of options | ||||||||
| Financing of Insurance Premiums | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
SELECTIS HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
Selectis Health, Inc (“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions of the US. In 2019 the Company shifted from leasing long-term care facilities to third-party, independent operators towards an owner operator model.
Prior to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. from September 30, 2013, to May 2021. Prior to this, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (“WPF”). WPF was merged into the Company in 2019.
We acquire, develop, lease, manage, and dispose of healthcare real estate, provide financing to healthcare providers, and provide healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following three healthcare segments: (i) senior housing (including independent and assisted living), (ii) post-acute/skilled nursing, and (iii) bonds securing senior housing communities. We will make investments within our healthcare segments using the following six investment products: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA and (xi) owning healthcare operations.
Management’s Liquidity Plans
On August 27, 2014, FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
For
the nine months ended September 30, 2022, the Company had negative operating cash flows of $
| 7 |
The focus on opportunities within our current portfolio and future properties to acquire and operate, the settlement, refinance, and continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing to additional working capital should alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively impact our future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary to make the consolidated financial statements not misleading have been included. Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission.
In May 2021, the board of directors of the Company approved a one-for-ten reverse stock split of the Company’s issued and outstanding shares of common stock. On September 21, 2021, the Company filed Amendment No. 1 to its Second Amended and Restated Articles of Incorporation reflecting the reverse split and name change. This took effect on September 22, 2021 upon approval from FINRA. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto, and elsewhere in this Form 10-Q, have been retroactively adjusted to give effect to the reverse stock split as if such reverse stock split occurred on the first day of the first period presented.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2022. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. Certain intercompany revenues and expenses were included in revenue and general and administration expenses. These reclassifications had no effect on the previously reported net income.
Revisions to Previously Issued Financial Statements
For the six months ending June 30, 2022, the Company identified an error related to the accounting guidance for intercompany revenues and expenses. For the six months ending June 30, 2022 the Company recorded $869,249 of intercompany revenues to healthcare revenue and $869,249 of intercompany expenses in general and administrative expenses.
The Company assessed the materiality of this error on prior period financial statements in accordance with the SEC Staff Accounting Bulletin Number 99, Materiality, and ASC 250-10, Accounting Changes and Error Corrections. The error did not have any effect on the Company’s previously reported Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Shareholder’s Deficit. The Company determined that this error was not material to the financial statements for the six months ended June 30, 2022. The Company decided to correct this immaterial error as revision to previously issued financial statement and has revised the June 30, 2022 financial statements presented herein.
The below tables summarize the effect of the revisions on the affected line items within the Condensed Consolidated Statement of Operations for the six months ended June 30, 2022:
| Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| As previously reported | Revision adjustments | As revised | ||||||||||
| Revenue | ||||||||||||
| Rental Revenue | $ | $ | $ | |||||||||
| Healthcare Revenue | ( | ) | ||||||||||
| Healthcare Grant Revenue | ||||||||||||
| Total Revenue | ( | ) | ||||||||||
| Expenses | ||||||||||||
| Property Taxes, Insurance and Other Operating | ||||||||||||
| General and Administrative | ( | ) | ||||||||||
| Provision for Bad Debts | ||||||||||||
| Depreciation and Amortization | ||||||||||||
| Total Expenses | ( | ) | ||||||||||
| Income from Operations | ||||||||||||
| Other (Income) Expense | ||||||||||||
| Loss (Gain) on Extinguishment of Debt | ||||||||||||
| Interest Expense, net | ||||||||||||
| Gain on Forgiveness of PPP Loan | ||||||||||||
| Other Income | ( | ) | ( | ) | ||||||||
| Lease Termination Expense | ||||||||||||
| Total Other (Income) Expense | ||||||||||||
| Net Income (Loss) | $ | $ | ||||||||||
During
the preparation of the nine months ending September 30, 2022, financial statements management became aware of misstatements in the financial statements of $
The Company determined that cash payments received from a Medicare B bad debt reimbursement program were recorded directly to revenue rather than a reduction to the account receivable account to which the receivables were recorded, causing both revenue and receivables to be overstated at each reporting periods.
