0001410578-24-000896.txt : 20240515 0001410578-24-000896.hdr.sgml : 20240515 20240515171430 ACCESSION NUMBER: 0001410578-24-000896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20240331 FILED AS OF DATE: 20240515 DATE AS OF CHANGE: 20240515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Summit Healthcare REIT, Inc CENTRAL INDEX KEY: 0001310383 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] ORGANIZATION NAME: 05 Real Estate & Construction IRS NUMBER: 731721791 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-52566 FILM NUMBER: 24952525 BUSINESS ADDRESS: STREET 1: 23382 MILL CREEK DRIVE STREET 2: STE 125 CITY: LAGUNA HILLS STATE: CA ZIP: 92653 BUSINESS PHONE: 949-535-2022 MAIL ADDRESS: STREET 1: 23382 MILL CREEK DRIVE STREET 2: STE 125 CITY: LAGUNA HILLS STATE: CA ZIP: 92653 FORMER COMPANY: FORMER CONFORMED NAME: Cornerstone Core Properties REIT, Inc. DATE OF NAME CHANGE: 20050518 FORMER COMPANY: FORMER CONFORMED NAME: Cornerstone Core Properties REIT DATE OF NAME CHANGE: 20050516 FORMER COMPANY: FORMER CONFORMED NAME: Cornerstone Realty Fund Inc DATE OF NAME CHANGE: 20041202 10-Q 1 shcr-20240331x10q.htm 10-Q
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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 March 31, 2024

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

Commission File Number 000-52566

SUMMIT HEALTHCARE REIT, INC.

(Exact name of registrant as specified in its charter)

MARYLAND

73-1721791

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

23382 MILL CREEK DRIVE, SUITE 125,

LAGUNA HILLS, CA

92653

(Address of principal executive offices)

(Zip Code)

800-978-8136

(Registrant’s telephone number, including area code)

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

Title of each class

Ticker symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

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 (Sec. 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 the definitions 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.

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

As of May 9, 2024, we had 23,027,978 shares of common stock of Summit Healthcare REIT, Inc. outstanding.

FORM 10-Q

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements:

3

Condensed Consolidated Balance Sheets (unaudited)

3

Condensed Consolidated Statements of Operations (unaudited)

4

Condensed Consolidated Statements of Equity (Deficit) (unaudited)

5

Condensed Consolidated Statements of Cash Flows (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

SIGNATURES

31

 

 

EX-31.1

 

EX-31.2

 

EX-32

 

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 

December 31, 

    

2024

    

2023

ASSETS

  

  

Cash and cash equivalents

$

6,480,000

$

10,997,000

Restricted cash

 

3,130,000

3,186,000

Real estate properties, net (Note 14)

 

58,065,000

156,966,000

Intangible lease assets, net (Note 14)

 

1,213,000

11,653,000

Tenant and other receivables, net

 

4,373,000

2,590,000

Other assets, net

 

1,505,000

1,552,000

Equity-method investments

 

1,576,000

2,852,000

Contract assets associated with GA8 Properties (Note 14)

126,061,000

Total assets

$

202,403,000

$

189,796,000

LIABILITIES AND EQUITY (DEFICIT)

 

Accounts payable and accrued liabilities

$

5,242,000

$

7,038,000

Accrued interest associated with GA8 Properties (Note 14)

2,782,000

1,041,000

Security deposits (Note 14)

 

837,000

3,705,000

Loans payable, net of debt issuance costs

 

56,860,000

56,179,000

Loans payable associated with GA8 Properties (Note 14)

123,280,000

123,750,000

Total liabilities

 

189,001,000

191,713,000

Commitments and contingencies

 

Stockholders’ Equity (Deficit)

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2024 and December 31, 2023

 

Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at March 31, 2024 and December 31, 2023

 

23,000

23,000

Additional paid-in capital

 

116,485,000

116,473,000

Accumulated deficit

 

(103,232,000)

(118,535,000)

Total stockholders’ equity (deficit)

 

13,276,000

(2,039,000)

Noncontrolling interests

 

126,000

122,000

Total equity (deficit)

 

13,402,000

(1,917,000)

Total liabilities and equity

$

202,403,000

$

189,796,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended

March 31, 

    

2024

    

2023

Revenues:

 

  

Total rental revenues

$

3,935,000

$

5,366,000

Resident fees and services

1,700,000

1,369,000

Asset management fees

96,000

147,000

Total operating revenue

 

5,731,000

6,882,000

Expenses:

 

Property operating costs

 

535,000

806,000

Resident costs

1,378,000

1,211,000

General and administrative

 

1,132,000

1,104,000

Depreciation and amortization

 

1,462,000

1,809,000

Total operating expenses

 

4,507,000

 

4,930,000

Gain on derecognition associated with GA8 Properties

(17,698,000)

Operating income

 

18,922,000

1,952,000

Income from equity-method investees

 

725,000

125,000

Other income

 

98,000

96,000

Interest expense

 

(1,014,000)

(1,028,000)

Interest expense associated with GA8 Properties

(3,406,000)

(3,104,000)

Net income (loss)

 

15,325,000

(1,959,000)

Noncontrolling interests’ share in net (income) loss

 

(22,000)

(17,000)

Net income (loss) applicable to common stockholders

$

15,303,000

$

(1,976,000)

Basic and diluted:

 

 

Net income (loss) applicable to common stockholders

$

0.67

$

(0.09)

Weighted average shares used to calculate basic and diluted earnings per common share

 

23,027,978

23,027,978

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(Unaudited)

Common Stock

Common

Number

Stock

Additional

Total

of

Par

Paid-In

Accumulated

Stockholders’

