UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One) 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015March 31, 2016 
oTRANSITION 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
 
AdCare Health Systems, Inc.
(Exact name of registrant as specified in its charter) 
Georgia 31-1332119
(State or other jurisdiction
of incorporation)
 (I.R.S. Employer Identification Number)
 1145 Hembree Road, Roswell, GA 30076
(Address of principal executive offices)
 
(678) 869-5116
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
   
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
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, 2015April 30, 2016:  19,902,28319,948,534 shares of common stock, with no par value were outstanding.


Table of Contents



AdCare Health Systems, Inc.
 
Form 10-Q
 
Table of Contents
 
  
Page
 Number
Part I.
FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements (unaudited)
4
 
Consolidated Balance Sheets as of September 30, 2015March 31, 2016 (unaudited) and December 31, 20142015
4
 
Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (unaudited)
5
 
Consolidated Statement of Stockholders' Equity/(Deficit)Deficit for the ninethree months ended September 30, 2015March 31, 2016 (unaudited)
6
 
Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 (unaudited)
7
 
Notes to Consolidated Financial Statements (unaudited)
89
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3830
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4535
Item 4.
Controls and Procedures
4636
   
Part II.
OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
4737
Item 1A.
Risk Factors
4737
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4738
Item 3.
Defaults upon Senior Securities
4738
Item 4.
Mine Safety Disclosures
4739
Item 5.
Other Information
4739
Item 6.
Exhibits
4839
   
Signatures
5943

2
Table of Contents



Forward-Looking Statements
 
This Quarterly Report on Form 10-Q (this "Quarterly Report") and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Exchange Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Act"). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made. 
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future.  The Company’s actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company’s critical accounting policies and risks and uncertainties related to, but not limited to, the operating results of the Company's tenants, the overall industry environment regulatory delays, negative clinical results, and the Company’s financial condition.  These and other risks and uncertainties are described in more detail in the Company’s most recent Annual Report on Form 10-K, as well as other reports that the Company files with the SEC. 
Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company’s views as of any subsequent date.  The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with the SEC that discuss factors germane to the Company’s business.

3
Table of Contents



Part I.  Financial Information 
Item 1.  Financial Statements 
ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s)
 September 30, 
 2015		 December 31, 
 2014		 March 31, 
 2016		 December 31, 
 2015
 (Unaudited)   (Unaudited)  
ASSETS  
  
  
  
Current assets:  
  
  
  
Cash and cash equivalents $4,275
 $10,735
 $2,264
 $2,720
Restricted cash 8,265
 3,321
 5,403
 9,169
Accounts receivable, net of allowance of $13,048 and $6,708 10,991
 24,294
Accounts receivable, net of allowance of $11,276 and $12,487 8,558
 8,805
Prepaid expenses and other 5,318
 1,766
 3,425
 3,214
Deferred tax asset 569
 569
Assets of disposal group held for use —
 4,592
Assets of disposal group held for sale 4,989
 5,813
 1,237
 1,249
Assets of variable interest entity held for sale 5,918
 5,924
Total current assets 40,325
 57,014
 20,887
 25,157
Restricted cash 3,953
 5,456
Restricted cash and investments 3,485
 3,558
Property and equipment, net 127,758
 130,993
 124,835
 126,676
Intangible assets - bed licenses 2,471
 2,471
 2,471
 2,471
Intangible assets - lease rights, net 3,587
 4,087
 3,254
 3,420
Goodwill 4,183
 4,224
 4,183
 4,183
Lease deposits 1,812
 1,683
 1,414
 1,812
Deferred loan costs, net 3,389
 3,464
Other assets 2,690
 569
 2,714
 1,996
Total assets $190,168
 $209,961
 $163,243
 $169,273
LIABILITIES AND EQUITY / (DEFICIT)  
  
LIABILITIES AND DEFICIT  
  
Current liabilities:  
  
  
  
Current portion of notes payable and other debt $39,150
 $2,436
 $46,919
 $50,960
Current portion of convertible debt, net of discounts —
 14,000
Revolving credit facilities and lines of credit 842
 5,576
Accounts payable 11,247
 16,434
 7,046
 8,741
Accrued expenses 7,768
 15,653
 2,327
 3,125
Liabilities of disposal group held for use —

4,035
Liabilities of disposal group held for sale 4,008
 5,197
 949
 958
Liabilities of variable interest entity held for sale 5,871
 5,956
Total current liabilities 68,886
 69,287
 57,241
 63,784
Notes payable and other debt, net of current portion:  
  
  
  
Senior debt, net of discounts 68,491
 106,089
Bonds, net of discounts 6,899
 7,011
Convertible debt 9,200
 —
Revolving credit facilities —
 1,059
Senior debt, net 54,479
 54,742
Bonds, net 6,618
 6,600
Convertible debt, net 9,010
 8,968
Other debt, net 413
 531
Other liabilities 2,996
 2,129
 4,096
 3,380
Deferred tax liability 605
 605
 389
 389
Total liabilities 157,077
 186,180
 132,246
 138,394
Commitments and contingencies (Note 14) 
 
 
 
Preferred stock, no par value; 5,000 shares authorized; 2,203 and 950 shares issued and outstanding, redemption amount $55,084 and $23,750 at September 30, 2015 and December 31, 2014, respectively 50,119
 20,392
Preferred stock, no par value; 5,000 shares authorized; 2,614 and 2,427 shares issued and outstanding, redemption amount $65,346 and $60,273 at March 31, 2016 and December 31, 2015, respectively 58,391
 54,714
Stockholders’ equity:  
  
  
  
Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 19,838 and 19,151 issued and outstanding at September 30, 2015 and December 31, 2014, respectively 60,768
 61,896
Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 19,907 and 19,861 issued and outstanding at March 31, 2016 and December 31, 2015, respectively 61,126
 60,958
Accumulated deficit (74,572) (56,067) (88,520) (84,793)
Total stockholders’ equity / (deficit) (13,804) 5,829
Noncontrolling interest in subsidiary (3,224) (2,440)
Total equity / (deficit) (17,028) 3,389
Total liabilities and equity / (deficit) $190,168
 $209,961
Total stockholders’ deficit (27,394) (23,835)
Total liabilities and stockholders' deficit $163,243
 $169,273
 See accompanying notes to unaudited consolidated financial statements

4
Table of Contents



ADCARE HEALTH SYSTEMS, 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, Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
Revenues:  
  
  
  
  
  
Rental revenues $5,826
 $388
 $11,322
 $980
 $6,849
 $1,340
Patient care revenues 4,290
 4,359
 12,532
 12,621
Management revenues 218
 354
 692
 1,140
Other revenues 86
 —
 135
 —
Management fee and other revenues 233
 218
Total revenues 10,420
 5,101
 24,681
 14,741
 7,082
 1,558
            
Expenses:  
  
  
  
  
  
Cost of services (exclusive of facility rent, depreciation and amortization) 4,354
 4,168
 12,887
 10,964
General and administrative expense 2,101
 3,575
 7,782
 12,313
 2,542
 3,331
Facility rent expense 1,802
 385
 3,618
 1,044
 2,179
 487
Depreciation and amortization 1,912
 1,861
 5,385
 5,570
 1,713
 1,675
Salary retirement and continuation costs 21
 1,488
 (27) 2,770
Other expenses 203
 102
Total expenses 10,190
 11,477
 29,645
 32,661
 6,637
 5,595
            
Income (loss) from operations 230
 (6,376) (4,964) (17,920) 445
 (4,037)
            
Other income (expense):  
  
  
  
Other expense:  
  
Interest expense, net (1,830) (2,594) (6,600) (7,770) 1,825
 2,490
Acquisition costs —
 (8) —
 (8)
Loss on extinguishment of debt —
 (1,220) (680) (1,803) —
 680
Other expense (269) (444) (749) (635) 42
 288
Total other expense, net (2,099) (4,266) (8,029) (10,216) 1,867
 3,458
            
Loss from continuing operations before income taxes (1,869) (10,642) (12,993) (28,136) (1,422) (7,495)
Income tax benefit (expense) —
 244
 (20) 236
Income tax expense —
 20
Loss from continuing operations (1,869) (10,398) (13,013) (27,900) (1,422) (7,515)
            
Income (loss) from discontinued operations, net of tax (3,228) 6,850
 (2,694) 19,034
 (528) 2,266
Net loss (5,097) (3,548) (15,707) (8,866) (1,950) (5,249)
            
Net loss attributable to noncontrolling interests 285
 218
 784
 548
 —
 230
Net loss attributable to AdCare Health Systems, Inc. (4,812) (3,330) (14,923) (8,318) (1,950) (5,019)
            
Preferred stock dividends (1,498) (646) (3,582) (1,938) (1,777) (646)
Net loss attributable to AdCare Health Systems, Inc. Common Stockholders $(6,310) $(3,976) $(18,505) $(10,256) $(3,727) $(5,665)
            
Net income (loss) per share of common stock attributable to AdCare Health Systems, Inc.  
  
