10-Q 1 rhe-10q_20190930.htm 10-Q Q3 FY19 rhe-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

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

For the transition period from                    to                   

Commission File Number 001-33135

 

Regional Health Properties, Inc.

(Exact name of registrant as specified in its charter)

 

Georgia

 

81-5166048

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification Number)

 

454 Satellite Boulevard NW, Suite 100, Suwanee, GA 30024

(Address of principal executive offices)

(678) 869-5116

(Registrant’s telephone number, including area code)

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, no par value

 

RHE

 

NYSE American

10.875% Series A Cumulative Redeemable

Preferred Stock, no par value

 

RHE-PA

 

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”,  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

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. Yes     No 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes   No 

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

As of October 31, 2019:  1,688,219 shares of common stock, no par value, were outstanding.

 

 

 

 


 

Regional Health Properties, Inc.

Form 10-Q

Table of Contents

 

 

 

 

 

Page
Number

Part I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

3

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018

 

4

 

 

Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018

 

5

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

 

6

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

37

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4.

 

Controls and Procedures

 

48

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

Item 3.

 

Defaults upon Senior Securities

 

51

Item 4.

 

Mine Safety Disclosures

 

51

Item 5.

 

Other Information

 

51

Item 6.

 

Exhibits

 

52

 

 

 

 

 

Signatures

 

56

 

2


 

Part I.  Financial Information

Item 1.

Financial Statements

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in 000’s)(Unaudited) 

 

 

 

September 30,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

3,421

 

 

$

2,407

 

Restricted cash

 

 

1,119

 

 

 

1,411

 

Accounts receivable, net of allowance of $721 and $1,356

 

 

912

 

 

 

971

 

Prepaid expenses and other

 

 

277

 

 

 

472

 

Notes receivable

 

 

687

 

 

 

610

 

Assets of disposal group held for sale

 

 

 

 

 

2,204

 

Total current assets

 

 

6,416

 

 

 

8,075

 

Restricted cash

 

 

2,550

 

 

 

2,668

 

Property and equipment, net

 

 

55,512

 

 

 

77,237

 

Intangible assets - bed licenses

 

 

2,471

 

 

 

2,471

 

Intangible assets - lease rights, net

 

 

584

 

 

 

906

 

Right-of-use operating lease assets

 

 

38,133

 

 

 

 

Goodwill

 

 

1,585

 

 

 

2,105

 

Lease deposits and other deposits

 

 

517

 

 

 

402

 

Straight-line rent receivable

 

 

6,376

 

 

 

6,301

 

Notes receivable

 

 

153

 

 

 

331

 

Other assets

 

 

74

 

 

 

74

 

Total assets

 

$

114,371

 

 

$

100,570

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of notes payable and other debt

 

$

1,747

 

 

$

26,397

 

Accounts payable

 

 

3,405

 

 

 

4,361

 

Accrued expenses and other

 

 

2,867

 

 

 

4,461

 

Operating lease obligation

 

 

6,093

 

 

 

 

Liabilities of disposal group held for sale

 

 

 

 

 

1,491

 

Total current liabilities

 

 

14,112

 

 

 

36,710

 

Notes payable and other debt, net of current portion:

 

 

 

 

 

 

 

 

Senior debt, net

 

 

47,251

 

 

 

48,317

 

Bonds, net

 

 

6,281

 

 

 

6,599

 

Other debt, net

 

 

502

 

 

 

 

Operating lease obligation

 

 

33,961

 

 

 

 

Other liabilities

 

 

1,247

 

 

 

2,793

 

Deferred tax liabilities

 

 

44

 

 

 

 

Total liabilities

 

 

103,398

 

 

 

94,419

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 1,688 issued and outstanding at September 30, 2019 and December 31, 2018

 

 

61,970

 

 

 

61,900

 

Preferred stock, no par value; 5,000 shares authorized; 2,812 shares issued and outstanding, redemption amount $70,288 at September 30, 2019 and December 31, 2018

 

 

62,423

 

 

 

62,423

 

Accumulated deficit

 

 

(113,420

)

 

 

(118,172

)

Total stockholders’ equity

 

 

10,973

 

 

 

6,151

 

Total liabilities and stockholders’ equity

 

$

114,371

 

 

$

100,570

 

 

See accompanying notes to unaudited consolidated financial statements

3


 

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

4,590

 

 