Noncontrolling 

Total

    

Shares

    

Value

    

Capital

    

Deficit

    

Equity (Deficit)

    

Interests

    

Equity (Deficit)

Balance — January 1, 2024

 

23,027,978

$

23,000

$

116,473,000

$

(118,535,000)

$

(2,039,000)

$

122,000

$

(1,917,000)

Stock-based compensation

 

 

 

12,000

 

 

12,000

 

12,000

Distributions paid to noncontrolling interests

 

 

 

 

 

 

(18,000)

(18,000)

Net income

 

 

 

 

15,303,000

 

15,303,000

 

22,000

15,325,000

Balance — March 31, 2024

 

23,027,978

$

23,000

$

116,485,000

$

(103,232,000)

$

13,276,000

$

126,000

$

13,402,000

Common Stock

Common

Number

Stock

Additional

Total

of

Par

Paid-In

Accumulated

Stockholders’

Noncontrolling 

Total

    

Shares

    

Value

    

Capital

    

Deficit

    

Equity

    

Interests

    

Equity

Balance — January 1, 2023

 

23,027,978

$

23,000

$

116,432,000

$

(93,734,000)

$

22,721,000

$

177,000

$

22,898,000

Stock-based compensation

 

 

 

7,000

 

 

7,000

7,000

Distributions paid to noncontrolling interests

 

 

 

 

 

(17,000)

(17,000)

Net (loss) income

 

 

 

 

(1,976,000)

 

(1,976,000)

17,000

(1,959,000)

Balance — March 31, 2023

 

23,027,978

$

23,000

$

116,439,000

$

(95,710,000)

$

20,752,000

$

177,000

$

20,929,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three months Ended March 31, 

    

2024

    

2023

Cash flows from operating activities:

Net income (loss)

$

15,325,000

$

(1,959,000)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

Amortization of debt issuance costs

 

187,000

228,000

Depreciation and amortization

 

1,462,000

1,809,000

Amortization of above-market lease intangible

21,000

16,000

Straight-line rents

 

(65,000)

(303,000)

Stock-based compensation expense

 

12,000

7,000

Income from equity-method investees

 

(725,000)

(125,000)

Gain on derecognition of assets associated with GA8 Properties

(17,698,000)

Change in operating assets and liabilities, net of derecognition of assets:

 

Tenant and other receivables, net

 

284,000

251,000

Other assets, net

 

(22,000)

17,000

Accounts payable and accrued liabilities

 

796,000

597,000

Security deposits

(280,000)

Net cash (used in) provided by operating activities

 

(703,000)

538,000

Cash flows from investing activities:

 

 

Reduction of cash from derecognition of assets associated with GA8 Properties

(3,084,000)

Additions to real estate and other assets

 

(2,000)

(145,000)

Investment in equity-method investees

 

(156,000)

Distributions received from equity-method investees

 

115,000

Net cash used in investing activities

 

(3,086,000)

(186,000)

Cash flows from financing activities:

 

 

Payments of loans payable

 

(766,000)

(284,000)

Distributions paid to noncontrolling interests

 

(18,000)

(17,000)

Deferred financing costs

(4,000)

Net cash used in financing activities

 

(784,000)

(305,000)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(4,573,000)

47,000

Cash, cash equivalents and restricted cash – beginning of period

 

14,183,000

14,163,000

Cash, cash equivalents and restricted cash – end of period

$

9,610,000

$

14,210,000

Supplemental disclosure of cash flow information:

 

Cash paid for interest

$

2,928,000

$

3,795,000

Supplemental disclosure of non-cash investing activities:

Derecognition of assets associated with GA8 Properties (Note 14):

Real estate properties, net

$

97,637,000

$

Intangible lease assets, net

$

10,250,000

$

Other assets

$

12,000

$

Accounts payable and accrued liabilities

$

(821,000)

$

Write off of deferred financing costs

$

790,000

Security deposits

$

(2,589,000)

$

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

(Unaudited)

1. Organization

Summit Healthcare REIT, Inc. (“Summit”) is a real estate investment trust that owns 100% of 14 properties (eight of which were derecognized in March 2024 and are included in contract assets associated with GA8 Properties (see Note 14)), 95.3% of four properties, and four unconsolidated equity-method investments with interests ranging from 10% - 20% that hold an aggregate of 30 properties. As used in these notes, the “Company”, “we”, “us” and “our” refer to Summit and its consolidated subsidiaries, including but not limited to Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), except where the context otherwise requires.

We conduct substantially all of our operations through the Operating Partnership, which is a Delaware limited partnership. We own a 99.88% general partner interest in the Operating Partnership, and Cornerstone Realty Advisors, LLC (“CRA”), a former affiliate, owns a 0.12% limited partnership interest.

Summit and the Operating Partnership are managed and operated as one entity, and Summit has no significant assets other than its investment in the Operating Partnership. Summit, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.

Cornerstone Healthcare Partners LLC – Consolidated Joint Venture

We own 95% of Cornerstone Healthcare Partners LLC (“CHP LLC”), which was formed in 2012, and the remaining 5% noncontrolling interest is owned by Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA. CHP LLC is consolidated within our condensed consolidated financial statements and owns four properties (the “JV Properties”) with another partially owned subsidiary. As of March 31, 2024 and December 31, 2023, we own a 95.3% interest in the four JV Properties, and CHREF owns a 4.7% interest.

