Impact of COVID-19 Pandemic
The extent to which the COVID-19 pandemic impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future, including but not limited to, the following:
? Our operating revenues and our triple-net operators’ revenues are dependent on
occupation. Declines in occupancy are expected due to heightened move-in
criteria and screening, as well as increased mortality rates among seniors. In
addition, increased expenses are expected to continue until the pandemic
subsidies. Such factors may impact our triple-net operator’s ability to pay rent
and contractual obligations. Furthermore, various local and state stay at home
orders and the temporary closure of certain medical practices as a result may
impact our medical office building tenants’ ability to pay rent. These factors
may cause operators or tenants to seek modifications of such obligations,
resulting in reductions in revenue and increases in uncollectible receivables.
20
? Assessing properties for potential impairment involves subjectivity in
determining if impairment indicators are present and in estimating the future
undiscounted cash flows or estimated fair value of the asset. Key assumptions
are made in this assessment and drive conclusions include the estimation of
future rental revenues, operating expenses, capitalization rates and the
ability and intent to hold the respective asset. All of these assumptions are
significantly affected by our expectations of future market or economic
conditions and can be highly impacted by the uncertainty of the COVID-19
pandemic.
? The determination of the allowance for credit losses is based on our evaluation
of collectability of our loans receivable and includes review of factors such
as delinquency status, historical loan charge-offs, financial strength of the
borrower and guarantors and the value of the underlying collateral. Reduced
economic activity severely impacts our borrowers’ businesses, financial
conditions and liquidity and may hinder their ability to make contractual
payments to us, leading to an increase in loans deemed to have deteriorated
credit which could result in an increase in the provision for loan losses.
RESULTS OF OPERATIONS Rental revenue for the year endedDecember 31, 2021 , totaled$626,808 , compared to$2,112,459 for the year endedDecember 31, 2020 , a decrease of$1,485,651 . The Company also had Healthcare revenue of$26,921,547 for the year endDecember 31, 2021 , an increase of$9,485,500 , compared to$17,436,047 for the year endedDecember 31, 2020 . The Company also had Healthcare Grant revenue of$1,514,728 for the year endDecember 31, 2021 , an increase of$134,536 , compared to$1,380,192 for the year endedDecember 31, 2020 . Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease. Management Revenue for the year endedDecember 31, 2021 , totaled$224,143 , compared to$0 for the year endedDecember 31, 2020 . General and administrative expenses were$5,911,934 for the year endedDecember 31, 2021 , compared to$2,088,722 for the year endedDecember 31, 2020 , an increase of$3,823,212 . This increase can be attributed to the Company operating more facilities, with the addition of the administration expenses within those operations. The Company expects general and administrative expenses will continue to increase as management assumes more operations. Property taxes, insurance, and other operating expenses totaled$21,473,397 and$13,384,322 for the years endedDecember 31, 2021 , and 2020, respectively, an increase of$8,089,075 . Operating expenses increased primarily as a result of operating three additional facilities, as well as increased costs due to the COVID-19 pandemic. Expenses related to the provision for bad debt were$897,538 for the year endedDecember 31, 2021 , and$292,529 for the year endedDecember 31, 2020 , a increase of$605,009 . This increase is due to the Company's growth in healthcare revenue which also increased the provision for bad debt expense.
Depreciation and amortization expense totaled
The Company had$2,497,893 of interest expense for the year endedDecember 31, 2021 , and$2,139,901 interest expense for the year endedDecember 31, 2020 . This increase is related to an increase in notes on new properties compared to the same period last year. 21
For the year endedDecember 31, 2021 , we recorded loss on extinguishment of debt of$65,623 compared to a gain of$1,727,349 for the year endedDecember 31, 2020 . During 2021, the Company recorded an aggregate gain on extinguishment of debt of$675,598 in connection with the forgiveness of the entire balance of principal and accrued interest on the remaining PPP loan. The Company recorded an aggregate gain on extinguishment of debt in 2020 of$1,619,849 in connection with the forgiveness of the entire balance of principal and accrued interest on two of its three PPP loans and the likely forgiveness of the third. Additionally, in 2020 the Company recorded an aggregate gain on extinguishment of debt of$107,500 in connection with the purchase from certain former investors inGWH Investors, LLC their notes in favor ofGoodwill Hunting, LLC .