$

4,972

 

 

$

14,746

 

 

$

15,706

 

Management fees

 

 

239

 

 

 

235

 

 

 

716

 

 

 

703

 

Other revenues

 

 

1

 

 

 

49

 

 

 

93

 

 

 

148

 

Total revenues

 

 

4,830

 

 

 

5,256

 

 

 

15,555

 

 

 

16,557

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility rent expense

 

 

1,640

 

 

 

2,171

 

 

 

5,006

 

 

 

6,512

 

Cost of management fees

 

 

148

 

 

 

137

 

 

 

467

 

 

 

448

 

Depreciation and amortization

 

 

797

 

 

 

1,126

 

 

 

2,661

 

 

 

3,507

 

General and administrative expense

 

 

730

 

 

 

984

 

 

 

2,551

 

 

 

2,751

 

Provision for doubtful accounts

 

 

32

 

 

 

(48

)

 

 

(214

)

 

 

3,934

 

Other operating expenses

 

 

191

 

 

 

255

 

 

 

821

 

 

 

823

 

Total expenses

 

 

3,538

 

 

 

4,625

 

 

 

11,292

 

 

 

17,975

 

Income (loss) from operations

 

 

1,292

 

 

 

631

 

 

 

4,263

 

 

 

(1,418

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

1,157

 

 

 

1,783

 

 

 

4,535

 

 

 

4,595

 

Loss on extinguishment of debt

 

 

924

 

 

 

3,514

 

 

 

2,478

 

 

 

3,955

 

Gain on disposal of assets

 

 

(6,451

)

 

 

 

 

 

(7,141

)

 

 

 

Other (income) expense

 

 

(48

)

 

 

 

 

 

6

 

 

 

10

 

Total other (income) expense, net

 

 

(4,418

)

 

 

5,297

 

 

 

(122

)

 

 

8,560

 

Income (loss) from continuing operations before income taxes

 

 

5,710

 

 

 

(4,666

)

 

 

4,385

 

 

 

(9,978

)

Income tax expense

 

 

 

 

 

 

 

 

44

 

 

 

33

 

Income (loss) from continuing operations

 

 

5,710

 

 

$

(4,666

)

 

$

4,341

 

 

$

(10,011

)

Income (loss) from discontinued operations, net of tax

 

 

101

 

 

 

157

 

 

 

411

 

 

 

(242

)

Net income (loss)

 

 

5,811

 

 

 

(4,509

)

 

 

4,752

 

 

 

(10,253

)

Preferred stock dividends - undeclared

 

 

(2,250

)

 

 

(1,912

)

 

 

(6,748

)

 

 

(5,736

)

Net income (loss) attributable to Regional Health Properties, Inc. common stockholders

 

$

3,561

 

 

$

(6,421

)

 

$

(1,996

)

 

$

(15,989

)

Net income (loss) per share of common stock attributable to Regional Health Properties, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

2.05

 

 

$

(3.93

)

 

$

(1.42

)

 

$

(9.45

)

Discontinued operations

 

$

0.06

 

 

$

0.09

 

 

$

0.24

 

 

 

(0.15

)

 

 

$

2.11

 

 

$

(3.84

)

 

$

(1.18

)

 

$

(9.60

)

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

1,688

 

 

 

1,688

 

 

 

1,688

 

 

 

1,665

 

 

See accompanying notes to unaudited consolidated financial statements

 

4


 

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in 000’s)

(Unaudited)

 

For the Nine Months ended September 30, 2019

 

Shares of

Common

Stock

 

 

Shares of

Preferred

Stock

 

 

Common

Stock and

Additional

Paid-in

Capital

 

 

Preferred

Stock

 

 

Accumulated

Deficit

 

 

Total

 

Balances, December 31, 2018

 

 

1,688

 

 

 

2,812

 

 

$

61,900

 

 

$

62,423

 

 

$

(118,172

)

 

$

6,151

 

Stock-based compensation

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

184

 

 

 

184

 

Balances, March 31, 2019

 

 

1,688

 

 

 

2,812

 

 

 

61,927

 

 

 

62,423

 

 

 

(117,988

)

 

 

6,362

 

Stock-based compensation

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,243

)

 

 

(1,243

)

Balances, June 30, 2019

 

 

1,688

 

 

 

2,812

 

 

 

61,948

 

 

 

62,423

 

 

 