Summit Union Life Holdings, LLC – Equity-Method Investment

In April 2015, through our Operating Partnership, we entered into a limited liability company agreement with Best Years, LLC (“Best Years”), an unrelated entity and a U.S.-based affiliate of Union Life Insurance Co, Ltd. (a Chinese corporation), and formed Summit Union Life Holdings, LLC (the “SUL JV”). The SUL JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of March 31, 2024, we have a 10% interest in the SUL JV which owns 14 properties as of March 31, 2024 and as of December 31, 2023, owned 15 properties.

Summit Fantasia Holdings II, LLC – Equity-Method Investment

In December 2016, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, and formed Summit Fantasia Holdings II, LLC (the “Fantasia II JV”). The Fantasia II JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of March 31, 2024 and December 31, 2023, we have a 20% interest in the Fantasia II JV which owns two properties.

Summit Fantasia Holdings III, LLC– Equity-Method Investment

In July 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia and formed Summit Fantasia Holdings III, LLC (the “Fantasia III JV”). The Fantasia III JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of March 31, 2024 and December 31, 2023, we have a 10% interest in the Fantasia III JV which owns eight properties. See Note 15 for further information.

7

Summit Fantasy Pearl Holdings, LLC– Equity-Method Investment

In October 2017, through our Operating Partnership, we entered into a limited liability company agreement with Fantasia, Atlantis Senior Living 9, LLC, a Delaware limited liability company (“Atlantis”), and Fantasy Pearl LLC, a Delaware limited liability company (“Fantasy”), and formed Summit Fantasy Pearl Holdings, LLC (the “FPH JV”). The FPH JV is not consolidated in our condensed consolidated financial statements and is accounted for under the equity-method in our condensed consolidated financial statements. As of March 31, 2024 and December 31, 2023, we have a 10% interest in the FPH JV which owns six properties.

Taxable REIT Subsidiaries

Summit Healthcare Asset Management, LLC

Summit Healthcare Asset Management, LLC (“SAM TRS”) is our wholly-owned taxable REIT subsidiary (“TRS”). We serve as the manager of the SUL JV, Fantasia I JV (through July 2, 2023), Fantasia II JV, Fantasia III JV, and FPH JV (collectively, our “Equity-Method Investments”), and provide management services in exchange for fees and reimbursements. All asset management fees earned by us are paid to SAM TRS and expenses incurred by us, as the manager, are reimbursed from SAM TRS. See Notes 5 and 7 for further information.

SHOP TRS LLC

SHOP TRS LLC (“SHOP TRS”) is our wholly-owned taxable REIT subsidiary that is the sole member for two of our operated properties which are the lessees for our two respective 100% owned real estate properties and the operated properties operations are consolidated in our condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on April 16, 2024. The accompanying condensed consolidated balance sheet at December 31, 2023 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2023 consolidated financial statements and contained in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 16, 2024 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2023 have been omitted in this report.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, the Operating Partnership and its consolidated companies and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

8

Reclassifications

Certain line items on the December 31, 2023 condensed consolidated balance sheet for loans payable and accounts payable and accrued liabilities and on condensed consolidated statement of operations for interest expense for the three months ended March 31, 2023 have been reclassified to conform to the current period presentation. See Note 14.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.

March 31, 

December 31, 

    

2024

    

2023

Cash and cash equivalents

$

6,480,000

$

10,997,000

Restricted cash

 

3,130,000

3,186,000

Total cash, cash equivalents, and restricted cash shown on the condensed consolidated statements of cash flows

$

9,610,000

$

14,183,000

3. Investments in Real Estate Properties

As of March 31, 2024 and December 31, 2023, the table below includes our 10 real estate properties held by our consolidated subsidiaries, 8 of which are 100% leased to the tenants of the related facilities and two are each 100% leased to an affiliated subsidiary. As of March 31, 2024, the table below excludes our eight derecognized real estate properties (see Note 14) and as of March 31, 2024 and December 31, 2023, excludes the 30 and 31 properties, respectively, owned by our unconsolidated Equity-Method Investments.

March 31, 

December 31, 

    

2024

    

2023

Land

$

8,530,000

$

14,905,000

Buildings and improvements

 

64,266,000

157,875,000

Less: accumulated depreciation

 

(15,256,000)

(20,439,000)

Buildings and improvements, net

 

49,010,000

137,436,000

Furniture and fixtures

 

5,103,000

12,106,000

Less: accumulated depreciation

 

(4,578,000)

(7,481,000)

Furniture and fixtures, net

 

525,000

4,625,000

Real estate properties, net

$

58,065,000

$

156,966,000

For the three months ended March 31, 2024 and 2023, depreciation expense (excluding lease intangibles amortization and leasing commission amortization) was approximately $1.3 million and $1.6 million, respectively.

CA3 Properties

In 2021, we acquired three properties located in California (“CA3 Properties”) and we entered into a first priority $15.0 million mortgage loan collateralized by the CA3 Properties with CIBC Bank, USA (“CIBC”). See table in Note 4 listing loans payable for further information.

In February 2024, we entered into a Purchase and Sale Agreement (“PSA”), as amended in April and May 2024 to extend the closing date, to sell the CA3 Properties. The transaction is expected to close in the second quarter of 2024. Either party may terminate the agreement for non-satisfaction or failure of a condition to the obligation of either party to consummate the transaction contemplated by this PSA, unless such matter has been satisfied or waived by the date specified in this PSA or by the closing date.