The Company had
LIQUIDITY AND CAPITAL RESOURCES
Through its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities. AtDecember 31, 2021 , the Company had cash and cash equivalents of$3,939,445 and restricted cash of$853,656 . Our restricted cash is to be expended on insurance, taxes, repairs, and capital expenditures associated with Providence ofSparta Nursing Home ,ATL/Warr, LLC andSouthern Tulsa TLC, LLC . Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from rental revenues received and existing cash on hand. We plan to renew secured obligations that mature during 2022, as our projected cash flow from operations will be insufficient to retire the debt. Cash used in operating activities was$270,930 for the year endedDecember 31, 2021 , compared to cash provided by operating activities of$2,734,207 for the year endedDecember 31, 2020 .
Cash used in investing activities was$519,575 for the year endedDecember 31, 2021 , compared to cash used in investing activities of$1,572,818 for the year endedDecember 31, 2020 . Cash provided by financing activities was$1,605,955 for the year endedDecember 31, 2021 , compared to cash provided by financing activities of$1,824,401 for the year endedDecember 31, 2020 . This resulted from proceeds from a PPP loan and private placement during the year endedDecember 21, 2021 . During 2020, we made payments on debt of$1,352,300 and received proceeds from issuance of debt of$3,265,448 . During 2021 we made payments on debt of$8,023,719 and received proceeds from issuance of debt of$9,134,102 . In accordance with ASU 2014-15 management believes the Company has sufficient liquidity and capital resources to maintain ongoing operations. This is, in part due to positive changes to cash flows, refinancing debt to more favorable terms, the forgiveness of our CARES Act loans, and the optimization of our operations in many of our current facilities. 22 As ofDecember 31, 2021 , and 2020, our debt balances consisted of the following:December 31, 2021 December 31, 2020
Senior Secured Promissory Notes $ 1,305,000 $ 1,695,000 Senior Secured Promissory Notes - Related Parties 750,000
975,000 Fixed-Rate Mortgage Loans 31,407,503 30,370,220 Variable-Rate Mortgage Loans 5,063,841 5,650,579
Other Debt, Subordinated Secured 741,000 741,000
Other Debt, Subordinated Secured - Related Parties 150,000 150,000
Other Debt, Subordinated Secured - Seller Financing 93,251 125,394
39,510,595 39,707,193
Unamortized Discount and Debt Issuance Costs (1,243,071 ) (455,827 )
$ 38,267,524 $ 39,251,366
As presented in the Consolidated Balance Sheets:
Current Maturities of Long Term Debt, Net $ 6,312,562 $ 19,299,156
Short term debt - Related Parties, Net 150,000
1,121,766 Debt, Net 31,054,962 18,830,444 Debt - Related Parties, Net 750,000 -
The weighted average interest rate and term of our fixed rate debt are 3.53% and 15.25 years, respectively, as of
23
Mortgage Loans and Lines of Credit Secured by Real Estate
Mortgage loans and other debts such as lines of credit are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee ofChristopher Brogdon , a formerly but no longer related party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following: Number of Total Face December 31, December 31, State Properties Amount 2021 2020 Arkansas(1) 1$ 5,000,000 $ 4,058,338 $ 4,618,006 Georgia 5$ 17,765,992 $ 16,581,283 $ 17,029,094 Ohio 1$ 3,000,000 $ 2,728,599 $ 2,798,000 Oklahoma(2)(3) 6$ 12,129,769
13 $ 37,895,761
(1) The mortgage loan collateralized by this property is 80% guaranteed by the
31 of each year. Guarantors under the mortgage loan include Christopher
Brogdon.
payments of principal and interest on the loan on our behalf in lieu of
paying rent on the facility to us, until a formal lease can be put in place.
During the year ended
of
(2) The Company has refinanced two of its mortgages that would have matured in
June and October of 2021 amounting to
their maturity dates to
(3) The Company refinanced all three mortgages in
matured in June and July of 2021 amounting to
Additionally, the Company has refinanced the primary mortgage at the Southern
Hills Campus, for 35 years at 2.38%.