  
  
Basic:  
  
  
  
Continuing operations $(0.17) $(0.61) $(0.84) $(1.70)
Discontinued operations (0.15) 0.39
 (0.10) 1.12
 $(0.32) $(0.22) $(0.94) $(0.58)
        
Diluted:  
  
  
  
Net loss (income) per share of common stock attributable to AdCare Health Systems, Inc.  
  
Basic and diluted:  
  
Continuing operations $(0.17) $(0.61) $(0.84) $(1.70) $(0.16) $(0.42)
Discontinued operations (0.15) 0.39
 (0.10) 1.12
 (0.03) 0.13
 $(0.32) $(0.22) $(0.94) $(0.58) $(0.19) $(0.29)
            
Weighted average shares of common stock outstanding:  
  
  
  
  
  
Basic 19,838
 18,134
 19,617
 17,539
Diluted 19,838
 18,134
 19,617
 17,539
Basic and diluted 19,885
 19,218

 See accompanying notes to unaudited consolidated financial statements

5
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY / (DEFICIT)DEFICIT
(Amounts in 000’s)
(Unaudited)

  Shares of Common Stock Common Stock and Additional
Paid-in
Capital		 Accumulated
Deficit		 Noncontrolling
Interest in Subsidiary		 Total
Balances, December 31, 2014 19,151
 $61,896
 $(56,067) $(2,440) $3,389
           
Stock-based compensation expense —
 677
 —
 —
 677
           
Option and warrant activity, net of shares withheld 527
 1,471
 —
 —
 1,471
           
Issuance of restricted stock, net 160
 —
 —
 —
 —
           
Common stock dividends —
 (3,276) —
 —
 (3,276)
           
Preferred stock dividends —
 —
 (3,582) —
 (3,582)
           
Net loss —
 —
 (14,923) (784) (15,707)
Balances, September 30, 2015 19,838
 $60,768
 $(74,572) $(3,224) (17,028)
  Shares of Common Stock Common Stock and Additional
Paid-in
Capital		 Accumulated
Deficit		 Total
Balances, December 31, 2015 19,861
 $60,958
 $(84,793) $(23,835)
         
Stock-based compensation —
 480
 —
 480
         
Common stock repurchase program (150) (312) —
 (312)
         
Issuance of restricted stock 196
 —
 —
 —
         
Preferred stock dividends —
 —
 (1,777) (1,777)
         
Net loss —
 —
 (1,950) (1,950)
Balances, March 31, 2016 19,907
 $61,126
 $(88,520) $(27,394)
 
See accompanying notes to unaudited consolidated financial statements

6
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in 000's)
 Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2016 2015
Cash flows from operating activities:  
  
  
  
Net loss $(15,707) $(8,866) $(1,950) $(5,249)
(Income) loss from discontinued operations, net of tax 2,694
 (19,034) 528
 (2,266)
Loss from continuing operations (13,013) (27,900) (1,422) (7,515)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:  
  
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:  
  
Depreciation and amortization 5,385
 5,570
 1,713
 1,675
Warrants issued for services —
 88
Stock-based compensation expense 677
 983
 480
 202
Rent expense in excess (deficit) of cash paid (39) 166
Rent expense in excess of cash paid 203
 43
Rent revenue in excess of cash received (989) (7) (718) (29)
Amortization of deferred financing costs 949
 1,452
 216
 350
Amortization of debt discounts and premiums (11) (13) 4
 4
Loss on debt extinguishment 680
 1,803
 —
 680
Acquisition costs —
 8
Deferred tax benefit —
 (191)
Bad debt expense 987
 461
Changes in operating assets and liabilities:
        
Accounts receivable (1,723) (743) (1,219) 140
Prepaid expenses and other (2,105) (501) (242) (751)
Other assets (2,254) (51) 17
 40
Accounts payable and accrued expenses (2,831) 1,554
 (590) (177)
Other liabilities 906
 161
 617
 90
Net cash used in operating activities - continuing operations (13,381) (17,160) (941) (5,248)
Net cash provided by (used in) operating activities - discontinued operations (750) 11,186
Net cash (used in) provided by operating activities - discontinued operations (639) 4,645
Net cash used in operating activities (14,131) (5,974) (1,580) (603)
    
Cash flows from investing activities:  
  
  
  
Change in restricted cash (3,440) 5,827
 3,839
 705
Proceeds from the sale of property and equipment 325
 —
Purchase of property and equipment (1,328) (3,421) (19) (374)
Net cash provided by (used in) investing activities - continuing operations (4,768) 2,406
Net cash provided by (used in) investing activities - discontinued operations 5,678
 (928)
Net cash provided by investing activities - continuing operations 4,145
 331
Net cash used in investing activities - discontinued operations (1) (44)
Net cash provided by investing activities 910
 1,478
 4,144
 287
    
Cash flows from financing activities:  
  
  
  
Proceeds from debt 22,757
 17,750
 203
 21,714
Proceeds from convertible debt 2,049
 6,500
 —
 1,685
Repayment of notes payable (24,410) (18,436) (4,518) (21,892)
Repayment on bonds payable (35) (2,994)
Repayment on convertible debt (6,849) (4,539)
Proceeds from lines of credit 27,468
 57,615
 —
 13,693
Repayment of lines of credit (33,261) (57,949) —
 (15,454)
Debt issuance costs (874) (858) (25) (511)
Exercise of warrants and options 1,471
 3,105
 —
 1,688
Proceeds from preferred stock issuances, net 29,727
 —
 3,677
 —
Other —
 (50)
Dividends paid on common stock
(2,083)
—
Repurchase of common stock (312) —
Dividends paid on preferred stock (3,581) (1,938) (1,777) (646)
Net cash provided by (used in) financing activities - continuing operations 12,379
 (1,794)
Net cash (used in) provided by financing activities - continuing operations (2,752) 277
Net cash used in financing activities - discontinued operations (5,618) (217) (268) (16)
Net cash provided by (used in) financing activities 6,761
 (2,011)
Net cash (used in) provided by financing activities (3,020) 261
Net change in cash and cash equivalents (6,460) (6,507) (456) (55)
Cash and cash equivalents, beginning 10,735
 19,374
 2,720
 10,735
Cash and cash equivalents, ending $4,275
 $12,867
 $2,264
 $10,680
    
Supplemental disclosure of cash flow information:  
  
  
  
Cash paid during the year for:        
Interest $6,402
 $7,300
 $1,630
 $2,407
Income taxes $20
 $36
Supplemental disclosure of non-cash activities:    
Conversions of debt and other liabilities to equity $—
 $6,930
Setoff for 2015 Notes received from 2014 Noteholders

$5,651

$—
2011 Notes surrendered and cancelled in payment for 2014 Notes $—
 $445
Dividend on common stock $1,193
 $—
Warrants issued in conjunction with convertible debt offering $—
 $88
Discounts on insurance financings $250
 $14

7
Table of Contents



Income taxes $—
 $20
Supplemental disclosure of non-cash activities:    
Notes issued in conjunction with financing of exit fees $—
 $680
 See accompanying notes to unaudited consolidated financial statements

78
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2015 and 2014March 31, 2016
 
NOTE 1.                         ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES 

See Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 to our Consolidated Financial Statements- Organization and Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014,2015, filed with the Securities and Exchange Commission (the "SEC") on March 31, 201530, 2016 (the "Annual Report"), for a description of all significant accounting policies. 
Description of Business
 
AdCare Health Systems, Inc. (“AdCare”), through its subsidiaries (together, the “Company” or “we”), is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and its controlled subsidiaries (collectively with AdCare,senior living. The Company's business primarily consists of leasing and subleasing such facilities to third-party tenants, which operate the “Company”) own, lease, operatefacilities. As of March 31, 2016, the Company owned, leased, or managemanaged for third-partiesthird parties 38 facilities primarily in the Southeast. The operators of the Company's facilities provide a range of health care services, including skilled nursing and assisted living facilitiesservices, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.

The Company was incorporated in Ohio on August 14, 1991, under the name Passport Retirement, Inc. In 1995, the Company acquired substantially all of the assets and liabilities of AdCare Health Systems, Inc. and changed its name to AdCare Health Systems, Inc. AdCare completed its initial public offering in November 2006. Initially based in Ohio, the Company expanded its portfolio through a series of strategic acquisitions to include properties in a number of other states, primarily in the statesSoutheast. In 2012, the Company relocated its executive offices and accounting operations to Georgia, and AdCare changed its state of Alabama, Arkansas,incorporation from Ohio to Georgia North Carolina, Ohio, Oklahomaon December 12, 2013.

Historically, the Company's business focused on owning and South Carolina.
operating skilled nursing and assisted living facilities. The Company also managed facilities on behalf of unaffiliated owners with whom the Company entered into management contracts. In July 2014, the Company announced that theCompany's Board of Directors had(the “Board”) approved a strategic plan to transition (the “Transition”) the Company to a healthcare property holding and leasing company. Throughcompany through a series of leasing and subleasing transactions,transactions. The Company completed the Transition through: (i) leasing to third-party operators all of the healthcare properties which it owns and previously operated; (ii) subleasing to third-party operators all of the healthcare properties which it leases (but does not own) and previously operated; and (iii) continuing the one remaining management agreement to manage two skilled nursing facilities and one independent living facility for third parties.