The below table summarizes the effect of the revisions on the affected line items within the Condensed Consolidated Statement of Operations and Condensed Consolidated Balance Sheet for the period ended March 31, 2022:
| Three months ended March 31, 2022 | ||||||||||||
| Reported | Revision adjustments | Adjusted | ||||||||||
| P&L Analysis | ||||||||||||
| Total Revenue | $ | $ | ( | ) | $ | |||||||
| Healthcare Revenue | ( | ) | ||||||||||
| Operating Income | ( | ) | ||||||||||
| Net Income | ( | ) | ||||||||||
| EPS | ||||||||||||
| WASO | ||||||||||||
| Balance Sheet Analysis | ||||||||||||
| Accounts Receivable | $ | $ | ( | ) | $ | |||||||
| Current Assets | ( | ) | ||||||||||
| Total Assets | ( | ) | ||||||||||
| Working Capital | ( | ) | ||||||||||
| Accumulated Deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total Equity | ( | ) | ||||||||||
The below table summarizes the effect of the revisions on the affected line items within the Condensed Consolidated Statement of Operations and Condensed Consolidated Balance Sheet for the period ended June 30, 2022:
| Three and six months ended June 30, 2022 | ||||||||||||||||||||||||
| YTD Reported | Revision adjustment | YTD Adjusted | QTD Reported | Revision adjustment | QTD Adjusted | |||||||||||||||||||
| P&L analysis | ||||||||||||||||||||||||
| Total Revenue | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Healthcare Revenue | ( | ) | ( | ) | ||||||||||||||||||||
| Operating Income | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ( | ) | ( | ) | ||||||||||||||||||||
| EPS | ||||||||||||||||||||||||
| WASO | ||||||||||||||||||||||||
| Balance Sheet analysis | ||||||||||||||||||||||||
| Accounts Receivable | $ | $ | ( | ) | $ | |||||||||||||||||||
| Current Assets | ( | ) | ||||||||||||||||||||||
| Total Assets | ( | ) | ||||||||||||||||||||||
| Working Capital | ( | ) | ||||||||||||||||||||||
| Accumulated Deficit | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total Equity | ( | ) | ||||||||||||||||||||||
| 8 |
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. FASB ASC Topic 260, “Earnings per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.
Diluted earnings per share are based on the assumption that all dilutive options and warrants were converted or exercised by applying the treasury stock method and that all convertible preferred stock were converted into common shares by applying the if-converted method. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period or at the time of issuance, if later, and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, the preferred dividends applicable to convertible preferred stock are added back to the numerator. The convertible preferred stock is assumed to have been converted at the beginning of the period or at time of issuance, if later, and the resulting common shares are included in the denominator.
We calculate basic earnings per share by dividing net income attributable to common stockholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the reporting period. Diluted earnings per share is calculated similarly but reflects the potential impact of outstanding options, warrants and other commitments to issue common stock, including shares issuable upon the conversion of convertible preferred stock outstanding, except where the impact would be anti-dilutive.
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator for basic earnings per share: | ||||||||||||||||
| Net Income (Loss) Attributable to Selectis Health, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Series D Preferred Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income (Loss) Attributable to Common Stockholders - Basic | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Numerator for diluted earnings per share: | ||||||||||||||||
| Net Income (Loss) Attributable to Common Stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Series D Preferred Dividends | ||||||||||||||||
| Net Income (Loss) Attributable to Common Stockholders - Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Denominator for basic earnings per share: | ||||||||||||||||
| Weighted Average Common Shares Outstanding | ||||||||||||||||
| Denominator for diluted earnings per share: | ||||||||||||||||
| Weighted Average Common Shares Outstanding - Basic | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Conversion of preferred shares | ||||||||||||||||
| Exercise of warrants | ||||||||||||||||
| Weighted Average Common Shares Outstanding - Diluted | ||||||||||||||||
| Net Income (Loss) per Share Attributable to Common Stockholders: | ||||||||||||||||
| Basic | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 9 |
Fair Value Measurements
The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1 – Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level 3 – Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company has no financial assets or financial liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2022.
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, accounts receivable, restricted cash, accounts payable, debt and lease security deposit. We consider the carrying values of our short-term financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the short period of time between origination of the financial assets and liabilities and their expected settlement, or because of their proximity to acquisition date fair values. The carrying value of debt approximates fair value based on borrowing rates currently available for debt of similar terms and maturities.
Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price based on the fair value of the tangible assets and intangible assets, if any, acquired and any liabilities assumed based on Level 3 inputs. These Level 3 inputs can include comparable sales values, discount rates, and capitalization rates from a third-party appraisal or other market sources.