(119,231

)

 

 

5,140

 

Stock-based compensation

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,811

 

 

 

5,811

 

Balances, September 30, 2019

 

 

1,688

 

 

 

2,812

 

 

$

61,970

 

 

$

62,423

 

 

$

(113,420

)

 

$

10,973

 

 

For the Nine Months ended September 30, 2018

 

Shares of

Common

Stock

 

 

Shares of

Preferred

Stock

 

 

Common

Stock and

Additional

Paid-in

Capital

 

 

Preferred

Stock

 

 

Accumulated

Deficit

 

 

Total

 

Balances, December 31, 2017

 

 

1,647

 

 

 

2,812

 

 

$

61,724

 

 

$

62,423

 

 

$

(106,277

)

 

$

17,870

 

Stock-based compensation

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,528

)

 

 

(2,528

)

Balances, March 31, 2018

 

 

1,647

 

 

 

2,812

 

 

 

61,755

 

 

 

62,423

 

 

 

(108,805

)

 

 

15,373

 

Stock-based compensation

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

 

 

 

45

 

Issuance of restricted stock, net of forfeitures

 

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,216

)

 

 

(3,216

)

Balances, June 30, 2018

 

 

1,688

 

 

 

2,812

 

 

 

61,800

 

 

 

62,423

 

 

 

(112,021

)

 

 

12,202

 

Stock-based compensation

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,509

)

 

 

(4,509

)

Balances, September 30, 2018

 

 

1,688

 

 

 

2,812

 

 

$

61,850

 

 

$

62,423

 

 

$

(116,530

)

 

$

7,743

 

 

See accompanying notes to unaudited consolidated financial statements

 

5


 

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000’s)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,752

 

 

$

(10,253

)

(Income) loss from discontinued operations, net of tax

 

 

(411

)

 

 

242

 

Income (loss) from continuing operations

 

 

4,341

 

 

 

(10,011

)

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,661

 

 

 

3,507

 

Stock-based compensation expense

 

 

70

 

 

 

126

 

Rent expense in excess of cash paid

 

 

252

 

 

 

301

 

Rent revenue in excess of cash received

 

 

(1,124

)

 

 

(1,784

)

Amortization of deferred financing costs, debt discounts and premiums

 

 

166

 

 

 

698

 

Loss on debt extinguishment

 

 

2,478

 

 

 

3,955

 

Gain on disposal of assets

 

 

(7,141

)

 

 

 

Bad debt (benefit) expense

 

 

(214

)

 

 

3,934

 

Deferred tax expense

 

 

44

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

578

 

 

 

(349

)

Prepaid expenses and other

 

 

326

 

 

 

239

 

Other assets

 

 

(57

)

 

 

35

 

Accounts payable and accrued expenses

 

 

(376

)

 

 

663

 

Other liabilities

 

 

161

 

 

 

7

 

Net cash provided by operating activities - continuing operations

 

 

2,165

 

 

 

1,321

 

Net cash used in operating activities - discontinued operations

 

 

(980

)

 

 

(1,264

)

Net cash provided by operating activities

 

 

1,185

 

 

 

57

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from disposal of lease assets, net

 

 

1,192

 

 

 

 

Proceeds from the sale of property and equipment, net

 

 

2,687

 

 

 

 

Purchase of property and equipment

 

 

(243

)

 

 

(266

)

Net cash provided by (used in) investing activities - continuing operations

 

 

3,636

 

 

 

(266

)

Net cash provided by (used in) investing activities

 

 

3,636

 

 

 

(266

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt issuance

 

 

 

 

 

2,397

 

Repayment on notes payable

 

 

(2,585

)

 

 

(1,546

)

Repayment on bonds payable

 

 

(344

)

 

 

(95

)

Debt extinguishment, forbearance and issuance costs

 

 

(1,254

)

 

 

(95

)

Net cash (used in) provided by financing activities - continuing operations

 

 

(4,183

)

 

 

661

 

Net cash used in financing activities - discontinued operations

 

 

(34

)

 

 

(188

)

Net cash (used in) provided by financing activities

 

 

(4,217

)

 

 

473

 

Net change in cash and restricted cash

 

 

604

 

 

 

264

 

Cash and  restricted cash, beginning

 

 

6,486

 

 

 

5,359

 

Cash and restricted cash, ending

 

$

7,090

 

 

$

5,623

 