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 new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the properties 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 escalation clauses. As a result of the Transition, the Company is in the process of transitioning to third-parties the operationsnow has many of the Company’s currently ownedcharacteristics of a real estate investment trust ("REIT") and operated healthcare facilities. In furtherance of this strategic plan, the Company is now focused on the ownership, acquisition and leasing of healthcare related properties. The Board is analyzing and considering: (i) whether and, if so, when, the Company could satisfy the requirements to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”); (ii) the structural and operational complexities which would need to be addressed before the Company could qualify as a REIT, including the disposition of certain assets or the termination of certain operations which may not be REIT compliant; and (iii) if the Company were to qualify as a REIT, whether electing REIT status would be in the best interests of the Company and its shareholders in light of various factors, including our significant consolidated Federal net operating loss carryforwards. There is no assurance that the Company will qualify as a REIT in future taxable years or, if it were to so qualify, that the Board would determine that electing REIT status would be in the best interests of the Company and its shareholders.

On March 29, 2016, the Company announced that given the completion of the Transition, the Board has begun to explore strategic alternatives for the Company.

As of September 30, 2015,March 31, 2016, the Company owned, leased, nineteenor managed 38 facilities primarily in the Southeast. Of the 38 facilities, the Company: (i) leased 22 owned and subleased eleven11 leased skilled nursing facilities andto third-party operators; (ii) leased two owned assisted living facilities to local third-party operatorsoperators; and (iii) managed on behalf of third-party owners two skilled nursing facilities and one independent living facility (see Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases in the Annual Report for a full description of the Company's leases).
As

9
Table of September 30, 2015, the Company operated or managed six facilities comprised of five skilled nursing facilities and one independent living/senior housing facility, excluding one skilled nursing facility held for sale. The Company’s facilities provide a range of health care services to patients and residents including skilled nursing and independent living services, social services, various therapy services, and other rehabilitative and healthcare services. As of September 30, 2015, of the six facilities, the Company owned and operated three facilities and managed three facilities for a third party.Contents
During the nine months ended September 30, 2015, the Company entered into leasing and operations transfer agreements for certain of its facilities (see Note 7 - Leases). Subsequent to September 30, 2015, the Company completed the sale and transferred the operations of Companions, a 102-bed skilled nursing facility located in Tulsa, Oklahoma ("Companions"), as well as transferred the operations of one additional facility located in Arkansas to new operators (see Note 10 - Discontinued Operations and Note 16 - Subsequent Events).


Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations 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 (consisting of normal recurring accruals) 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,March 31, 2016 and 2015, and 2014, are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2014,2015, 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. 
You should read the accompanying unaudited consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2014,2015, included in the Annual Report. 
The Company operates in one business segment. These statements include the accounts of AdCare Health Systems, Inc. and its controlled subsidiaries. Controlled subsidiaries include AdCare’s wholly-owned subsidiaries and one consolidated variable interest entity (a "VIE") in which AdCare has control as primary beneficiary. All inter-company accounts and transactions were eliminated in the consolidation. 

8
Table of Contents



Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported results of operations during the reporting period. Examples of significant estimates include allowance for doubtful accounts; contractual allowances for Medicaid, Medicare, and managed care reimbursements;accounts, deferred tax valuation allowance;allowance, fair value of employee and nonemployee stock based awards; andawards, valuation of goodwill and other long-lived assets.assets, and cash flow projections. Actual results could differ materially from those estimates.

Reclassifications
 
Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation with no effect on the Company’s consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities, or stockholders’ equity. In addition, reclassificationsReclassifications were made to the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014,March 31, 2015, to reflect the same facilities in discontinued operations for both periods presented.
Patient Care Revenue Recognition and Receivables
The Company recognizes patient care revenues when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. The Company's patient care revenues are derived primarily from providing healthcare services to patients or residents and are recognized on the date services are provided at amounts billable In addition, reclassifications were made to the individual. For reimbursement arrangements with third-party payors including Medicaid, Medicare and private insurers, patient care revenues are recorded based on contractually agreed-upon amounts on a per patient day basis.
The Company records patient care revenues from Medicaid and Medicare and managed care programsConsolidated Balance Sheet as services are performed at their expected net realizable amounts under these programs. The Company’s patient care revenues from Medicaid and Medicare and managed care programs are subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known. The Company recorded retroactive losses to patient care revenues of $4,351 and $596,847 reported in discontinued operations for the three and nine months ended September 30, 2015, respectively, and $38,747 and $49,826 reported in discontinued operations for the three and nine months ended September 30, 2014, respectively. The Company recorded a retroactive gain to patient care revenues of $21,161 reported in continuing operations for the nine months ended September 30, 2014.
Potentially uncollectible patient accounts are provided for on the allowance method based upon management's evaluation of outstanding accounts receivable at period-end and historical experience. Uncollected accounts that are written off are charged against allowance. As of September 30, 2015March 31, 2016 and December 31, 2014,2015 to reflect the Company has an allowancenetting of deferred financing costs with the respective debt facility.
Revenue Recognition
Rental Revenues. The Company's triple-net leases provide for uncollectible accounts of $13.0 millionperiodic and $6.7 million, respectively. 
Rental Revenue Recognition and Receivables

The Company, as lessor or sublessor, makes a determination with respect to each of its leases and subleases whether they should be accounted for as operating leases.determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term of the lease when collectibility is reasonably assured. Differences betweenRecognizing rental income earned andon a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due under the lease are charged or credited, as applicable, tofrom our tenants, creating a straight-line rent receivable. Payments received under operating leases are accountedreceivable that is included in other assets on our consolidated balance sheets. Rent revenues for nine facilities in the statements of operations as rental revenue for actual rent collected plus or minus a straight-line adjustment for estimated minimum lease escalators. As of December 31, 2014, the Company evaluated collectibility of rental revenueArkansas and determined that no allowance was required. As of September 30, 2015, the Company recorded an allowance of one month's rent totaling $0.1 million for three facilities located in Georgia operated by one of the Company's tenants.are recorded on a cash basis.

Management Fee Revenue RecognitionRevenues and ReceivablesOther Revenues.
ManagementThe Company recognizes management fee revenues and receivables are recorded in the month thatas services are provided. Further, the Company recognizes interest income from lease inducements receivables as other revenues.

Allowances. The Company assesses the collectibility of our rent receivables, including straight-line rent receivables. The Company bases its assessment of the collectibility of rent receivables 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, the Company provides an allowance against the recognized rent receivable asset for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease, the Company may adjust its reserve to increase or reduce the rental revenue recognized in the period the Company makes such change in its assumptions or estimates. 

As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the Company evaluated collectibilityallowed for approximately $11.3 million and $12.5 million, respectfully, of management fees and determined that no allowance was required. gross patient care related receivables primarily from our operations before completion of our Transition. Allowance for patient care receivables are estimated based on an aged bucket method incorporating different payor types. Any changes in patient care receivable allowances will be recognized as a component of discontinued operations. All patient care receivables


910
Table of Contents



exceeding 365 days are fully allowed at March 31, 2016 and December 31, 2015. Accounts receivable, net totaled $8.6 million at March 31, 2016 and $8.8 million at December 31, 2015 of which $6.5 million and $8.0 million, respectively, related to patient care receivables from our legacy operations.

Fair Value Measurements and Financial Instruments 

Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—     Quoted market prices in active markets for identical assets or liabilities
Level 2—     Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3—     Significant unobservable inputs
The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments becausesince they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.

Recent Accounting Pronouncements
 
Except for rules and interpretive releases of the Securities and Exchange Commission ("SEC")SEC under authority of federal securities laws, the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. The Company has reviewed the FASB accounting pronouncements and Accounting Standards Update ("ASU") interpretations that have effectiveness dates during the periods reported and in future periods.     
In April 2014, the FASB issued ASU 2014-08, which amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU should be applied prospectively and is effective for the Company for the 2015 annual and interim reporting periods. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The Company adopted this ASU January 1, 2015.
In May 2014, the FASB issued ASU 2014-09 guidance which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The new standard requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The new guidance does not affect the recognition of revenue from leases. In August 2015, the FASB delayed the effective date of the new revenue standard by one year. As a result, this new revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoptionapplication is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, including interim periods within those reporting periods.2016. The Company has not yet determinedis currently evaluating the impact if any, thaton the adoption of this new standard will have on its consolidatedCompany's financial position orand results of operations.operations and related disclosures.

In August 2014, the FASB issued ASU 2014-15, which provides guidance regarding an entity’s ability to continue as a going concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has concluded that changes in its accounting required by this new guidance will not yet determinedmaterially impact the impact, if any,Company's financial position or results of operations and related disclosures.