| 10 |
3. PROPERTY AND EQUIPMENT, NET
The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of September 30, 2022, and December 31, 2021, are as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Land Improvements | ||||||||
| Buildings and Improvements | ||||||||
| Furniture, Fixtures and Equipment | ||||||||
Property and Equipment, gross | ||||||||
| Less Accumulated Depreciation | ( | ) | ( | ) | ||||
Property and Equipment, net | $ | $ | ||||||
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Depreciation Expense (excluding Intangible Assets) | $ | $ | ||||||
4. INVESTMENTS IN DEBT SECURITIES
At September 30, 2022 and December 31, 2021, the Company held investments in debt securities that were classified as held-to-maturity and carried at amortized costs. Held-to-maturity securities consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| States and Municipalities | $ | $ | ||||||
Contractual
maturity of held-to-maturity securities at September 30, 2022, is $
| 11 |
5. DEBT AND DEBT - RELATED PARTIES
The following is a summary of the Company’s debt outstanding as of September 30, 2022, and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Senior Secured Promissory Notes | $ | $ | ||||||
| Senior Secured Promissory Notes - Related Parties | ||||||||
| Fixed-Rate Mortgage Loans | ||||||||
| Variable-Rate Mortgage Loans | ||||||||
| Other Debt, Subordinated Secured | ||||||||
| Other Debt, Subordinated Secured - Related Parties | ||||||||
| Other Debt, Subordinated Secured - Seller Financing | ||||||||
| Unamortized Discount and Debt Issuance Costs | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| As presented in the Consolidated Balance Sheets: | ||||||||
| Current Maturities of Long Term Debt, Net | $ | $ | ||||||
| Short term debt – Related Parties, Net | ||||||||
| Debt, Net | ||||||||
| Debt – Related Parties, Net | ||||||||
The
weighted average interest rate and term of our fixed rate debt are
Corporate Senior and Senior Secured Promissory Notes
As
of September 30, 2022, and December 31, 2021, the senior secured notes are subject to annual interest ranging from
| 12 |
Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon, formerly but no longer a related party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following:
| Number of | Total Face | Total Principal Outstanding as of | ||||||||||||||
| State | Properties | Amount | September 30, 2022 | December 31, 2021 | ||||||||||||
| Arkansas(1) | $ | $ | $ | |||||||||||||
| Georgia(2) | $ | $ | $ | |||||||||||||
| Ohio | $ | $ | $ | |||||||||||||
| Oklahoma(3) | $ | $ | $ | |||||||||||||
| $ | $ | $ | ||||||||||||||
| (1) | |
| (2) | |
| (3) |
Subordinated, Corporate and Other Debt
Other debt due at September 30, 2022 and December 31, 2021 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.
| Principal Outstanding at | Stated Interest | |||||||||||||||
| Property | Face Amount | September 30, 2022 | December 31, 2021 | Rate | Maturity Date | |||||||||||
| Goodwill Nursing Home (1) | $ | $ | $ | |||||||||||||
| Goodwill Nursing Home - Related Party (1) | $ | $ | $ | |||||||||||||
| Higher Call Nursing Center (2) | $ | $ | $ | |||||||||||||
| $ | $ | |||||||||||||||
| 13 |
Our corporate debt at September 30, 2022, and December 31, 2021 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
| Principal Outstanding at | Stated Interest | |||||||||||||||
| Series | Face Amount | September 30, 2022 | December 31,2021 | Rate | Maturity Date | |||||||||||
| 10% Senior Secured Promissory Notes | ||||||||||||||||
| 11% Senior Secured Promissory Notes – Related Party | ||||||||||||||||
| $ | $ | |||||||||||||||
6. STOCKHOLDERS’ EQUITY
Preferred Stock
During the nine months ended September 30, 2022
and 2021, the Company paid $
Common Stock
For the nine months ended September 30, 2022, the Company did not issue nor did it pay dividends on common stock.
| 14 |
Common Stock Warrants
As of September 30, 2022, and December 31, 2021, the
Company had
| September 30, 2022 | ||||||||
| Number of | Weighted Average | |||||||
| Warrants | Exercise Price | |||||||
| Beginning Balance | $ | |||||||
| Exercised | ||||||||
| Expired | ||||||||
| Ending Balance | $ | |||||||
7. OTHER CURRENT LIABILITY
During the year ended December 31, 2021 the Company received an overpayment
from Medicare of $
8. RELATED PARTIES
Clifford Neuman, a former member of the Company’s
Board of Directors, provided legal services to the Company. As of September 30, 2022, and December 31, 2021, the Company owed Mr. Neuman
for legal services rendered $
8. FACILITY LEASES
The following table summarizes our leasing arrangements related to the Company’s healthcare facilities at September 30, 2022:
| Monthly Lease | ||||||||
| Facility | Income (1) | Lease Expiration | Renewal Option if any | |||||
| Goodwill (1) | $ | |||||||
| (1) |
Future cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows:
| Years Ending September 30, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and Thereafter | ||||
| Total | $ | |||
| 15 |
9. LEGAL PROCEEDINGS
The Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey v. GL Nursing, LLC, et. Al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement and Release with the Receiver and an Operations Transfer Agreement pursuant to which our newly formed subsidiary will acquire the assets and operations of the facility. In March 2021, the Court approved the Settlement Agreement and Operations Transfer Agreement, the skilled nursing license was assigned to the Company’s wholly-owned subsidiary Park Place Health, LLC and the Company reopened the facility under the name Park Place Health. This matter is considered resolved.
Oliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
In re: Providence HR, LLC v. CRM of Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
In re: ALT/WARR, LLC v. CRM of Sparta, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
| 16 |
These are companion cases arising out of the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta, Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March 22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease operators to comply with their leases, including payment of rent, pending the next hearing. In June 2021, the Court entered an Order approving a Lease Termination Agreement, Operations Transfer Agreement and Interim Management Agreement which had been negotiated by the Company and the two operating tenants, CRM of Warrenton, LLC and CRM of Sparta, LLC. The Lease Termination Agreement and Operations Transfer Agreement became effective upon the granting of a new License by the State of Georgia for the Warrenton and Sparta facilities to two newly formed wholly owned operating subsidiaries of the Company: Selectis Sparta, LLC and Selectis Warrenton, LLC.
High Street Nursing, LLC v. Ohio Department of Health, Court of Common Pleas, Franklin County, Ohio, Case No. 21 CV 6559.
The Company brought this action through its wholly owned subsidiary High Street Nursing, LLC (“High Street”) against the Ohio Department of Health (ODH) to prevent the Department of Health from revoking the state issued license covering the Meadowview skilled nursing facility located in Seville, Ohio. The facility is owned by High Street and was leased to a third-party operator who abandoned the facility. The Department of Health is trying to revoke the license of the former operator and has refused our request to transfer the license to a new operator controlled by the Company. Our Motion for Temporary Injunction was denied by the Court. We have subsequently filed a Motion for Preliminary and Permanent Injunction which is pending. Our claims against the Department of Health are based upon our property interests in the facility and raise issues of unlawful condemnation and eminent domain. No prediction can be made regarding the outcome of this matter; but the Company will pursue the ODH to the fullest extent.
In the Matter of Hunter
The Company received a spoliation letter from an attorney dated October 8, 2021, advising of the intent to assert a personal injury claim against our operating subsidiary Glen Eagle Health & Rehab, LLC which operates our skilled nursing facility in Abbeville, Georgia. We have been provided no further information, but after reviewing the information we believe at this time that the likelihood of an adverse outcome is remote.
Edwards Redeemer Property Holdings, LLC, et.al. v. Buildstrong Roofing and Construction, Inc.,et.al. District Court of and for Tulsa County, Oklahoma, Case No. CJ-202
This Company brought this action against a contractor that performed work at our Park Place facility in Oklahoma City and our Southern Hills SNF in Tulsa. The claims are based upon negligence and breach of contract for subpar work due to defects in materials, workmanship and Buildstrong not providing services for which they received payment. The case is pending.
Tara Gaspar, et.al v. GL Nursing, LLC, et.al., Circuit Court of Lonoke County, Arkansas, Civil Division, Case. No. 43CV-21-864.
This case is a personal injury action in which our subsidiary GL Nursing, LLC was joined as a defendant because it is the owner of the property leased to an operating tenant. The action is based upon quality of care over which we had no control. We believe that our risk of a material adverse outcome is remote.
10. SUBSEQUENT EVENTS
Effective October 4, 2022, the Company changed its independent registered public accountants by engaging Marcum LLP as the company’s independent registered public accounting firm for the year ended December 31, 2022. Marcum LLP will also review the Company’s interim report as of and for the period ended September 30, 2022. Haynie & Company had previously served as the Company’s independent registered public accountants for the year ended December 31, 2021.
Effective October 17, 2022, Clifford Neuman resigned as a director and Andy Sink was appointed to fill the vacancy created by Mr. Neuman’s resignation. It was determined that Mr. Neuman did not qualify as an “independent” director within the meaning of Nasdaq regulations; and Mr. Neuman agreed to resign from the Board to facilitate the Company’s efforts to up list to the Nasdaq Stock Market.
| 17 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise. All forward-looking statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.
Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:
| ● | strategic business relationships; |
| ● | statements about our future business plans and strategies; |
| ● | anticipated operating results and sources of future revenue; |
| ● | our organization’s growth; |
| ● | adequacy of our financial resources; |
| ● | development of markets; |
| ● | competitive pressures; |
| ● | changing economic conditions; |
| ● | expectations regarding competition from other companies |
| ● | the duration and scope of the COVID-19 pandemic |
| ● | the impact of the COVID-19 pandemic on occupancy rates and on the operations of the Company’s facilities and its operators/tenants. |
| ● | Actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting our properties and our operations and the operations of our operators/tenants. |
| ● | The effects of health and safety measures adopted by us and our operators/tenants in response to the COVID-19 pandemic. |
| ● | Increased operational costs because of health and safety measures related to COVID-19. |
| ● | The impact of the COVID-19 pandemic on the business and financial conditions of our operators/tenants and their ability to pay rent. |
| ● | Disruptions to our property acquisition and disposition activities due to economic uncertainty caused by COVID-19. |
| ● | General economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth. |
| 18 |
| ● | macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets; |
| ● | changes in national and local economic conditions in the real estate and healthcare markets specifically; |
| ● | legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010; |
| ● | the availability of debt and equity capital; |
| ● | changes in interest rates; |
| ● | competition in the real estate industry; and, |
| ● | the supply and demand for operating properties in our market areas. |
Properties
As of September 30, 2022, we owned thirteen (13) long-term care facilities including a campus of three buildings in Tulsa, OK. The following table provides summary information regarding these facilities at September 30, 2022:
| Total Square Feet | # of Beds | |||||||||||||||||||||||||||
| Operating | Leased | |||||||||||||||||||||||||||
| Leased | Square | Square | Operating | Leased | ||||||||||||||||||||||||
| State | Properties | Operations | Operations | Feet | Feet | Beds | Beds | |||||||||||||||||||||
| Arkansas | 1 | - | 1 | - | 40,737 | - | 141 | |||||||||||||||||||||
| Georgia | 5 | 4 | 1 | 78,197 | 46,199 | 454 | 100 | |||||||||||||||||||||
| Ohio | 1 | 1 | - | 27,500 | - | 99 | - | |||||||||||||||||||||
| Oklahoma | 6 | 6 | - | 162,976 | - | 351 | - | |||||||||||||||||||||
| Total | 13 | 11 | 2 | 268,673 | 86,936 | 904 | 241 | |||||||||||||||||||||
Results of Operations
The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations – Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021
Rental revenues for the nine months ended September 30, 2022, and 2021 totaled $469,938 and $933,360. The Company also had healthcare revenue of $26,438,806 for the nine months ended September 30, 2022, compared to $17,431,882 for the nine months ended September 30, 2021. Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease.
| 19 |
General and administrative expenses were $5,329,475 and $4,732,115 for the nine months ended September 30, 2022 and 2021. To support the healthcare operations management has increased our corporate support to continue to aid the facilities in delivering world class care.
Property taxes, insurance, and other operating expenses totaled $21,192,559 and $12,613,896 for the nine months ended September 30, 2022 and 2021, respectively. This increase can be attributed to the Company operating additional facilities compared to the previous year. Expenses related to the provision for bad debt was $783,524 for the nine months ended September 30, 2022, and $28,275 for the nine months ended September 30, 2021. This increase is due to the Company’s growth in healthcare revenue and new bad debt policy which has increased the provision for bad debt expense.
Depreciation and amortization expense totaled $1,348,645 and $1,286,279 for the nine months ended September 30, 2022, and 2021 respectively. This increase is related to an increase in our plant, property, and equipment, compared to the same period in the prior year
The Company had $1,438,629 of interest expense for the nine months ended September 30, 2022, and $1,680,540 interest expense for the nine months ended September 30, 2021. This decrease is related to the refinancing mortgages during the year ended December 31, 2021.
The Company had $135,468 of other income for the nine months ended September 30, 2022, and $548,933 for the nine months ended September 30, 2021 Management is recording the principal reduction payments made by the operator for the Arkansas facility as other income. We will continue to record this as the operator continues to satisfy the debt.
Results of Operations – Three Months Ended September 30, 2022, Compared to the Three Months Ended September 30, 2021
Rental revenues for the three months ended September 30, 2022, and 2021 totaled $158,875 and $155,071. The Company also had healthcare revenue of $9,135,306 for the three months ended September 30, 2022, compared to $6,939,841 for the three months ended September 30, 2021. Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease.
| 20 |
General and administrative expenses were $1,970,890 and $1,721,292 for the three months ended September 30, 2022 and 2021. To support the healthcare operations management has increased our corporate support to continue to aid the facilities in delivering world class care.
Property taxes, insurance, and other operating expenses totaled $7,227,718 and $4,413,930 for the three months ended September 30, 2022 and 2021, respectively. This increase can be attributed to the Company operating additional facilities compared to the previous year.
Expenses related to the provision for bad debt was $252,050 for the three months ended September 30, 2022, and $12,142 for the three months ended September 30, 2021. This increase is due to the Company’s growth in healthcare revenue and new bad debt policy which has increased the provision for bad debt expense.
Depreciation and amortization expense totaled $453,608 and $435,013 for the three months ended September 30, 2022, and 2021 respectively.
The Company had $722,226 of interest expense for the three months ended September 30, 2022, and $486,816 interest expense for the three months ended September 30, 2021. This increase is related to the refinancing of mortgages during the year ended December 31, 2021.
The Company had $53,582 of other income for the three months ended September 30, 2022, and $51,856 of other expense for the three months ended September 30, 2021 Management is recording the principal reduction payments made by the operator for the Arkansas facility as other income. We will continue to record this as the operator continues to satisfy the debt.