Fantasia I JV Transfer of Interest and Sale

On July 3, 2023, the majority member of the Fantasia I JV assigned its 65% interest, for no consideration, to Summit. As such, as of July 2023, Summit owned 100% of Fantasia I JV. The Fantasia I JV consisted of the real estate of Summit Citrus Heights, LLC, a wholly-owned subsidiary (“Summit Citrus Heights”) and the operating assets and liabilities of its associated senior housing facility, Sun

9

Oak Assisted Living (“Sun Oak” or “CH TRS”). Summit Citrus Heights was the sole member of CH TRS LLC, the operating company for Sun Oak. On September 29, 2023, we sold the real estate of Summit Citrus Heights, including the Sun Oak facility.

Summary of Properties

The following table provides summary information regarding our portfolio (excluding the 30 properties owned by our unconsolidated Equity-Method Investments, our 8 derecognized real estate properties (see Note 14) and the $12.75 million loan from Oxford Finance, LLC (“Oxford”) (see Note 14) with Summit Georgia Holdings LLC, our wholly-owned subsidiary,) as of March 31, 2024:

Loans

Payable,

Excluding

Debt

Purchase

Issuance

Property

    

Location

    

Date Purchased

    

Type(1)

    

Price

    

Costs

Rivers Edge Rehabilitation and Care (f/k/a Sheridan Care Center)

 

Sheridan, OR

August 3, 2012

 

SNF

$

4,100,000

$

3,784,000

Fernhill Care Center

 

Portland, OR

August 3, 2012

 

SNF

 

4,500,000

3,320,000

Friendship Haven Healthcare and Rehabilitation Center

 

Galveston County, TX

September 14, 2012

 

SNF

 

15,000,000

11,054,000

Pacific Health and Rehabilitation Center

 

Tigard, OR

December 24, 2012

 

SNF

 

8,140,000

5,534,000

Brookstone of Aledo

 

Aledo, IL

July 2, 2013

 

AL

 

8,625,000

6,426,000

Sundial Assisted Living

 

Redding, CA

December 18, 2013

 

AL

 

3,500,000

3,612,000

Pennington Gardens

 

Chandler, AZ

July 17, 2017

 

AL/MC

 

13,400,000

9,835,000

Yucaipa Hill Post Acute

Yucaipa, CA

July 2, 2021

SNF

10,715,000

8,014,000

Creekside Post Acute

Yucaipa, CA

July 2, 2021

SNF

4,780,000

3,575,000

University Post Acute

Mentone, CA

July 2, 2021

SNF

4,560,000

3,411,000

Total:

 

$

77,320,000

$

58,565,000

(1)SNF is an abbreviation for skilled nursing facility.

AL is an abbreviation for assisted living facility.

MC is an abbreviation for memory care facility.

Future Minimum Lease Payments

The future minimum lease payments to be received under our existing tenant operating leases (excluding the 30 properties owned by our unconsolidated Equity-Method Investments, our eight derecognized subsidiaries (see Note 14), and the two intercompany leases between our wholly-owned subsidiaries: Summit Chandler LLC and Pennington Gardens, and HP Redding LLC and Sundial) as of March 31, 2024, for the period from April 1, 2024 to December 31, 2024 and for each of the four following years and thereafter ending December 31 are as follows:

Years ending

    

April 1, 2024 to December 31, 2024

$

4,671,000

2025

 

6,332,000

2026

 

6,447,000

2027

 

6,564,000

2028

 

5,115,000

Thereafter

 

28,497,000

$

57,626,000

Impairment of Real Estate Properties

As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to their estimated fair values, or estimated fair value less selling costs, under certain circumstances.

No impairments were recorded during the three months ended March 31, 2024 and 2023.

10

4. Loans Payable

As of March 31, 2024 and December 31, 2023, our loans payable consisted of the following:

    

March 31, 2024

    

December 31, 2023

Loans payable to Lument (formerly ORIX Real Estate Capital, LLC) (insured by HUD) in monthly installments of approximately $183,000, including interest, ranging from a fixed rate of 2.79% to 4.2%, due in September 2039 through April 2055, and collateralized by Sheridan, Fernhill, Pacific Health, Aledo, Sundial and Friendship Haven.

$

33,730,000

$

33,984,000

Loan payable to Capital One Multifamily Finance, LLC (insured by HUD) in monthly installments of approximately $49,000, including interest at a fixed rate of 4.23%, due in September 2053, and collateralized by Pennington Gardens.

9,835,000

9,877,000

Loan payable to CIBC Bank, USA in monthly installments of approximately of $147,000 including cash collateral fund payments, variable interest rate (9.4% at March 31, 2024 and December 31, 2023), due in July 2024, and, collateralized by Yucaipa Hill Post Acute, Creekside Post Acute and University Post Acute (“CA3 Properties”). See Note 3 for additional information.

15,000,000

15,000,000

 

58,565,000

58,861,000

Less debt issuance costs

 

(1,705,000)

(2,682,000)

Total loans payable

$

56,860,000

$

56,179,000

As of March 31, 2024, we have total debt obligations of approximately $58.6 million that will mature between 2024 and 2055, in addition to the loans payable associated with GA8 Properties discussed below. See Note 3 for loans payable balance for each property. All of the loans payable have certain financial and non-financial covenants, including ratios and financial statement considerations. As of March 31, 2024, we were in compliance with all of our debt covenants except for the GA8 Properties (see below and Note 14 for further information).

During the three months ended March 31, 2024 and 2023, we incurred approximately $4.2 million and $3.9 million of interest expense, respectively, including interest expense related to the GA8 Properties and excluding debt issuance costs and amortization.

In connection with our loans payable, we incurred debt issuance costs. As of March 31, 2024 and December 31, 2023, the unamortized balance of the debt issuance costs was approximately $1.7 million and $2.7 million, respectively. These debt issuance costs are being amortized over the life of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For each of the three months ended March 31, 2024 and 2023, $0.2 million of debt issuance costs were amortized and included in interest expense in our condensed consolidated statements of operations.