In February 2015, the FASB issued ASU 2015-02, which which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that theapplied to certain investment companies and similar entities. This consolidation guidance is effective for public business entities for annual and interim periods beginning after December 15, 2015. The adoption of this new standard willguidance did not have a material impact on itsthe Company's consolidated financial statements.condition, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, which requires debt issuance costs to be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The new standard is to be applied on a retrospective basis and reported as a change in an

11
Table of Contents



accounting principle. In August 2015, the FASB released clarifying guidance for debt issuance costs related to line-of-credit arrangements, which permits debt issuance costs to be presented as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Debt issuance costs associated with a line of credit can be amortized ratably over the term of the line-of-credit arrangement. This standard is effective for annual reporting periods beginning after December 15,

10
Table of Contents



2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating changesadopted in its accounting required by this new standardthe first quarter of 2016 and the impacthas retroactively applied to the December 31, 2015 balance sheet presentation. This change represents a change in accounting principle. The amount of deferred financing costs reclassified against long-term debt was $2.5 million and $2.7 million for March 31, 2016 and December 31, 2015, respectively. The adoption did not materially impact the Company's financial positionresults of operations and related disclosures.

In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance the acquirer recognizes, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. New disclosures are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recognized in current-period earnings by line item that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At adoption, the new guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In January 2016, the FASB issued ASU 2016-01 which provides revised accounting guidance related to the accounting for and reporting of financial instruments. This guidance significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02 as a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance, ASC 840,Leases. ASU 2016-02 creates a new Topic, ASC 842, Leases. This new Topic retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating changes in its accounting required by this new standard and the impact toof the Company'sadoption of this guidance on its consolidated financial positioncondition, results of operations and related disclosures.cash flows.

In March 2016, the FASB issued ASU 2016-09 with the intention to simplify aspects of the accounting for share-based payment transactions, including income tax impacts, classification on the statement of cash flows, and forfeitures. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The various amendments within the standard require different approaches to adoption of either retrospective, modified retrospective or prospective. Early adoption is permitted. The company is currently evaluating the potential impact of this standard as well as the as available transition methods.

NOTE 2.                         EARNINGS PER SHARE 

Basic earnings per share is computed by dividing net income or loss attributedattributable to AdCare Health Systems, Inc. common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share exceptexcept: (i) net income or loss is adjusted forby the impact of the assumed conversion of convertible debt into shares of common stock; and (ii) the weighted-average number of shares of common stock outstanding includes potentially dilutive securities such(such as options, warrants non-vested shares, and additional shares of common stock issuable under convertible notesdebt outstanding during the periodperiod) when such potentially dilutive securities are not anti-dilutive. Potentially dilutive securities from options warrants and unvested restricted shareswarrants are calculated in accordance with the treasury stock method.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. Potentially dilutive securities from convertible notesdebt are

12
Table of Contents



calculated based on the assumed conversionissuance at the beginning of the period, as well as any adjustment to income that would result from thetheir assumed conversion.issuance. For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, potentially dilutive securities of 5.04.6 million and 7.87.0 million, respectively, were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive for those 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,
  2015 2014
(Amounts in 000’s, except per share data) Income
(loss)		 Shares Per
Share		 Income
(loss)		 Shares Per
Share
Continuing operations:  
  
  
  
  
  
Loss from continuing operations $(1,869)     $(10,398)  
  
Preferred stock dividends (1,498)     (646)    
Basic loss from continuing operations $(3,367) 19,838
 $(0.17) $(11,044) 18,134
 $(0.61)
Diluted loss from continuing operations(a)
 $(3,367) 19,838
 $(0.17) $(11,044) 18,134
 $(0.61)
             
Discontinued operations:  
  
  
  
  
  
(Loss) income from discontinued operations $(3,228)     $6,850
    
Net loss attributable to noncontrolling interests 285
  
  
 218
  
  
Basic (loss) income from discontinued operations attributable to the Company $(2,943) 19,838
 $(0.15) $7,068
 18,134
 $0.39
Diluted (loss) income from discontinued operations attributable to the Company(a)
 $(2,943) 19,838
 $(0.15) $7,068
 18,134
 $0.39
             
Net loss attributable to AdCare:  
  
  
  
  
  
Basic loss $(6,310) 19,838
 $(0.32) $(3,976) 18,134
 $(0.22)
Diluted loss(a)
 $(6,310) 19,838
 $(0.32) $(3,976) 18,134
 $(0.22)

11
Table of Contents



 Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2016 2015
(Amounts in 000’s, except per share data) Income
(loss)		 Shares Per
Share		 Income
(loss)		 Shares Per
Share		 Income
(loss)		 Shares Per
Share		 Income
(loss)		 Shares Per
Share
Continuing operations:  
  
  
  
  
  
  
  
  
  
  
  
Loss from continuing operations $(13,013)     $(27,900)  
  
 $(1,422)     $(7,515)  
  
Preferred stock dividends (3,582)     (1,938)     (1,777)     (646)    
Basic loss from continuing operations $(16,595) 19,617
 $(0.84) $(29,838) 17,539
 $(1.70) $(3,199) 19,885
 $(0.16) $(8,161) 19,218
 $(0.42)
Diluted loss from continuing operations(a)
 $(16,595) 19,617
 $(0.84) $(29,838) 17,539
 $(1.70) $(3,199) 19,885
 $(0.16) $(8,161) 19,218
 $(0.42)
                        
Discontinued operations:  
  
  
  
  
  
  
  
  
  
  
  
(Loss) income from discontinued operations $(2,694)     $19,034
     $(528)     $2,266
    
Net loss attributable to noncontrolling interests 784
     548
     —
     230
    
Basic (loss) income from discontinued operations attributable to the Company $(1,910) 19,617
 $(0.10) $19,582
 17,539
 $1.12
 $(528) 19,885
 $(0.03) $2,496
 19,218
 $0.13
Diluted (loss) income from discontinued operations attributable to the Company(a)
 $(1,910) 19,617
 $(0.10) $19,582
 17,539
 $1.12
 $(528) 19,885
 $(0.03) $2,496
 19,218
 $0.13
                        
Net loss attributable to AdCare:  
  
  
  
  
  
  
  
  
  
  
  
Basic loss $(18,505) 19,617
 $(0.94) $(10,256) 17,539
 $(0.58) $(3,727) 19,885
 $(0.19) $(5,665) 19,218
 $(0.29)
Diluted loss(a)
 $(18,505) 19,617
 $(0.94) $(10,256) 17,539
 $(0.58) $(3,727) 19,885
 $(0.19) $(5,665) 19,218
 $(0.29)
(a) Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:

 As of September 30, March 31,
(Share amounts in 000’s) 2015 2014 2016 2015
Outstanding stock options 744
 1,758
Outstanding warrants - employee 1,887
 1,846
Outstanding warrants - nonemployee 239
 816
Stock options 373
 894
Warrants 2,051
 2,266
Subordinated convertible notes 2,165
 3,334
 2,165
 3,804
Total anti-dilutive securities 5,035
 7,754
 4,589
 6,964
 
NOTE 3.                         LIQUIDITY AND PROFITABILITY
 
Sources of Liquidity

The Company has and continues to undertake measures to streamlineimprove its operations and streamline cost infrastructure in connection with its new business model, including: (i) continuing to reduce and ultimately eliminating patient care revenues and related costs while increasing future minimum lease revenue; (ii) refinancing or repaying current maturities to reduce interest costs and reducing mandatory principal repayments through refinancing transactions with the United States Department of Housing and Urban Development ("HUD")HUD or other lending sources; and (iii) reducing general and administrative expenses.

At September 30, 2015,March 31, 2016, the Company had $4.3$2.3 million in cash and cash equivalents as well as restricted cash of $12.2$8.9 million. Over the next twelve months, the Company anticipates both access to and receipt of several sources of liquidity.

At September 30, 2015,March 31, 2016, the Company had one skilled nursing facility, threetwo office buildings and one VIE held for sale. The Company completed the sale of one of its one skilled nursing facilityoffice buildings on October 30, 2015April 25, 2016 for $0.7 million and expects to sell its VIE in the fourth quarter of 2015. The Company expects to sell the remaining office buildings in 2016. The Company anticipates thatcomplete the sale of its second office building by the VIE will approximate the VIE's related obligations and the saleend of the skilled nursing facility will generate positive cash flows of $0.4 million. The Company anticipates that the cash proceeds from the sale of the office buildings will exceed related obligations by approximately $0.5 million.second


1213
Table of Contents



quarter of 2016. The office building sold on April 25, 2016 had debt of approximately $0.9 million and the remaining office building, which is unencumbered, is contracted to sell at $0.2 million. The Company anticipates that the sale of the two office buildings combined will approximate the related debt obligations.

The Company routinely has discussions with existing and new potential new lenders to refinance current debt on a longer termlong-term basis and, in recent periods, has refinanced short-term acquisition-related debt including seller notes, with traditional long termlong-term mortgage notes, some of which have been executed under government guaranteed lending programs. During the remainder of 2015 and into the first quarter of 2016, the Company anticipates net proceeds of approximately $1.6 million received in the form of repayments on intercompany notes refinanced along with other existing debt to such government guaranteed lending programs.