Liquidity and Capital Resources
Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities.
At September 30, 2022, the Company had cash of $1,928,472 and restricted cash of $831,687. Our restricted cash is to be spent on insurance, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home or Warrenton Health and Rehab. Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from healthcare operations, rental revenues received, and existing cash on hand. We have successfully refinanced all five mortgage that matured in the 2021 fiscal year.
Cash used in operating activities was $650,648 for the nine months ended September 30, 2022, compared to cash used in operating activities of $1,604,764 for the nine months ended September 30, 2021. Healthcare revenue was adversely affected by COVID-19 which increased costs and decreased our census.
Cash used in investing activities was $330,769 for the nine months ended September 30, 2022, compared to cash used in investing activities of $493,689 for the nine months ended September 30, 2021.
Cash used in financing activities was $1,051,525 for the nine months ended September 30, 2022 compared to cash provided by financing activities of $1,734,008 for the nine months ended September 30, 2021. This resulted from proceeds from a PPP loan during the nine months ended September 30, 2021.
In accordance with ASU 2014-15 management believes the Company has sufficient liquidity and capital resources to maintain ongoing operations. This is, in part due to refinancing debt to more favorable terms, and the optimization of our operations in many of our current facilities.
| 21 |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.
Critical Accounting Policies
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties using standard industry valuation techniques.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
| 22 |
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.
Revenue Recognition
The Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets and totaled $177,716 and $336,931 as of September 30, 2022, and 2021, respectively.
Rent receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line recognition of rents. Such allowances are charged to net against rental incomes.
When the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. As of September 30, 2022, and 2021, there were no deferred lease incentives recorded.
For our healthcare operations, we recognize revenue in accordance with ASC 606 whereby we apply the following steps:
| a. | Step 1: Identify the contract(s) with a customer | |
| b. | Step 2: Identify the performance obligations in the contract | |
| c. | Step 3: Determine the transaction price | |
| d. | Step 4: Allocate the transaction price to the performance obligations in the contract | |
| e. | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
In accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that are a direct reduction to net operating revenues.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2022. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
| 23 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
Our management, including our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were not effective due to material weakness in our internal controls over financial reporting due to lack of segregation of duties, a limited corporate governance structure and insufficient formal management review process over certain financial and accounting reports resulting in misreporting of healthcare revenue and expenses. In light of the material weaknesses described above, we performed additional analysis deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with U.C. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented. The Company plans to implement multi-level review in 2023, and management intends to work internally and with various third-parties to ensure we have the proper controls in place going forward.
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.
As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.
While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.
Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.
This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement and Release with the Receiver and an Operations Transfer Agreement pursuant to which our newly formed subsidiary will acquire the assets and operations of the facility. In March 2021, the Court approved the Settlement Agreement and Operations Transfer Agreement, the skilled nursing license was assigned to the Company’s wholly-owned subsidiary Park Place Health, LLC and the Company reopened the facility under the name Park Place Health. This matter is considered resolved.
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Oliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman LLC was formed on November 21, 2019. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
In re: Providence HR, LLC v. CRM of Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
In re: ALT/WARR, LLC v. CRM of Sparta, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
These are companion cases arising out of the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta, Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March 22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease operators to comply with their leases, including payment of rent, pending the next hearing. In June 2021, the Court entered an Order approving a Lease Termination Agreement, Operations Transfer Agreement and Interim Management Agreement which had been negotiated by the Company and the two operating tenants, CRM of Warrenton, LLC and CRM of Sparta, LLC. The Lease Termination Agreement and Operations Transfer Agreement became effective upon the granting of a new License by the State of Georgia for the Warrenton and Sparta facilities to two newly formed wholly owned operating subsidiaries of the Company: Selectis Sparta, LLC and Selectis Warrenton, LLC.
High Street Nursing, LLC v. Ohio Department of Health, Court of Common Pleas, Franklin County, Ohio, Case No. 21 CV 6559.
The Company brought this action through its wholly owned subsidiary High Street Nursing, LLC (“High Street”) against the Ohio Department of Health (ODH) to prevent the Department of Health from revoking the state issued license covering the Meadowview skilled nursing facility located in Seville, Ohio. The facility is owned by High Street and was leased to a third-party operator who abandoned the facility. The Department of Health is trying to revoke the license of the former operator and has refused our request to transfer the license to a new operator controlled by the Company. Our Motion for Temporary Injunction was denied by the Court. We have subsequently filed a Motion for Preliminary and Permanent Injunction which is pending. Our claims against the Department of Health are based upon our property interests in the facility and raise issues of unlawful condemnation and eminent domain. No prediction can be made regarding the outcome of this matter; but the Company will pursue the ODH to the fullest extent.