The principal payments due on the loans payable (excluding debt issuance costs and loans payable associated with GA8 Properties) for the period from April 1, 2024 to December 31, 2024 and for each of the four following years and thereafter ending December 31 are as follows:

Principal

Years Ending

    

Amount

 

April 1, 2024 to December 31, 2024

$

15,905,000

2025

 

1,246,000

2026

 

1,292,000

2027

 

1,341,000

2028

 

1,390,000

Thereafter

 

37,391,000

$

58,565,000

11

GA8 Properties

In 2021, through our wholly-owned subsidiary and the parent holding company for the GA8 Properties, Summit Georgia Holdings LLC (“GA Holdco”), we acquired eight skilled nursing facilities located in Georgia (collectively, the “GA8 Properties”). The GA8 Properties were financed with a $91.0 million first priority mortgage loan with CIBC collateralized by those properties, a $20.0 million subordinated term loan with Oxford Financing LLC (“Oxford”) collateralized by those properties and a $12.75 million mezzanine loan with Oxford secured by the equity interests of the GA Holdco.

During 2023 and as of March 31, 2024, we have been out of compliance with respect to our debt covenants for our GA8 Properties due to the tenants’ EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) default and from our continuing failure to pay the full and timely interest payments due on the mezzanine loan from October 2023 to April 2024, and for the subordinated term loan from January 2024 through April 2024. Oxford had previously agreed to defer a portion of our interest payments on the mezzanine loan for October and November 2023. As of March 31, 2024 and December 31, 2023, the outstanding interest due on the mezzanine loan is approximately $1.1 million and $0.6 million, respectively. As of March 31, 2024 and December 31, 2023, the outstanding interest due on the subordinated term loan is approximately $1.0 million and $0.3 million, respectively. All interest and principal payments to CIBC have been made timely.

On March 13, 2024, we received a notice of default from Oxford, dated March 12, 2024, for the mezzanine loan primarily based on the non-compliance noted above, whereby Oxford exercised certain rights, including, their right to act as attorney-in-fact of GA8 HoldCo, and appointed an independent manager over the GA8 Properties, thereby removing the Company as the manager and removing the Company’s voting rights and rights to receive any distributions with respect to such properties. The Oxford notice of default also constitutes an event of default under the GA8 Properties subordinated term loan with Oxford and the first priority mortgage loan with CIBC. On May 7, 2024, we received a notice of default and reservation of rights letter from CIBC. There were no actions taken by this notice. See Note 14 for further information regarding the derecognition of the GA8 Properties and related debt.

12

As of March 31, 2024 and December 31, 2023, loans payable associated with GA8 Properties consisted of the following:

    

March 31, 2024

    

December 31, 2023

Loan payable to CIBC Bank, USA in monthly installments of approximately $850,000 (including interest and principal) variable interest rate (8.8% at March 31, 2024 and December 31, 2023), due in December 2024, and collateralized by Calhoun Health Center, Maple Ridge Health Care Center, Chatsworth Health Care Center, East Lake Arbor, Fairburn Health Care Center, Grandview Health Care Center, Rosemont at Stone Mountain, and Willowwood Nursing Center & Rehab (“GA8 Properties”). See Note 14 for additional information.

 

90,530,000

 

91,000,000

Loan payable to Oxford Finance, LLC in monthly installments of approximately $260,000 (interest only through maturity), variable interest rate (16.4% at March 31, 2024 and December 31, 2023, respectively) due in March 2025, collateralized in second position by the GA8 Properties. See Note 14 for additional information.

 

20,000,000

 

20,000,000

Mezzanine Loan payable to Oxford Finance, LLC in monthly installments of approximately $168,000 (interest only through maturity), variable interest rate (16.4% at March 31, 2024 and December 31, 2023, respectively) due in December 2026, secured by the equity interests of our wholly-owned subsidiary, Summit Georgia Holdings LLC, the parent holding company for the GA8 Properties. See Note 14 for additional information.

12,750,000

12,750,000

Total loans payable associated with GA8 Properties

$

123,280,000

$

123,750,000

HUD-insured loans

We have six properties with HUD-insured loans from Lument Capital (formerly ORIX Real Estate Capital, LLC) and one property with a HUD-insured loan from Capital One Multifamily Finance, LLC. See table above listing loans payable for further information.

All of the HUD-insured loans are subject to customary representations, warranties and ongoing covenants and agreements with respect to the operation of the facilities, including the provision for certain maintenance and other reserve accounts for property tax, insurance, and capital expenditures, with respect to the facilities all as described in the HUD agreements. These reserves are included in restricted cash in our condensed consolidated balance sheets.

Master Letter of Credit Agreement

In June 2023, we entered into $1.0 million Master Letter of Credit Agreement with CIBC. As of March 31, 2024, there are no outstanding letters of credit under this agreement.

5. Equity-Method Investments

As of March 31, 2024 and December 31, 2023, the balances of our Equity-Method Investments were approximately $1.6 million and $2.9 million, respectively, and are as follows:

Summit Union Life Holdings, LLC

The SUL JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the SUL JV (the “SUL LLC Agreement”).

Under the SUL LLC Agreement, net operating cash flow of the SUL JV is distributed monthly, first to the Operating Partnership and Best Years pari passu up to a 9% to 10% annual return, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds from the sale of the properties held by the SUL JV, a refinancing or another capital event will be paid first to the Operating Partnership and Best Years pari passu until each has received an amount equal to its accrued but unpaid 9% to 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.