 

6


 

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in 000’s)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash interest paid

 

$

4,105

 

 

$

3,775

 

Cash income taxes paid

 

$

 

 

$

33

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Non-cash payments of short-term debt

 

$

(24,637

)

 

$

 

Non-cash payments of long-term debt

 

$

 

 

$

(8,744

)

Non-cash payments of convertible debt

 

 

 

 

 

(1,500

)

Non-cash payments of professional liability settlements from financing

 

 

 

 

 

(2,371

)

Non-cash debt extinguishment, issuance costs and prepayment penalties

 

 

(1,036

)

 

 

(1,238

)

Non-cash surrender of security deposit

 

 

(140

)

 

 

 

Non-cash payments of professional liability settlements from prior insurer

 

 

 

 

 

(2,850

)

Net payments through escrow

 

$

(25,813

)

 

$

(16,703

)

Non-cash proceeds from sale of property and equipment

 

 

25,813

 

 

 

 

Non-cash proceeds from financing

 

 

 

 

 

13,853

 

Non-cash proceeds from prior insurer for professional liability settlements

 

 

 

 

 

2,850

 

Net proceeds through escrow

 

$

25,813

 

 

$

16,703

 

 

 

 

 

 

 

 

 

 

Non-cash deferred financing

 

$

 

 

$

3,352

 

Surrender of security deposit

 

$

 

 

$

305

 

Non-cash proceeds from vendor-financed insurance

 

$

250

 

 

$

198

 

Non-cash proceeds from finance lease to purchase fixed assets

 

$

26

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

7


 

REGIONAL HEALTH PROPERTIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2019

NOTE 1.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

AdCare Health Systems, Inc. (“AdCare”) is the former parent of, and the predecessor issuer to, Regional Health Properties, Inc. (“Regional Health” or “Regional” and, together with its subsidiaries, the “Company” or “we”). On September 29, 2017, AdCare merged (the “Merger”) with and into Regional Health, a Georgia corporation and wholly owned subsidiary of AdCare formed for the purpose of the Merger, with Regional Health continuing as the surviving corporation in the Merger. The Company now has many of the characteristics of a real estate investment trust and is focused on the ownership, acquisition and leasing of healthcare related properties. For a description of the Merger, see Part II, Item 8, “Financial Statements and Supplemental Data”, Note 1 – Summary of Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on May 17, 2019 (the “Annual Report”).

Regional Health is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. The Company’s business primarily consists of leasing and subleasing healthcare facilities to third-party tenants, which operate the facilities. The operators of the Company’s facilities provide a range of healthcare services to their patients and residents, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.

As of September 30, 2019, the Company owned, leased, or managed for third parties 24 facilities, primarily in the Southeast United States. Of the 24 facilities, the Company: (i) leased 10 owned facilities and subleased nine leased skilled nursing facilities to third-party tenants; (ii) leased two owned assisted living facilities to third-party tenants; and (iii) managed on behalf of third-party owners two skilled nursing facilities and one independent living facility. See Note 7 Leases, herein, and Note 7 Leases located in Part II, Item 8, “Financial Statements and Supplemental Data” in the Annual Report for a more detailed description of the Company’s leases.

 

Pursuant to the Purchase and Sale Agreement, dated April 15, 2019, as subsequently amended from time to time (the “PSA”), between certain subsidiaries of the Company and MED Healthcare Partners LLC (“MED”), the Company sold to affiliates of MED Healthcare Partners LLC (“MED”) four skilled nursing facilities (collectively, the “PSA Facilities”), together with substantially all of the fixtures, equipment, furniture, leases and other assets relating to such PSA Facilities (the “Asset Sale”). Under the PSA, the Company sold: (i) on August 28, 2019, the 100-bed skilled nursing facility commonly known as Northwest Nursing Center located in Oklahoma City, Oklahoma (the “Northwest Facility”); and (ii) on August 1, 2019, the following three facilities, (a) the 182-bed skilled nursing facility commonly known as Attalla Health & Rehab located in Attalla, Alabama (the “Attalla Facility”), (b) the 100-bed skilled nursing facility commonly known as Healthcare at College Park located in College Park, Georgia (the “College Park Facility”), and (c) the 118-bed skilled nursing facility commonly known as Quail Creek Nursing Home located in Oklahoma City, Oklahoma (the “Quail Creek Facility”).