In the Matter of Hunter
The Company received a spoliation letter from an attorney dated October 8, 2021, advising of the intent to assert a personal injury claim against our operating subsidiary Glen Eagle Health & Rehab, LLC which operates our skilled nursing facility in Abbeville, Georgia. We have been provided no further information, but after reviewing the information we believe at this time that the likelihood of an adverse outcome is remote.
Edwards Redeemer Property Holdings, LLC, et.al. v. Buildstrong Roofing and Construction, Inc.,et.al. District Court of and for Tulsa County, Oklahoma, Case No. CJ-202
This Company brought this action against a contractor that performed work at our Park Place facility in Oklahoma City and our Southern Hills SNF in Tulsa. The claims are based upon negligence and breach of contract for subpar work due to defects in materials, workmanship and Buildstrong not providing services for which they received payment. The case is pending.
Tara Gaspar, et.al v. GL Nursing, LLC, et.al., Circuit Court of Lonoke County, Arkansas, Civil Division, Case. No. 43CV-21-864.
This case is a personal injury action in which our subsidiary GL Nursing, LLC was joined as a defendant because it is the owner of the property leased to an operating tenant. The action is based upon quality of care over which we had no control. We believe that our risk of a material adverse outcome is remote.
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Item 2. COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported globally.
Starting in March 2020, the COVID-19 pandemic, and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers.
The Centers for Disease Control & Prevention (“CDC”) provides final confirmation of the cases. The Company is engaging in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health and safety of residents while respecting their rights. Employees at all of our facilities are taking several precautions as they care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Additionally, as of the date of this Report, all of our facilities have reported occurrences of COVID-19 in both staff and residents. We have implemented aggressive vaccination programs at all of our facilities but have not imposed mandates. As of the date of this Report, the vast majority of our staff and residents have been vaccinated.
The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers, and managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers, and managers regarding ways in which these programs could benefit them or us.
The COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results, and financial condition.
We expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business, tenants, and operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and cash flows but it could be material.
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Recent Developments Related to COVID-19
In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, we and our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, personal protective equipment (“PPE”), quality of care, visitation protocols, staffing levels, and reporting, among other regulations, throughout the pandemic. Many of our controlled and third-party operators have reported incurring significant cost increases as a result of the COVID-19 pandemic, with dramatic increases for facilities with positive cases. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, we are experiencing declines, in some cases that are material, in occupancy levels as a result of the pandemic, which declines on average appear to be stabilizing. We believe these declines may be in part due to COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.
While substantial government support, primarily through the federal CARES Act in the U.S. and distribution of PPE, vaccines and testing equipment by federal and state governments, has been allocated to SNFs and to a lesser extent to ALFs, further government support will likely be needed to continue to offset these impacts. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, it remains unclear as to whether unallocated funds under the Provider Relief Fund will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fund or otherwise allocated to health care operators or our operators, or whether additional Medicaid funds under the recently enacted American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) in the U.S. will ultimately support reimbursement to our operators. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief that is sufficient and timely, we anticipate that the operating results of certain of our operators would be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.
There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the impact of vaccination programs and participation levels in those programs in reducing the spread of COVID-19 in our facilities, and the extent to which funding support from the federal government and the states will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring.
While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the impact of occupancy declines at many of our operators, and it remains uncertain whether and when demand and occupancy levels will return to pre-COVID-19 levels.
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Government Regulation and Reimbursement
The healthcare industry is heavily regulated. We are subject to extensive and complex federal, state and local healthcare laws and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
The U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020, following the World Health Organization’s decision to declare COVID-19 a public health emergency of international concern. This declaration, which has been extended, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. These regulatory actions could contribute to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion.
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020, and discussed below, continue to have a significant impact on our operations and financial condition. The extent of the COVID-19 pandemic’s effect on the Company’s and our operators’ operational and financial performance will depend on future developments, including the sufficiency and timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, the impact of new vaccine distributions on our operators and their populations, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business; however, the adverse impact on our business, results of operations, financial condition and cash flows could be material.
A significant portion of our revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government health care programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses.
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The following is a discussion of recent developments regarding certain U.S. laws and regulations generally applicable to our operators, and in certain cases, to us, and their impact.
Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds, through the CARES Act and Provider Relief Fund, appropriating $178 Billion to Health Care Providers. In response to the pandemic, Congress enacted a series of economic stimulus and relief measures throughout 2020 and 2021. On March 18, 2020, the Families First Coronavirus Response Act was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the public health emergency terminates. States will make individual determinations about how this additional Medicaid reimbursement will be applied to SNFs, if at all.