13

For the three months ended March 31, 2024 and 2023, we invested approximately $0 and $156,000, respectively, related to capital calls for the SUL JV. In March 2024, the SUL JV sold one property for a gain of $7.7 million. We recorded our 10% share of the gain of approximately $0.8 million in income from equity-method investees in the condensed consolidated statements of operations for the three months ended March 31, 2024 and recorded distributions receivable from the sale of approximately $1.9 million, which is included in tenant and other receivables in the condensed consolidated balance sheet as of March 31, 2024. Additionally, in April 2024, we received approximately $1.9 million in cash for the distributions receivable.

As of March 31, 2024 and December 31, 2023, the balance of our equity-method investment related to the SUL JV was approximately $0.6 million and $1.8 million, respectively.

Summit Fantasia Holdings II, LLC

The Fantasia II JV will exist until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia II JV (the “Fantasia II LLC Agreement”). All capital proceeds from the sale of the properties held by the Fantasia II JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 8% return plus its total capital contribution, and thereafter 70% to Fantasia and 30% to the Operating Partnership.

In June 2023, the tenant for the two properties in the Fantasia II JV filed for receivership. The two properties are currently being operated by the receivership estate in conjunction with a third-party manager under a one-year management agreement. As of March 31, 2024, there has been no termination of the tenant leases and the Fantasia II JV is currently communicating with the receiver regarding ongoing lease terms and payments. The Fantasia II JV has not received any rent payments since May 2023. In September 2023, due to the ongoing issues with the receivership, we determined the fair value of our investment in the Fantasia II JV to be impaired and recorded a $0.5 million impairment charge. However, due to our intention to fund a capital call in 2024, we are recording our share of the Fantasia II JV losses.

As of March 31, 2024 and December 31, 2023, due to the losses incurred in the Fantasia II JV, the negative balance of our equity-method investment related to the Fantasia II JV was approximately ($0.2) million and ($0.1) million, respectively.

Summit Fantasia Holdings III, LLC

The Fantasia III JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the Fantasia III JV (the “Fantasia III LLC Agreement”).

Under the Fantasia III LLC Agreement, net operating cash flow of the Fantasia III JV is distributed monthly, first to the Operating Partnership and Fantasia pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 75% to Fantasia and 25% to the Operating Partnership. All capital proceeds from the sale of the properties held by the Fantasia III JV, a refinancing or another capital event, will be paid first to the Operating Partnership and Fantasia pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 75% to Fantasia and 25% to the Operating Partnership.

On May 1, 2024, the Fantasia III JV sold the eight properties and therefore as of May 2, 2024, we no longer have an equity-method investment in the Fantasia III JV. See Note 15 for further information.

As of March 31, 2024 and December 31, 2023, the balance of our equity-method investment related to the Fantasia III JV was approximately $1.2 million.

Summit Fantasy Pearl Holdings, LLC

The FPH JV will continue until an event of dissolution occurs, as defined in the limited liability company agreement of the FPH JV (the “FPH LLC Agreement”).

Under the FPH LLC Agreement, net operating cash flow of the FPH JV is distributed monthly, first to the members pari passu until each member has received an amount equal to its accrued, but unpaid 9% return, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia and 20% to the Operating Partnership. All capital proceeds from the sale of the properties held by the FPH JV, a

14

refinancing or another capital event, will be paid to the members pari passu until each has received an amount equal to its accrued but unpaid 9% return plus its total capital contribution, and thereafter 65.25% to Fantasy, 7.5% to Atlantis, 7.25% to Fantasia, and 20% to the Operating Partnership.

As of March 31, 2024 and December 31, 2023, the balance of our equity-method investment related to the FPH JV was $0.

Distributions from Equity-Method Investments

As of March 31, 2024 and December 31, 2023, we have distributions receivable, which are included in tenant and other receivables in our condensed consolidated balance sheets, as follows:

March 31, 

December 31, 

    

2024

    

2023

SUL JV

$

2,131,000

(1)

$

311,000

Fantasia II JV

 

30,000

30,000

Fantasia III JV

 

111,000

87,000

FPH JV

 

64,000

64,000

Total

$

2,336,000

$

492,000

(1)Included in the SUL JV distributions receivable are proceeds from the sale of a property in March 2024 for approximately $1.9 million for which the cash was received in April 2024.

For the three months ended March 31, 2024 and 2023, we have received cash distributions, which are included in our cash flows from operating activities in tenant and other receivables, and cash flows from investing activities, as follows:

Three months Ended March 31, 2024

Three months Ended March 31, 2023

Cash Flow

Cash Flow

Cash Flow

Cash Flow

Total Cash 

from

from

Total Cash 

from

from

Distributions

Operating

Investing

Distributions

Operating

Investing

    

Received

    

Activities

    

Activities

    

Received

    

Activities

    

Activities

SUL JV

$

159,000

$

159,000

$

$

134,000

$

42,000

$

92,000

Fantasia II JV

 

80,000

57,000

23,000

Fantasia III JV

 

12,000

12,000

FPH JV

 

Total

$

159,000

$

159,000

$

$

226,000

$

111,000

$

115,000

Asset Management Fees

We serve as the manager of our Equity-Method Investments and provide management services in exchange for fees and reimbursements. As the manager, we are paid an annual asset management fee for managing the properties held by our Equity-Method Investments, as defined in those agreements. For the three months ended March 31, 2024 and 2023, we recorded approximately $0.1 million and $0.2 million, respectively, in asset management fees from our Equity-Method Investments.