The Company maintains two revolving lines of credit for which the Company has limited remaining capacity (see Note 9 - Notes Payable and Other Debt). All balances on these lines of credit are expected to be repaid in 2015. Given the Company's ongoing transition out of healthcare operations, the Company does not anticipate any additional draws or sources of cash on these credit lines.

On July 21, 2015, the Company entered into separate At Market Issuance Sales Agreements (together, the “Sales Agreements”) with each of MLV & Co. LLC and JMP Securities LLC (each, an “Agent” and together, the “Agents”), pursuant to which the Company may offer and sell, from time to time, up to 800,000 shares of the Company’s 10.875% Series A Cumulative Redeemable Preferred Stock, no par value per share and liquidation preference of $25.00 per share (the "Series A Preferred Stock"), through an “at-the-market” offering program ("ATM"). As of September 30, 2015,March 31, 2016, the Company sold 90,136500,600 shares of Series A Preferred Stock under the ATM, generating net proceeds to the Company of approximately $2.2 million. Management believes that the ATM will continue to be a potential source of liquidity for the Company in the future$10.4 million (see Note 11 - DividendsCommon and Preferred Stock).

On July 30, 2015,March 24, 2016, the Company amendedreceived a commitment to refinance the termsBentonville, Heritage Park and River Valley Credit Facility, the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of that$25.4 million of debt, subject to definitive documentation and certain 8% subordinated convertible note, issued byclosing conditions. On March 24, 2016, the Company to Cantone Asset Management, LLC ("CAM") and due July 31, 2015, withalso obtained a principal payment amount as of such date of $4.8 million to: (i)lender commitment to extend the maturity date with respect to $1.5 million of the principal amountGeorgetown and Sumter Credit Facility totaling $9.1 million from September 2016 to June 2017 subject to definitive documentation and certain closing conditions. On March 29, 2016, the Company obtained a lender commitment to extend the maturity date of the NoteQuail Creek Credit Facility totaling $5.0 million from September 2016 to OctoberSeptember 2018 subject to definitive documentation and certain closing conditions.

On May 10, 2016, the Company executed a purchase and sale agreement to sell nine of its facilities in Arkansas for a total sales price of $55.0 million. At March 31, 2017; (ii) increase2016, total outstanding debt on those facilities was approximately $30.2 million, net of restricted cash deposits. All such debt and restricted cash was current at March 31, 2016. The Company anticipates cash inflows associated with the interest rate from 8.0%sale of such facilities to 10.0% per annum;exceed related obligations by approximately $21.8 million, less routine closing costs and (iii) increase the conversion price from $3.97 to $4.25 per share (see Note 9- Notes Payable and Other Debt).a seller note of $3.0 million.

Cash Requirements

At September 30, 2015,March 31, 2016, the Company had $134.5$118.4 million in indebtedness of which the current portion is $49.9$47.9 million. This current portion is comprised of the following components: (i) debt of held for sale entities of approximately $9.9$0.9 million, primarily senior debt - bond and mortgage indebtedness; and (ii) remaining debt of approximately $40.0$46.9 million which includes revolver debt, senior debt - bonds, and senior debt - mortgage indebtedness (for a complete debt listing and credit facility detail, see Note 9 - Notes Payable and Other Debt). As indicated previously, the Company routinely has ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, has refinanced shorter term acquisition debt including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs.

The Company anticipates, for the next twelve months, net principal disbursements of approximately $12.0$42.9 million (including approximately $1.7 million of payments on shorter term vendor notes, $2.7 million of routine debt service amortization, $0.9 million of the sale of two office buildings, and $0.7 million payment of other debt) which reflect the offsetis inclusive of anticipated proceeds on refinancing of approximately $13.1$36.9 million. On March 24, 2016, the Company received a lender commitment to refinance approximately $25.4 million and to extend $9.1 million of current maturities, subject to definitive documentation and certain closing conditions. On March 29, 2016, the Company received a lender commitment to extend approximately $5.0 million of current maturities, subject to definitive documentation and certain closing conditions. The Company anticipates operating cash requirements in 2015for the next twelve months as being substantially less than in 2014previous twelve months due to the transition to a healthcare property holding and leasing company.Transition. Based on the described sources of liquidity, the Company expects sufficient funds for its operations and scheduled debt service, at least through the next twelve months. On a longer term basis, at September 30, 2015,March 31, 2016, the Company has approximately $60.3$60.4 million of debt maturities due over the next two year period ending September 30, 2017.March 31, 2018. These debt maturities include $7.7$9.2 million of convertible promissory notes, which are convertible into shares of the common stock, and exclude outstanding debt related to the Company's consolidated VIE and disposal groups held for sale as of September 30, 2015 (see Note 10 - Discontinued Operations and Note 13 - Variable Interest Entities).stock. The Company has been successful in recent years in raising new equity capital and believes based on recent discussions that these markets will continue to be available to it for raising capital in the future. The Company believes its long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

The Company continues to absorbhas absorbed negative cash flows from operations in the past, including the three months ended March 31, 2016, but anticipates a reversal to a positive cash flow from operations subsequent to all AdCare operated facilities having completed transition to third parties. The transition to positive cash flows from operating activities is expected to occur induring the remainder of 2016. In order to satisfy the Company's capital needs, the Company seeks to: (i) improvecontinue improving operating results through a series ofits leasing and subleasing transactions

14
Table of Contents



executed with favorable terms and consistent and predictable cash flow; (ii) expand borrowing arrangements with certain lenders; (iii) refinance current debt where possible to obtain more favorable terms; (iv) potential sale of certain facilities; and (iv)(v) raise capital through the issuance of debt or equity securities. The Company anticipates that these actions, if successful, will provide the opportunity to maintain liquidity on a short and long termlong-term basis, thereby permitting the Company to meet our operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful or that anticipated operating results or the transition of the Company to primarily a property holding and leasing company will be achieved.Transition. If the Company is unable to expand existing borrowing agreements, refinance current debt,

13
Table of Contents



or raise capital through the issuance of securities, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives or sell assets.

The Board has agreed to explore strategic alternatives for the Company which may affect the sources of liquidity and cash requirements of the Company.

NOTE 4.                         RESTRICTED CASH
 
The following table sets forth the Company’s various restricted cash, escrow deposits and related financial instruments:
 
(Amounts in 000’s) September 30, 2015 December 31, 2014 March 31, 2016 December 31, 2015
Cash collateral and certificates of deposit, current
 $6,933
 $2,302
 $3,823
 $7,687
HUD replacement reserves, current portion 787
 637
HUD escrow deposits
 536
 289
Other restricted cash, current portion 9
 93
Current replacement reserves 1,036
 950
Escrow deposits
 544
 532
Total current portion 8,265
 3,321
 5,403
 9,169
        
Cash collateral and certificates of deposit for long-term debt obligations 2,708
 3,446
Restricted investments for other debt obligations 1,940
 2,264
HUD replacement reserves 1,121
 1,074
 1,167
 1,174
Reserves for capital improvements 124
 936
 378
 120
Total noncurrent portion 3,953
 5,456
 3,485
 3,558
Total restricted cash $12,218
 $8,777
 $8,888
 $12,727
 
NOTE 5.                         PROPERTY AND EQUIPMENT
 
The following table sets forth the Company’s property and equipment:
 
(Amounts in 000’s) 
Estimated Useful
Lives (Years)
 September 30, 2015 December 31, 2014 
Estimated Useful
Lives (Years)
 March 31, 2016 December 31, 2015
Buildings and improvements
5-40 $128,543
 $128,136

5-40 $129,062
 $128,912
Equipment
2-10 13,357
 13,294

2-10 13,484
 13,470
Land
— 7,122
 7,127

— 6,810
 7,128
Computer related
2-10 2,918
 2,908

2-10 3,000
 2,999
Construction in process — 488
 52
 — 186
 390
   152,428
 151,517
   152,542
 152,899
Less: accumulated depreciation and amortization   (24,670) (20,524)   (27,707) (26,223)
Property and equipment, net   $127,758
 $130,993
   $124,835
 $126,676
 
Buildings and improvements includes the capitalization of costs incurred for the respective certificates of need (the "CON"). For additional information on the CON amortization, see Note 6 - Intangible Assets and Goodwill.
Depreciation
For the three months ended March 31, 2016 and 2015, total depreciation and amortization expense was approximately $1.9$1.7 million and $5.4$1.7 million, for the three and nine months ended September 30, 2015, and $1.9 million and $5.6 million for the three and nine months ended September 30, 2014, respectively. Total depreciation and amortization expense excludes $0.1 million forin the ninethree months ended September 30,March 31, 2015 and $0.1 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, that is recognized in lossLoss from discontinued operations,Discontinued Operations, net of tax. Total depreciation and amortization expense includes the amortization of the CON (see Note 6 - Intangible Assets and Goodwill). ThereNo amount was no depreciation and amortization expense recognized in loss from discontinued operations, net of tax,excluded for the three months ended September 30, 2015.March 31, 2016.
During the three and nine months ended September 30, 2015, the Company recognized an impairment charge of approximately $0.2 million and $0.3 million, respectively, to write down the carrying value of its two office buildings located in Roswell, Georgia. The assets and liabilities of the office buildings are included in Assets and Liabilities Held for Sale as of September 30, 2015 (see Note 10 - Discontinued Operations).