 

In connection with the Asset Sale: (i) MED paid to the Company a cash purchase price for the PSA Facilities equal to $28.5 million in the aggregate; (ii) the Company incurred approximately $0.4 million in sales commission expenses and $0.1 million for a building improvement credit; and (iii) the Company transferred approximately $0.1 million in lease security deposits to MED.

 

On August 1, 2019, the Company used a portion of the proceeds from the Asset Sale to repay approximately $21.3 million to Pinecone Realty Partners II, LLC (“Pinecone”) to extinguish all indebtedness owed by the Company under a loan agreement, dated February 15, 2018, as amended from time to time with an original aggregate principal amount of $16.25 million which refinanced existing mortgage debt (the “Pinecone Credit Facility”), and to repay approximately $3.8 million to Congressional Bank to extinguish all indebtedness owed by the Company under a term loan agreement, dated September 27, 2013, as amended from time to time, between the Company and Congressional Bank (the “Quail Creek Credit Facility”). For further information, see Note 9 – Notes Payable and Other Debt and Note 10 – Discontinued Operations and Dispositions.

The Company leases its currently-owned healthcare properties, and subleases its currently-leased healthcare properties, on a triple-net basis, meaning that the lessee (i.e., the third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual rent escalation clauses.

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When used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), unless otherwise specifically stated or the context otherwise requires, the terms:

 

“Board” or “Board of Directors” refers to the Board of Directors of AdCare with respect to the period prior to the Merger and to the Board of Directors of Regional Health with respect to the period after the Merger;

 

“common stock” refers to AdCare’s common stock with respect to the period prior to the Merger and to Regional Health’s common stock with respect to the period after the Merger;

 

“Series A Preferred Stock” refers to AdCare’s 10.875% Series A Cumulative Redeemable Preferred Stock with respect to the period prior to the Merger and to Regional Health’s 10.875% Series A Cumulative Redeemable Preferred Stock with respect to the period after the Merger; and

 

“Charter” refers to the amended and restated articles of incorporation of Regional Health.

Going Concern

As of September 30, 2019, we had negative working capital of approximately $1.6 million, which excludes $6.1 million of current operating lease obligation (with the corresponding right of use asset classified as long term). At September 30, 2019, we had $3.4 million in unrestricted cash and $55.8 million in indebtedness, including current maturities of $1.7 million. On August 1, 2019, the Company fully repaid the amounts due under the Pinecone Credit Facility and the Quail Creek Credit Facility using the proceeds from the sale of three of the Company’s facilities. On September 30, 2019, the Company and Pinecone entered into a waiver and release agreement and the Company paid approximately $0.4 million to Pinecone to fully extinguish the surviving obligations and provisions (the “Surviving Obligations”) of the Pinecone Credit Facility, which included (i) a right of first refusal to provide first mortgage financing for any acquisition of a healthcare facility by the Company for a period of three months following the above repayment, and (ii) an exclusive option to refinance the Company’s existing first mortgage loan (the “Pinecone Financing Option”), with a balance of $5.3 million at June 30, 2019, on the Company’s 124-licensed bed skilled nursing facility located in Alabama known as Coosa Valley Health Care, in each case subject to the terms and conditions of the Pinecone Credit Facility.

Prior to August 1, 2019, the continuation of our business was dependent upon our ability: (i) to comply with the terms and conditions under the Pinecone Credit Facility and the second new amended and restated forbearance agreement, dated March 29, 2019, between the Company and certain of its subsidiaries and Pinecone (the “Second A&R Forbearance Agreement”) as amended on June 13, 2019; and (ii) to refinance or obtain further debt maturity extensions on the Quail Creek Credit Facility, neither of which was entirely within the Company’s control. These factors had created substantial doubt about the Company’s ability to continue as a going concern. However, the Company repaid the Pinecone Credit Facility and Quail Creek Credit Facility on August 1, 2019 and fully extinguished the Surviving Obligations on September 30, 2019. If efforts to make such repayment had been unsuccessful, the Company would have been required to seek relief through other available alternatives, including a filing under the U.S. Bankruptcy Code. The consolidated financial statements do not include any adjustments that might have been necessary if the Company was unable to continue as a going concern. See Note – 10 Discontinued Operations and Dispositions for information with respect to the PSA, with respect to the sale of the PSA Facilities and the repayment of all amounts due under the Pinecone Credit Facility and the Quail Creek Credit Facility, which have addressed certain factors that had created substantial doubt regarding the Company’s ability to continue as a going concern.