6. Receivables

Tenant and Other Receivables, Net

Tenant and other receivables, net consists of:

March 31, 

December 31, 

    

2024

    

2023

Straight-line rent receivables

$

1,461,000

$

1,396,000

Distribution receivables from Equity-Method Investments (see Note 5)

 

2,336,000

492,000

Asset management fees

 

230,000

327,000

Other receivables

 

346,000

375,000

Total

$

4,373,000

$

2,590,000

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7. Related Party Transactions Equity-Method Investments

See Notes 5 and 6 for further discussion of distributions and asset management fees related to our Equity-Method Investments.

8. Intangible Lease Assets

As of March 31, 2024, the table below includes intangible lease assets related to our consolidated real estate properties and excludes our eight derecognized real estate properties (see Note 14). As of December 31, 2023, the table below includes intangible lease assets related to our consolidated real estate properties.

Intangible lease assets are as follows:

    

March 31, 

    

December 31, 

2024

2023

In-place leases

$

526,000

$

12,680,000

Less: accumulated amortization

 

(97,000)

(1,831,000)

In-place leases, net

 

429,000

10,849,000

Above-market leases

 

959,000

959,000

Less: accumulated amortization

 

(175,000)

(155,000)

Above-market leases, net

 

784,000

804,000

Total intangible lease assets, net

$

1,213,000

$

11,653,000

For each of the three months ended March 31, 2024 and 2023, amortization expense for intangible lease assets was approximately $0.2 million of which approximately $0.02 million relates to the amortization of above market leases which is included within rental revenues in the accompanying condensed consolidated statements of operations.

Expected future amortization of the intangible lease assets as of March 31, 2024, for the period from April 1, 2024 to December 31, 2024 and for each of the four following years and thereafter ending December 31 are as follows:

Years ending December 31, 

    

    

April 1, 2024 to December 31, 2024

$

75,000

2025

 

99,000

2026

 

99,000

2027

 

99,000

2028

 

99,000

Thereafter

 

742,000

$

1,213,000

9. Right of Use (ROU) Asset - Operating

In November 2022, we entered into an operating lease for office space (“Office Lease”) for a period of sixty-six (66) months, with a five-year renewal option. The office space subject to the Office Lease is located in Laguna Hills, California. The Office Lease provides for the abatement of the base rent for the second full calendar month (January 2023) through the seventh full calendar month of the lease term (June 2023). The initial annual base rent is $204,399 and increases three percent (3%) each year on the anniversary date of the commencement of the Office Lease.

The Office Lease is classified as an operating lease. A “right to use” or “ROU asset” represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Office Lease did not provide an explicit rate of interest; therefore we used an estimated incremental borrowing rate of 5% based on a fully collateralized and fully amortizing loan with a maturity date of the same length as the lease that is based on information available at the commencement date in determining the present value of lease payments. The Office Lease does not contain material residual value guarantees or material restrictive covenants.

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Supplemental balance sheet information related to the Office Lease are as follows:

Component

    

Consolidated Balance Sheet Caption

    

March 31, 2024

    

December 31, 2023

Right of use asset - operating

 

Other assets, net

$

664,000

$

698,000

Lease liability - operating

 

Accounts payable and accrued liabilities

$

835,000

$

877,000

Lease expense is presented as part of continuing operations within general and administrative expenses in the condensed consolidated statements of operations. For the three months ended March 31, 2024 and 2023, we recognized approximately $46,000 and $45,000, respectively, in lease expense. The lease payments are classified within operating activities in the consolidated statements of cash flows. As of March 31, 2024 and 2023, we paid approximately $53,000 and $0, respectively, in lease payments and the weighted average remaining lease term is 4.0 years.

Lease payments on the Office Lease for the period from April 1, 2024 to December 31, 2024 and for each of the four following years and thereafter ending December 31 are as follows:

Year

    

Lease payments

April 1, 2024 to December 31, 2024

$

158,000

2025

 

217,000

2026

 

224,000

2027

 

231,000

2028

 

99,000

Total lease payments

$

929,000

Less imputed interest

 

(94,000)

Total lease liability

$

835,000

10. Concentration of Risk

As of March 31, 2024, we owned eight properties in Georgia (see Note 14), four properties in California, three properties in Oregon, one property in Texas, one property in Illinois, and one property in Arizona (excluding the 30 properties held by our Equity-Method Investments). Accordingly, there is a geographic concentration of risk subject to economic conditions in certain states.

For the three months ended March 31, 2024, we leased our 16 real estate properties to 14 different tenants under long-term triple net leases, and four of the 14 tenants each represented more than 10% of our rental revenue. For the three months ended March 31, 2023, we leased our 16 real estate properties to 14 different tenants under long-term triple net leases, and three of the 14 tenants each represented more than 10% of our rental revenue.

As of March 31, 2024, our GA8 Properties are considered to be a significant asset concentration as the aggregate net assets of the GA8 Properties were greater than 20% of our total assets due to cross-default provisions in the leases.

For further information regarding our treatment of the GA8 Properties, see Note 14.

11. Fair Value Measurements of Financial Instruments

Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, tenant and other receivables, certain other assets, accounts payable and accrued liabilities, security deposits and loans payable. With the exception of the loans payable discussed below, we consider the carrying values to approximate fair value (categorized within Level 1 of the fair value hierarchy) for such financial instruments because of the short period of time between origination of the instruments and their expected payment.

As of March 31, 2024 and December 31, 2023, the fair value of our HUD-insured loans payable was $36.2 million and $36.4 million, compared to the principal balance (excluding debt discount) of $43.6 million and $43.9 million, respectively. The fair value of loans payable was estimated using lending rates available to us for financial instruments with similar terms and maturities. The fair value of our fixed and variable rate loans payable was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As the inputs to our valuation

17

estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 liability within the fair value hierarchy.