In a further response to the pandemic, the CARES Act authorized approximately $178 Billion to be distributed through the Public Health and Social Services Emergency Fund (“Provider Relief Fund”) to reimburse eligible healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus. The Provider Relief Fund is administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements.
HHS began distributing Provider Relief Fund grants in April 2020 and has made grants available to various provider groups in three general phases. In May 2020, HHS announced that approximately $9.5 Billion in targeted distributions would be made available to eligible skilled nursing facilities, approximately $2.5 Billion of which were composed of performance-based incentive payments tied to a facility’s infection rate. Approximately $8.5 billion in additional funds were added to the Provider Relief Fund through the American Rescue Plan Act enacted on March 11, 2021; however, these funds are limited to rural providers and suppliers.
HHS continues to evaluate and provide allocations of, and issue regulations and guidance regarding, grants made under the CARES Act and related legislation. There are substantial uncertainties regarding the extent to which our operators will receive funds which have not been allocated, whether additional funds will be allocated to the Provider Relief Fund, health care providers or senior care providers and whether additional payments will be distributed to providers, the financial impact of receiving any of these funds on their operations or financial condition, and whether operators will be able to meet the compliance requirements associated with the funds. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act.
The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments are loans that providers must repay. Additionally, CMS suspended Medicare sequestration payment adjustments, which would have otherwise reduced payments to Medicare providers by 2%, from May 1, 2020, through December 31, 2021, but also extended sequestration through 2030. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020, through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
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Quality of Care Initiatives and Additional Requirements Related to COVID-19:
In addition to COVID-19 reimbursement changes, several regulatory initiatives announced in 2020 and the first quarter of 2021 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. For example, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds and the implementation of new quality measures. Although the American Rescue Plan Act did not allocate specific funds to SNF or assisted living facility providers, approximately $200 million was allocated to quality improvement organizations to provide infection control and vaccination uptake support to SNFs.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020 and the first quarter of 2021. In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S. health care system, including the impact on quality of care provided within the skilled nursing industry. These hearings could result in legislation imposing additional requirements on our operators.
Reimbursement Generally:
Medicaid. The American Rescue Plan Act contains several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. For example, the American Rescue Plan Act increases the FMAP by 10 percentage points for state home and community-based services expenditures beginning April 1, 2021, through March 31, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. As a condition for receiving the FMAP increase, states must enhance, expand, or strengthen their Medicaid home and community-based services program during this period. These potential enhancements to Medicaid reimbursement funding may be offset in certain states by state budgetary concerns, the ability of the state to allocate matching funds and to comply with the new requirements, the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic, and the potential allocation of state Medicaid funds available for reimbursement away from SNFs in favor of home and community-based programs. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past and may in the future adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
Department of Justice and Other Enforcement Actions:
SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.
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Item 1A. Risk Factors
COVID
The COVID-19 pandemic has subjected our business, operations, and financial condition to a number of risks including the risks described in greater detail in the Management’s Discussion and Analysis section of this Report, including, but not limited to, those discussed below:
| ● | Risks Related to Revenue: Our revenues and our operators’ revenues are dependent, in part, on occupancy. In addition to the impact of increases in mortality rates on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our operating and triple-net properties could further decrease. Such a decrease could affect the net operating income of our operating properties and the ability of our triple-net operators to make contractual payments to us. |
| ● | Risks Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy or insolvency due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant because of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about the operator’s financial condition and insolvency proceedings, particularly considering ongoing publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should such events occur, our revenue and operating cash flow may be adversely affected. |
| ● | Risks Related to Operations: Across all of our properties, we and our operators have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or tenants’ contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties, employees and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement of people. |
| ● | Risks Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have a significant development portfolio and have not experienced significant delays or disruptions but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position. |
| ● | Risks Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets. |
The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many of the other risks described in this Report.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None, except as previously disclosed.
Item 3. Defaults Upon Senior Securities
None, except as disclosed in this Report.
Item 4. Mine Safety Disclosures
Item 5. Other Information
None.
Item 6. Exhibits
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002* | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002* | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
| 101.INS | Inline XBRL Instance Document** | |
| 101.SCH | Inline XBRL Schema Document** | |
| 101.CAL | Inline XBRL Calculation Linkbase Document** | |
| 101.LAB | Inline XBRL Label Linkbase Document** | |
| 101.PRE | Inline XBRL Presentation Linkbase Document** | |
| 101.DEF | Inline XBRL Definition Linkbase Document** | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* filed herewith
** furnished, not filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SELECTIS HEALTH, INC | ||
| Date: January 06, 2023 | By: | /s/ Lance Baller |
| Lance Baller, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: January 06, 2023 | By: | /s/ Mary Lucus |
| Mary Lucus, Chief Financial Officer | ||
| (Principal Accounting Officer) | ||
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