1415
Table of Contents



NOTE 6.                         INTANGIBLE ASSETS AND GOODWILL
    
The Company incurred an impairment charge to intangible assets and goodwill of $0.04 million during the three and nine months ended September 30, 2015, related to the sale of its Bentonville, Arkansas skilled nursing facility (see below).
Intangible assets consist of the following: 
(Amounts in 000’s) CON (included in property and equipment) Bed Licenses - Separable Lease Rights Total CON (included in property and equipment) Bed Licenses - Separable Lease Rights Total
Balances, December 31, 2014  
  
  
  
Balances, December 31, 2015  
  
  
  
Gross $35,690
 $2,471
 $7,406
 $45,567
 $35,690
 $2,471
 $6,881
 $45,042
Accumulated amortization (3,587) —
 (3,319) (6,906) (4,760) —
 (3,461) (8,221)
Net carrying amount $32,103
 $2,471
 $4,087
 $38,661
 $30,930
 $2,471
 $3,420
 $36,821
                
Disposition        
Gross —
 —
 (525) (525)
Accumulated amortization —
 —
 525
 525
Amortization expense (880) —
 (500) (1,380) (293) —
 (167) (460)
                
Balances, September 30, 2015        
Balances, March 31, 2016        
Gross 35,690
 2,471
 6,881
 45,042
 35,690
 2,471
 6,881
 45,042
Accumulated amortization (4,467) —
 (3,294) (7,761) (5,053) —
 (3,628) (8,681)
Net carrying amount $31,223
 $2,471
 $3,587
 $37,281
 $30,637
 $2,471
 $3,253
 $36,361
 
Amortization expense for the CON included in property and equipment was approximately $0.3 million and $0.9$0.3 million for the three and nine months ended September 30,March 31, 2016 and 2015, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2014.respectively.
Amortization expense for lease rights was approximately $0.2 million and $0.5$0.2 million for the three and nine months ended September 30,March 31, 2016 and 2015, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2014.respectively.
Expected amortization expense for all definite lived intangibles for each of the years ended December 31, is as follows: 
(Amounts in 000’s) Bed Licenses Lease Rights Bed Licenses Lease Rights
2015(a)
 $293
 $167
2016 1,173
 667
2016(a)
 $880
 $500
2017 1,173
 667
 1,173
 667
2018 1,173
 667
 1,173
 667
2019 1,173
 667
 1,173
 667
2020 1,173
 482
Thereafter 26,238
 752
 25,065
 270
Total expected amortization expense $31,223
 $3,587
 $30,637
 $3,253
 (a) Estimated amortization expense for the year ending December 31, 20152016, includes only amortization to be recorded after September 30, 2015March 31, 2016.


15
Table of Contents



On July 1, 2015, the Company completed the sale of its Bentonville, Arkansas skilled nursing facility consisting of 83 licensed beds ("Bentonville") for approximately $3.4 million net of closing costs. At the time of sale, the Company recorded a goodwill impairment charge of $0.04 million.
The following table summarizes the carrying amount of goodwill:
(Amounts in 000’s) September 30, 2015 December 31, 2014 March 31, 2016 December 31, 2015
Goodwill $5,023
 $5,023
 $5,023
 $5,023
Accumulated impairment losses (840) (799) (840) (840)
Total $4,183
 $4,224
Net carrying amount $4,183
 $4,183
 
The Company does not amortize indefinite lived intangibles, which consist of separable bed licenses, or goodwill.
 
NOTE 7. LEASES
Operating Leases
The Company leases a total of eleven skilled nursing facilities from unaffiliated owners under non-cancelable operating leases, most of which have initial lease terms of fifteen to seventeen years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs; eachcosts. Each of the

16
Table of Contents



skilled nursing facilities that are leased by the Company are subleased to and operated by third-party operators. The Company also leases certain office space located in Atlanta, Georgia.
Foster Prime Lease
Eight of the Company's skilled nursing facilities (collectively, the "Georgia Facilities") are operated under a single master indivisible lease arrangement, dated August 1, 2010, by and between ADK Georgia, LLC, a Georgia limited liability company and subsidiary of the The Company (“ADK”), and William M. Foster ("Lessor"), as landlord (the "Prime Lease"). The lease has a term of ten years into 2020. Under the Prime Lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicaid and Medicare provider requirements, is a default under the Prime Lease. In addition, other potential defaults related to an individual facility may cause a default of the entire Prime Lease. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.
On August 14, 2015, ADK and Lessoralso entered into a second amendment to the Prime Lease (the “Second Amendment”) whereby the parties amended the Prime Lease to extend its initial term by seven years, resulting in a new lease termination date of August 31, 2027. In considerationagreements for the extension, among other things, the Company agreed to: (i) pay to Lessor a fee of $575,000; (ii) release to Lessor upon the earlier of January 1, 2016 or the termination of the Prime Lease one month of pre-paid rentvarious equipment previously used in the amount of $398,000; (iii) release to Lessor upon the earlier of January 1, 2017 or the termination of the Prime Lease the security deposit paid under the Prime Leasefacilities. These leases are included in the amount of $500,000; and (iv) pay to Lessor within ten days of the end of each quarter a payment of $26,000.future minimum lease payments below.
The Second Amendment also amends the Prime Lease to provide that the Company (and not Lessor) is responsible for the cost of maintaining the Georgia Facilities consistent with the standards for other commercial care facilities in the areas where the Georgia Facilities are located, including the cost to repair or replace all structural or capital items due to ordinary wear and tear.
Pursuant to the Second Amendment: (i) Lessor consented to ADK’s sublease of the Georgia Facilities to third-party operators and ADK agreed to obtain Lessor’s consent prior to any future sublease of any of the Georgia Facilities; and (ii) the Company executed a Lease Guaranty for the benefit of Lessor whereby the Company guaranteed the performance of all of ADK’s obligations under the Prime Lease. In connection with such guaranty, the Company also consented to being primarily responsible for all of ADK’s obligations under the Prime Lease, thereby allowing Lessor to proceed directly against the Company, without having taken any prior action against ADK, should ADK be in default under the Prime Lease. As of September 30, 2015,March 31, 2016, the Company is in compliance with all operating lease financial and administrative covenants of this lease agreement.
Bonterra/Parkview Master Lease
Two of the Company's facilities are operated under a single indivisible lease, dated October 29, 2010 (the "Bonterra/Parkview Master Lease"); therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has an initial term of twelve years into 2022 and two optional ten-year renewal terms, and includes covenants and restrictions. The

16
Table of Contents



Company is required to make minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities.
On September 1, 2015, ADK Bonterra/Parkview. LLC, a wholly-owned subsidiary of the Company ("Bonterra"), and Georgia Lessor - Bonterra/Parkview, LLC entered into a second amendment to the Bonterra/Parkview Master Lease whereby the parties amended such lease to: (i) extend its initial term by three years, resulting in a new lease termination date of August 31, 2025; (ii) provide consent to the sublease of the two facilities to a third-party operator; and (iii) extend the optional renewal terms to two separate twelve-year renewal periods. In consideration for the amended terms, among other things, the Company agreed to a monthly increase in base rent equal to 37.5% of the difference between the base rent owed by the Company under the Bonterra/Parkview Master Lease and the base rent owed to the Company by the new operator. As of September 30, 2015, the Company is in compliance with all financial and administrative covenants of this lease agreement.
Covington Prime Lease
One of the Company's facilities is operated under a lease agreement dated August 26, 2002, as subsequently amended (the "Covington Prime Lease"), by and between the Company and Covington Realty, LLC ("Covington Lessor"). The annual base rent beginning on May 1, 2014 was approximately $0.6 million. The lease agreement was set to expire on April 30, 2019.
On August 1, 2015, Covington Lessee entered into an Agreement Regarding Lease and Sublease (the "Covington Prime Lease Amendment") with the Company, which amended the Covington Prime Lease. The Covington Prime Lease Amendment, among other things: (i) provided lessor consent for Covington Lessee to sublease the facility to an affiliate of Beacon Health Management, LLC; (ii) extended the term of the lease to expire on April 30, 2025; and (iii) set the annual base rent, effective May 1, 2015 and continuing throughout the lease term, equal to 102% of the immediately preceding lease year's base rent. As of September 30, 2015, the Company is in compliance with all financial and administrative covenants of this lease agreement.covenants.
Future Minimum Lease Payments
Future minimum lease payments for each of the next five years ending December 31, are as follows:
 (Amounts in
000's)		 (Amounts in
000's)
2015(a)
 $2,034
2016 8,091
2016(a)
 $6,006
2017 8,189
 8,158
2018 8,349
 8,340
2019 8,526
 8,526
2020 8,697
Thereafter 64,017
 55,320
Total $99,206
 $95,047
(a) Estimated minimum lease payments for the year ending December 31, 2015,2016, include only payments to be recorded after September 30, 2015.March 31, 2016.
The Company has also entered into lease agreements for various equipment used in the facilities. These leases are included in future minimum lease payments above.
Leased and Subleased Facilities to Third-Party Operators
In connection withAs a result of the Company'sstrategic plancompletion of the Transition, the Company leases or subleases to transition to a healthcare property holding and leasing company, thirty-twothird-party operators 35 facilities (twenty-one(24 owned by us and eleven11 leased to us) are leased or subleased on a triple net basis, meaning that the lessee (i.e.(i.e., the new third-party operator of the property) is obligated under the lease or sublease, as applicable, for all liabilitiescosts of operating the property, in respect toincluding insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Termination of Arkansas Leases. Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”) nine facilities located in Arkansas (the “Arkansas Facilities”) to affiliates (the “Aria Sublessees”) of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated the applicable Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease. The term of each Aria Sublease was approximately fifteen (15) years, and the annual aggregate base and special rent payable to the Company under the Aria Subleases was approximately $5.1 million in the first year of such subleases and the base rent was subject to specified annual rent escalators.