As a result of such repayments, the Company is able to conclude that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance. For additional information, see Note 3 – Liquidity.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results that may be expected for the fiscal year. The consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. 

9


 

You should read the unaudited consolidated financial statements in this Quarterly Report together with the historical audited consolidated financial statements of the Company for the year ended December 31, 2018, included in the Annual Report. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of all significant accounting policies. During the three and nine months ended September 30, 2019, there were no material changes to the Company’s policies, except as noted below in Recently Adopted Standards.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Reverse Stock Split

On December 27, 2018, the Board authorized a reverse stock split of the issued and outstanding shares of the common stock, at a ratio of one-for-twelve shares (the “Reverse Stock Split”). Shareholder approval for the Reverse Stock Split was obtained at the Company’s annual meeting of shareholders on December 27, 2018 and the Reverse Stock Split became effective on December 31, 2018. At the effective date, every 12 shares of the common stock that were issued and outstanding were automatically combined into one issued and outstanding share of the common stock. Shareholders did not receive fractional shares in connection with the Reverse Stock Split and instead, received an additional whole share of the common stock in lieu thereof. The authorized number of shares, and the par value per share, of the common stock was not affected by the Reverse Stock Split. The Reverse Stock Split also correspondingly affected all outstanding Regional Health equity awards. The Reverse Stock Split was implemented for the purpose of complying with the NYSE American LLC (“NYSE American” or the “Exchange”) continued listing standards regarding low selling price.

All authorized, issued and outstanding stock and per share amounts contained in the accompanying consolidated financial statements have been adjusted to reflect the Reverse Stock Split for all prior periods presented.

Revenue Recognition and Allowances

Triple-Net Leased Properties. The Company’s triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectability is probable. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in straight-line rent receivable on our consolidated balance sheets. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company’s facilities, rental income for the affected facilities is thus recognized only upon cash collection, and any accumulated straight-line rent receivable is thus reversed in the period in which the Company deems rent collection to no longer be probable. Rental revenues for five facilities located in Ohio (until operator transition on December 1, 2018), one facility in North Carolina (until operator transition on March 1, 2019) and four facilities held for sale since April 15, 2019 (until the sale of such facilities, which occurred on August 1, 2019 (three facilities) and August 28, 2019 (one facility)) were recorded on a cash basis during the year ended December 31, 2018, the three months ended March 31, 2019 and until the sale of such facilities, respectively. For additional information with respect to such facilities, see Note 7 – Leases and Note 10 – Discontinued Operations and Dispositions.

Revenue from Contracts with Customers. The Company recognizes management fee revenues as services are provided. The Company has one contract to manage three facilities (the “Management Contract”), with payment for each month of service received in full on a monthly basis. The maximum penalty for service contract nonperformance under the Management Contract is $50,000 per year, payable after the end of the year. Further, the Company recognizes interest income from loans and investments, using the effective interest method when collectability is probable. The Company applies the effective interest method on a loan-by-loan basis.

Allowances. The Company assesses the collectability of its rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectability of rent receivables and working capital loans to tenants on several factors, including payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company’s evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments or payments on a working capital loan, then the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. Payments received on impaired loans are applied against the allowance. If the Company changes its assumptions or estimates regarding the collectability of future rent payments required by a lease or required from a working capital loan to a tenant, then the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates. See Note 7 – Leases.

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As of September 30, 2019 and December 31, 2018, the Company reserved for approximately $0.7 million and $1.4 million, respectively, of uncollected receivables. Accounts receivable, net, totaled $0.9 million at September 30, 2019 and $1.0 million at December 31, 2018.

Extinguishment of Debt

 

The Company recognizes extinguishment of debt when the criteria for a troubled debt restructure are not met and the change in the debt terms is considered substantial. The Company calculates the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt (including deferred finance fees) and recognizes a gain or loss on the income statement of the period of extinguishment.

Pre-paid expenses and other

As of September 30, 2019 and December 31, 2018, the Company had $0.3 million and $0.5 million, respectively, in pre-paid expenses and other, primarily for directors’ and officers’ insurance and mortgage insurance premiums.