Subordinated, Corporate, and Other Debt
Other debt due atDecember 31, 2021 and 2020 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties. Principal Outstanding at Stated December 31, December 31, Interest Property Face Amount 2021 2020 Rate Maturity Date 13% Goodwill Nursing Home$ 2,030,000 $ 741,000 $ 741,000 Fixed 31-Dec-19 Goodwill Nursing Home - 13% Related Party$ 150,000 $ 150,000 $
150,000 Fixed
Higher Call Nursing Center
$ 2,330,000 $ 984,251 $ 1,016,394
24
Our corporate debt at December 31, 2021 and December 31, 2020 includes unsecured
notes and notes secured by all assets of the Company not serving as collateral
for other notes.
Principal Outstanding at
Stated
Face December 31, December 31, Interest
Series Amount 2021 2020 Rate Maturity Date
10% Senior Secured 10.0% Promissory Note$ 25,000 $ -$ 25,000 Fixed 31-Dec-18 10% Senior Secured 10.0% Promissory Notes 1,670,000 1,230,000 1,670,000 Fixed 30-Jun-23 10% Senior Secured
Promissory Notes - Related
10.0%
Party 975,000 750,000 975,000 Fixed 30-Jun-23
$ 2,670,000 $ 1,980,000 $ 2,670,000
Contractual Obligations
As of
Less Than More Than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Notes Payable - Principal $ 41,200,007 $ 8,531,185 $ 8,303,456 $ 4,903,847 $ 19,461,519
Notes Payable - Interest 6,014,312 1,278,288 1,390,163 772,087 2,573,775
Total Contractual Obligations
We have$9,800,000 of debt maturing and expect principal reduction payments of approximately$8,500,000 in the year endingDecember 31, 2022 . While we anticipate being able to refinance all the loans at reasonable market terms upon maturity, inability to do so may impact our financial position and results of operations. We expect to refinance all loans maturing in 2022 as the associated properties meet loan to value requirements currently being employed in commercial lending. See the consolidated financial statements included elsewhere in this Form 10-K for additional debt details. Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand and revenues generated from operations are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations at Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.
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SUMMARY OF CRITICAL ACCOUNTING POLICIES
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions. Property Acquisitions We allocate the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence period. Acquisition-related costs such as due diligence, legal and accounting fees are included in the purchase price. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Business Acquisitions Upon acquisition of business entities and real estate determined to be a business combination, the Company identifies and recognizes the net tangible and identified intangible assets based on fair values, and net assets as goodwill or gain on bargain purchase. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing, leasing, and or operating at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year
from the date of acquisition.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition, and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties using standard industry valuation techniques.Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets.Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value. Revenue Recognition The Company recognizes revenue in accordance with ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," including subsequently issued updates. Under the accounting guidance our revenues are presented net of estimated allowances, and we no longer present the provision for doubtful accounts as a separate line item on our balance sheet. The Company reviews its calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing for the uncollectible portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly with a greater emphasis given to current trends. This calculation is routinely analyzed by the Company based on actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed. Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, and Medicaid) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare, and Medicaid). Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care are based upon the payment terms specified in the related contractual agreements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the "cost report" filing and settlement process). The collection of outstanding receivables for Medicare, and Medicaid, is our primary source of cash and is critical to our operating performance. The primary collection risks relate to Medicaid pending patient accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management's assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and accounts receivable (the "hindsight analysis") as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and write off data. We believe our quarterly updates to the estimated contractual allowance amounts at each of our facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. In accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that are a direct reduction to net operating revenues. For the year endingDecember 31, 2021 the uncollectable amounts totaled$1,901,203 . During the year endedDecember 31, 2021 the Company recognized$1,514,728 , and$1,380,192 during the year endedDecember 31, 2020 in healthcare grant revenue. 26 Subsequent Events
InJanuary 2022 , as part of the debt conversion initiated inDecember 2021 , the Company converted an additional$355,000 of Senior preferred notes for 71,000 shares of common stock at$5.00 per share.
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