On July 17, 2015, the Company made a short-term loan to Highlands Arkansas Holdings, LLC, an affiliate of Aria (“HAH”), for working capital purposes, and, in connection therewith, HAH executed a promissory note (the “Note”) in favor of the Company. Since July 17, 2015, the Note has been amended from time to time and currently has an outstanding principal amount of $1.75 million and had a maturity date of December 31, 2015. The Company is currently seeking the repayment of the Note in accordance with its terms and expects full repayment.


17
Table of Contents



Lease of Arkansas Facilities. On February 5, 2016, nine wholly-owned subsidiaries of the Company (each, a “Skyline Lessor”) entered into a Master Lease Agreement (the “Skyline Lease”) pursuant to which each Skyline Lessor leases to Skyline Healthcare LLC (“Skyline”), or any affiliate of Skyline (the “Skyline Lessee”), one of the Arkansas Facilities. The term of the Skyline Lease commenced on April 1, 2016. The initial lease term of the Skyline Lease is fifteen (15) years with two (2) separate renewal terms of five (5) years each. The annual rent under the Skyline Lease in the first year will be $5.4 million, and such rent shall escalate at 2.5% each year during the initial term and any subsequent renewal terms. Skyline has guaranteed the obligations of its affiliates.

In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million, which the Purchaser could exercise in accordance with such agreement until May 1, 2016. The purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to be evidenced by a promissory note executed by the Purchaser. The closing of such purchase and sale shall take place on or before August 1, 2016 on a date designated by the Purchaser to the Skyline Lessors in writing. The Purchaser has delivered notice of its intent to exercise the purchase option and a definitive agreement with respect to such purchase has been executed (see Note 16 - Subsequent Events).

New Beginnings. On January 22, 2016, New Beginnings Care, LLC and its affiliated debtors (collectively, “New Beginnings”) filed petitions to reorganize their finances under the Bankruptcy Code. New Beginnings operates the Savannah Beach, Oceanside and Jeffersonville facilities pursuant to a master lease dated November 3, 2015 with the Company. The Jeffersonville facility was decertified by the Center for Medicare Services (“CMS”) in February 2016 for deficiencies related to its operations and maintenance of the facility. Since that time, New Beginnings has been paying partial rent for the Oceanside and Savannah Beach facilities but not for the Jeffersonville Facility. On March 4, 2016, due to defaults by New Beginnings, the Company petitioned the Bankruptcy Court to lift the automatic stay to enable the Company to regain possession of the three facilities. Prior to the court ruling on the motion, the Company entered into a consent order (the “Consent Order”) with New Beginnings, the debtors’ creditors’ committee, which represents the unsecured creditors in the proceedings, and Gemino Financial (the debtors’ secured lender), in which the Company agreed to give the creditors’ committee until June 4, 2016 to sell all of New Beginnings’ assets including the leasehold interest and personal property for the Company’s three facilities. The Consent Order further provides that if the creditors’ committee is unable to sell the assets by such date, the automatic stay will be lifted and the Company will be allowed to reclaim possession of the three facilities. The court signed the Consent Order on May 9, 2016, and it was entered on the docket on May 10, 2016.
The Oceanside facility was cited for deficiencies during a State survey on November 6, 2015 and had six months, or until May 5, 2016, to meet the pertinent provisions of Section 1819 and 1919 of the Social Security Act and be deemed in substantial compliance with each of the requirements for long term care facilities established by the Secretary of Health and Human Services in 42 CFR section 483.1 et seq. (collectively, “CMS Requirements”) with regard to the facility. As of May 3, 2016, out of concern that decertification of Oceanside was imminent, New Beginnings obtained a preliminary injunction against the Georgia Department of Community Health and the United States Department of Health and Human Services Center for Medicare and Medicaid Services and their officers, agents, servants, employees and attorneys prohibiting the termination of the facility’s Medicare and Medicaid provider agreements until the earlier of (i) July 1, 2016, or (ii) the completion of the administrative review process pursuant to 42 U.S.C. § 405(g), or (iii) the full administration of the bankruptcy estate pursuant to Title 11 of the United States Code, in part in order to give New Beginnings time to market its leasehold interests and assets to potential buyers pursuant to the Consent Order.
On May 9, 2016, a Notice of Involuntary Termination from CMS was issued to New Beginnings indicating that its operations at the Oceanside facility were not in substantial compliance with CMS Requirements and that its provider agreements with CMS were terminated as of such date. The letter noted that the effectuation of the involuntary termination is stayed by the terms of the Bankruptcy Court’s order.
The Company is providing support to New Beginnings in an effort to clear the deficiencies raised by CMS and to persuade CMS to rescind its decertification of the Oceanside facility.

To date, New Beginnings has neither affirmed nor rejected the Master Lease entered into on November 3, 2015 with respect to the Jeffersonville, Oceanside, and Savannah Beach facilities. The Company is in discussions with New Beginnings and other potential operators about renting such facilities.

Future minimum lease receivables from the Company’s facilities leased and subleased to third party operators for each of the next five years ending December 31, are as follows:

1718
Table of Contents



 (Amounts in
000's)		 (Amounts in
000's)
2015(a)
 $5,947
2016 24,096
2016(a)
 $19,725
2017 24,643
 26,845
2018 25,193
 27,474
2019 25,766
 28,082
2020 27,634
Thereafter 215,971
 204,913
Total $321,616
 $334,673
(a) Estimated minimum lease receivables for the year ending December 31, 2015,2016, include only payments to be received after September 30, 2015.March 31, 2016.

For further details regarding the Company's leased and subleased facilities to third-party operators, see below and also Note 16 - Subsequent Events in this Quarterly Report andPart II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases included in the Annual Report.
Arkansas Leases
The Company subleases through its subsidiaries (each, an “Aria Sublessor”) eight skilled nursing facilities located in Arkansas to affiliates of Aria Health Group, LLC (each, an “Aria Sublessee”) pursuant to separate sublease agreements, dated January 16, 2015, as subsequently amended (each such sublease, an “Aria Sublease”). The Aria Subleases commenced on May 1, 2015. Each Aria Sublease is structured as triple net lease wherein the Aria Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The Aria Subleases are cross-defaulted. In connection with each Aria Sublease, each Aria Sublessor and Aria Sublessee also entered into an operations transfer agreement with respect to the applicable facility, each containing customary terms and conditions relating to the transfer of operations of the skilled nursing facilities.

In connection with certain amendments to each Aria Sublease, the Company entered into a Lease Inducement Fee Agreement, dated April 30, 2015 (the "Aria Lease Inducement"), with Aria Health Consulting, LLC. The Aria Lease Inducement provided for a one-time payment from the Company to Aria Health Consulting, LLC equal to $2.0 million minus the security deposits and first month's base and special rent for all Aria Sublessees. On April 30, 2015, in connection with the Aria Lease Inducement, the Aria Subleases were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of $29,500 per month payable in advance on or before the first day of each month (except for the first special rent payment, which was subtracted from the lease inducement fee paid by the Company under the Aria Lease Inducement).
As a condition to the Aria Sublessees’ agreement to a commencement date of May 1, 2015, the Company and the Aria Sublessees agreed to assess, in good faith and within thirty days following the commencement date, making a one-time equitable adjustment to base rent equal to the difference between the facilities' 2014 professional liability and general liability insurance costs and projected costs for the first lease year of comparable or mutually acceptable insurance as further adjusted by anticipated Medicaid reimbursement rate increases solely from such added costs.

On July 17, 2015, the Company, on behalf of each Aria Sublessor, and Highlands Arkansas Holdings, LLC, an affiliate of Aria Health Group, LLC and acting on behalf of each Aria Sublessee, entered into a letter agreement whereby the parties agreed to amend the Aria Subleases to reflect a one-time equitable adjustment to annual base rent, for the collective benefit of each Aria Sublessee, in the aggregate amount of $360,000.