Self-Insurance

The Company has self-insured against professional and general liability claims since it discontinued its healthcare operations during 2014 and 2015 in connection with its transition from an owner and operator of healthcare properties to a healthcare property holding and leasing company (the “Transition”). See Part II, Item 8, “Financial Statements and Supplementary Data”, Note 15 Commitments and Contingencies in the Annual Report for more information. The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions, including estimated settlement amounts and legal fees and other expenses anticipated to be incurred in such settlement, as applicable; and (v) the venues in which the actions have been filed or will be adjudicated. The Company believes that most of the professional and general liability actions are defensible and intends to defend them through final judgment unless settlement is more advantageous to the Company. Accordingly, the self-insurance reserve reflects the Company’s estimate of settlement amounts for the pending actions, if applicable, and legal costs of settling or litigating the pending actions, as applicable. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve may not be sufficient to cover the settlement amounts actually incurred in settling the pending actions, or the legal costs actually incurred in settling or litigating the pending actions. See Note 8 – Accrued Expenses and Other.

In addition, the Company maintains certain other insurance programs, including commercial general liability, property, casualty, directors’ and officers’ liability, crime and employment practices liability.

Recently Adopted Standards

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) ASU 2016-02, Leases, as codified in Accounting Standards Codification (“ASC”) 842, using the non-comparative transition option pursuant to ASU 2018-11. Therefore we have not restated comparative period financial information for the effects of ASC 842, and we have not made the new required lease disclosures for comparative periods beginning before January 1, 2019. The Company recognized both right of use assets and lease liabilities for leases in which we lease land, real property or other equipment, electing the practical expedient to maintain the prior operating lease classification. Effective January 1, 2019, we will assess any new contracts or modification of contracts in accordance with ASC 842 to determine the existence of a lease and its classification. We are reporting revenues and expenses for real estate taxes and insurance, prospectively where the lessee has not made those payments directly to a third party in accordance with their respective leases with us.

The following table summarizes real estate tax recognized on our consolidated statement of operations for the three and nine months ended September 30, 2019 and 2018:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Amounts in 000’s)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Rental revenues

 

$

129

 

 

$

 

 

$

358

 

 

$

 

Other operating expenses

 

 

129

 

 

 

 

 

 

358

 

 

 

 

 

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Also, we now expense certain leasing costs, other than leasing commissions, as they are incurred. Current GAAP provides for the deferral and amortization of such costs over the applicable lease term. Adoption of ASU 2016-02 has not had a material effect on the Company’s consolidated financial statements, other than the initial balance sheet impact of recognizing the right-of-use assets and the right-of-use lease liabilities. Upon adoption, we recognized operating lease assets of $39.8 million on our consolidated balance sheet for the period ended March 31, 2019, which represents the present value of minimum lease payments associated with such leases. Also upon adoption, we recognized operating lease liabilities of $41.5 million, instead of $1.7 million of previously recorded deferred rent recorded in “Other Liabilities” on our consolidated balance sheet for the period ended March 31, 2019. The present value of minimum lease payments was calculated on each lease using a discount rate that approximated our incremental borrowing rate and the current lease term and upon adoption we utilized a discount rate of 7.98% for the Company’s leases. See Note 7– Leases for the Company’s operating leases.  

 

See Part II, Item 8, “Financial Statements and Supplementary Data”, Note 1 – Summary of Significant Accounting Policies included in the Annual Report, for a description of the other accounting pronouncements the Company is currently evaluating.

 

NOTE 2.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the respective period. Diluted earnings per share is similar to basic earnings per share except that the net income or loss is adjusted by the impact of the weighted-average number of shares of common stock outstanding including potentially dilutive securities (such as options, warrants and non-vested common stock) when such securities are not anti-dilutive. Potentially dilutive securities from options, warrants and unvested restricted shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. For the three and nine months ended September 30, 2019 and 2018, approximately 0.1 million and 0.1 million shares, respectively, of potentially dilutive securities were excluded from the diluted loss per share calculation because including them would have been anti-dilutive for such periods.

The following tables provide a reconciliation of net income (loss) for continuing and discontinued operations and the number of shares of common stock used in the computation of both basic and diluted earnings per share:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

5,710

 

 

$

(4,666

)

 

$

4,341

 

 

$

(10,011

)

 

Preferred stock dividends - undeclared (1)

 

 

(2,250

)

 

 

(1,912

)

 

 

(6,748

)