As of March 31, 2024 and December 31, 2023, we believe the carrying amounts of our variable rate loans payable are reasonably estimated at their carrying amounts as there have been minimal changes to the fixed spread portion of interest rates for similar loans observed in the market, and as the variable portion of our interest rates fluctuate with the associated market indices. We believe the fair value of our variable rate mezzanine loan payable, which is currently in default, approximates the carrying amount based on the contractual rights of the mezzanine loan payable holders.

As of March 31, 2024 and December 31, 2023, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our condensed consolidated financial statements.

12. Commitments and Contingencies

We inspect our properties under a Phase I assessment for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our commitments and contingencies include the usual obligations of real estate owners and licensed operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also subject to contingent losses resulting from litigation against the Company.

18

Legal Proceedings

HCRE

In September 2015, a bankruptcy petition was filed against Healthcare Real Estate Partners, LLC (“HCRE”) by the investors in Healthcare Real Estate Fund, LLC and Healthcare Real Estate Qualified Purchasers Fund, LLC (collectively, the “Funds”). HCRE did not timely respond to the involuntary petition and the Bankruptcy Court entered an Order of Relief making HCRE a debtor in bankruptcy. As a result, HCRE was removed as manager under the Funds’ operating agreement. Thereafter the Company became the manager of the Funds and purchased the investors’ interests in the Funds for approximately $0.9 million. Following the subsequent dismissal of the involuntary bankruptcy petition filed against it, HCRE filed a motion for attorneys’ fees and damages and a separate complaint for violation of the automatic stay against the petitioning creditors and the Company in the United States Bankruptcy Court of the District of Delaware. The Bankruptcy Court granted a motion to dismiss the complaint for violation of the automatic stay filed jointly by the petitioning creditors and us, and dismissed the complaint with prejudice. HCRE appealed the Bankruptcy Court’s decision to the United States District Court for the District of Delaware which affirmed the Bankruptcy Court’s dismissal of the complaint in a decision dated September 9, 2018. On October 11, 2018, HCRE appealed the District Court’s decision affirming the Bankruptcy Court’s dismissal of the complaint to the United States Court of Appeals for the Third Circuit. On October 22, 2019, the Third Circuit granted HCRE’s appeal, reversing the District Court and holding that HCRE could assert the adversary complaint seeking damages for violation of the automatic stay. The Company filed a Petition for Rehearing on November 5, 2019 asserting that HCRE is not entitled to assert a claim for damages for violation of the automatic stay. This Petition was denied and the mandate was issued sending the matter back to the Bankruptcy Court. The Bankruptcy Court held a status conference on February 4, 2021, and subsequently entered scheduling orders to govern discovery and pretrial matters. The parties filed dispositive motions, including a motion filed by the Company and the petitioning creditors for judgment on the pleadings. On February 4, 2022, the Bankruptcy Court entered an order denying the motion for judgment on the pleadings on the basis that the Bankruptcy Court would consider the points raised therein after trial. The Bankruptcy Court also entered an order denying HCRE’s motion to dismiss certain counterclaims and severing certain other counterclaims asserted by the petitioning creditors and the Company against HCRE on jurisdictional grounds, with the effect that such counterclaims may be pursued in the United States District Court. Trial in the Bankruptcy Court was conducted on January 9 and 10, 2023, with final concluding arguments presented on January 19, 2023. On May 12, 2023, the Court issued an opinion to award the plaintiffs $75,000 for reimbursement of legal fees related to the filing of the involuntary bankruptcy petition plus $517,000 for reimbursement of attorney’s fees related to the stay violation. Several additional motions have been filed and were heard in September 2023. On November 14, 2023, the Bankruptcy Court entered a further Memorandum Opinion, which modified the award for reimbursement of attorneys’ fees for the stay violation from $517,000 to $665,000. The Bankruptcy Court entered an Order and Judgment with respect to the amounts set forth above on May 2, 2024. The Company also filed a notice of appeal with respect to the $664,637 fee award, which appeal remains pending. The Company has also asserted counterclaims against HCRE, which are pending in the Delaware District Court, and which are stayed pending a final determination of the matters addressed in the Bankruptcy Court, including the appeal. Based on the assessment by management, as of March 31, 2024, the Company has accrued $75,000 for the reimbursement of legal fees related to the involuntary petition filing and $0 for the $665,000 in attorney’s fees related to the stay violation as we believe that a loss is currently not probable under Accounting Standards Codification 450, “Contingencies.”

Eikanas Dispute

On May 15, 2023, the Board of Directors of the Company sent Kent Eikanas, the then-Chief Executive Officer, written notice of various deficiencies in his performance , thereby initiating the 60-day cure period required by Mr. Eikanas’ Amended and Restated Employment Agreement, dated October 19, 2021. On July 14, 2023 (the “Termination Date”), the Board of Directors (the “Board”) of the Company terminated, for cause, Mr. Eikanas from his position as Chief Executive Officer and Secretary of the Company, after Mr. Eikanas was given written notice of and failed to cure various deficiencies in his performance following the expiration of a 60-day cure period. Per the terms of his employment agreement, upon Mr. Eikanas’ termination for cause, Mr. Eikanas is also deemed to have resigned, as of the Termination Date, from all positions with the Company and its subsidiaries, the Board and any boards of directors or managers of any of Company’s subsidiaries and affiliates.

On June 5, 2023, Mr. Eikanas filed a lawsuit against the Company in the Superior Court of California for, among other things, w