On October 6, 2015, the Aria Subleases were amended to, among other things: (i) reduce the base rent payable pursuant to such subleases, resulting in the aggregate annual base rent under all eight Aria Subleases being reduced from approximately $5.0 million to approximately $4.3 million; (ii) extend the term of such subleases from ten to fifteen years; and (iii) increase the annual rent escalator with respect to such rent (with the rent escalator equal to 2.0% of the preceding year’s base rent in lease years two and three, 3.0% of the preceding year’s base rent in lease years four through six and 3.5% of the preceding year’s base rent in lease years seven through fifteen).

On July 17, 2015, a wholly owned subsidiary of the Company (the “Highlands Sublessor”) entered into a sublease agreement (the "River Valley Sublease") pursuant to which the Highlands Sublessor leases one skilled nursing facility located in Arkansas to an affiliate of Aria Health Group, LLC (the “Highlands Sublessee”). Affiliates of both the Company and Aria Health Group, LLC had entered into a sublease agreement, dated January 16, 2015, for the same facility but it was mutually terminated on April 30, 2015. The River Valley Sublease is structured as triple net lease wherein the Highlands Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. In connection with the River Valley

18
Table of Contents



Sublease, the current licensed operator of the facility, a wholly-owned subsidiary of the Highlands Sublessor, and the Highlands Sublessee also entered into an operations transfer agreement with respect to the facility, containing customary terms and conditions relating to the transfer of operations thereof.

On October 6, 2015, the River Valley Sublease was amended to, among other things: (i) extend the commencement date of the sublease to November 1, 2015; (ii) reduce the initial base rent payable pursuant to such sublease from $50,000 to $40,000 per month in year one; (iii) extend the term of the sublease to approximately fifteen years (subject to a one time renewal, upon the exercise of the Highlands Sublessee’s option and assuming the satisfaction of certain conditions, for an additional five year period); and (iv) increase the annual rent escalator with respect to such rent (with the base rent in lease year two equal to $50,000 per month and the rent escalator equal to 2.0% of the preceding year’s base rent in lease year three, 3.0% of the preceding year’s base rent in lease years four through six and 3.5% of the preceding year’s base rent in lease years seven through fifteen). Giving effect to such amendments, the annual rent under the River Valley Lease in the first year was reduced from approximately $0.6 million to approximately $0.5 million. On November 1, 2015, the River Valley Sublease became effective and operations transferred to the Highlands Sublessee.

Georgia Leases
Powder Springs and Tara
On January 31, 2015, a wholly owned subsidiary (“Wellington Sublessor”) of the Company entered into separate sublease agreements pursuant to which Wellington Sublessor leases two skilled nursing facilities located in Georgia, to affiliates of Wellington Health Services, L.L.C (each a "Wellington Sublessee"). Each sublease agreement was subject to, among other things, each Wellington Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The subleases commenced on April 1, 2015. The facilities are currently leased by Wellington Sublessor, as tenant, pursuant to the Prime Lease. Each sublease agreement is structured as triple net lease wherein the Wellington Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of each sublease agreement will expire on July 31, 2020 coterminous with the Prime Lease. If Wellington Sublessor and landlord agree to extend the term of the Prime Lease, Wellington Sublessee has the right to extend the term of the sublease agreements through the end of the renewal term of the Prime Lease. The annual rent under the two sublease agreements in the first year will be $3.9 million in the aggregate, and the annual rent under each sublease will escalate at 1% each year through the initial term and 2% per year through the renewal term, if any. The sublease agreements are cross-defaulted. In connection with the sublease agreements, the current licensed operators (wholly-owned subsidiaries of Wellington Sublessor) and the Wellington Sublessees also entered into operations transfer agreements with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.
On September 23, 2015, Wellington Sublessor entered into two separate First Amendment to Sublease Agreement (collectively, the "Wellington First Amendments") with Wellington Sublessee. The Wellington First Amendments extend the initial term under the sublease agreements to expire on August 31, 2027, to coincide with the expiration of the initial term under the Prime Lease.
College Park
On February 18, 2015, a wholly owned subsidiary (“College Park Sublessor”) of the Company entered into separate sublease agreements pursuant to which College Park Sublessor leases one skilled nursing facility located in Georgia, to affiliates of C.R. of College Park, LLC (the "College Park Sublessee"). The sublease agreement was subject to, among other things, the College Park Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease agreement is structured as triple net lease wherein the College Park Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on April 30, 2020 and has a five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.6 million annually, and the annual rent will escalate at $12,000 annually through the lease term. The sublease commenced on April 1, 2015. In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of College Park Sublessor) and the College Park Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities. The sublease agreement became effective on April 1, 2015 and the operations of the facility were transferred to the College Park Sublessee.

19
Table of Contents



Autumn Breeze
On February 18, 2015, a wholly owned subsidiary (“Autumn Breeze Sublessor”) of the Company entered into a sublease agreement pursuant to which Autumn Breeze Sublessor will lease one skilled nursing facility located in Georgia, to affiliates of C.R. of Autumn Breeze, LLC (the "Autumn Breeze Sublessee"). The sublease agreement is subject to, among other things, the Autumn Breeze Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease agreement is structured as triple net lease wherein the Autumn Breeze Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on April 30, 2020 and has a five year renewal option. The annual rent under the sublease agreement in the first year will approximate $0.8 million annually, and the annual rent will escalate at $12,000 annually through the initial lease term. In connection with the sublease agreements, the current licensed operator (wholly-owned subsidiary of Autumn Breeze Sublessor) and the Autumn Breeze Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities. The sublease agreement became effective on September 30, 2015 and the operations of the facility were transferred to the Autumn Breeze Sublessee.
LaGrange
On March 17, 2015, a wholly owned subsidiary (“LaGrange Sublessor”) of the Company entered into a sublease agreement pursuant to which LaGrange Sublessor leases one skilled nursing facility located in Georgia, to affiliates of C.R. of LaGrange, LLC (the "LaGrange Sublessee"). The sublease agreement was subject to, among other things, the LaGrange Sublessee's receipt of all licenses and other approvals from the State of Georgia to operate such facility. The sublease commenced on April 1, 2015. The facilities are currently leased by LaGrange Sublessor, as tenant, pursuant to the Prime Lease. The sublease agreement is structured as triple net lease wherein the LaGrange Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on July 31, 2020 coterminous with the Prime Lease. If LaGrange Sublessor and landlord agree to extend the term of the Prime Lease, LaGrange Sublessee has the right to extend the term of the sublease agreements through the end of the renewal term of the Prime Lease. The annual rent under the sublease agreement in the first two years will approximate $1.0 million annually, and the annual rent will escalate at 3.0% annually through the lease term. In connection with the sublease agreements, the current licensed operators (wholly-owned subsidiaries of LaGrange Sublessor) and the LaGrange Sublessee also entered into an operations transfer agreement with respect to the applicable facility, containing customary terms and conditions relating to the transfer of operations of skilled nursing facilities.
On September 14, 2015, LaGrange Sublessor entered into a First Amendment to Sublease Agreement (the "LaGrange First Amendment") with LaGrange Sublessee. The LaGrange First Amendment extends the initial term under the sublease agreement to expire on August 31, 2027, to coincide with the expiration of initial term under the Prime Lease.

Glenvue
On July 1, 2015, a wholly-owned subsidiary (“Glenvue Sublessor”) of the Company entered into a sublease agreement ("Glenvue Agreement") pursuant to which Glenvue Sublessor leased the Facility to C.R. of Glenvue, LLC (the "Glenvue Sublessee") commencing on July 1, 2015. The Glenvue Agreement is structured as triple net lease wherein the Glenvue Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the Glenvue Agreement will expire on June 30, 2020 and has a five year renewal option. The annual cash rent under the sublease agreement in the first year is $1.2 million, and the annual rent will escalate at $12,000 annually through the lease term. The Glenvue Agreement replaces an existing sublease agreement that was originally executed in November 2014.
On August 14, 2015, Glenvue Sublessor entered into a First Amendment to Sublease Agreement (the "Glenvue First Amendment") with Glenvue Sublessee. The Glenvue First Amendment, among other things: (i) extends the initial term of the sublease to expire on June 30, 2025; and (ii) commencing on August 1, 2015, the annual base rent under the sublease agreement shall be equal to: (a) $1.1 million in the first year; and (b) 103% of the immediately preceding lease year for years two through ten.
Bonterra and Parkview
On July 20, 2015, a wholly-owned subsidiary of the Company (the "Georgia Sublessor") entered into a sublease agreement pursuant to which the Georgia Sublessor will lease two skilled nursing facilities located in Georgia (the “Georgia Properties”) to affiliates of Wellington Health Services, L.L.C (collectively, the “Georgia Sublessees”). The sublease agreement is one indivisible lease for the lease of both Georgia Properties, and the terms of the sublease agreement apply to both Georgia Properties collectively as though they are treated as one economic unit. The Wellington Sublessor currently leases the Georgia Properties from a third-party

20
Table of Contents



landlord (“Landlord”) under a master lease agreement (the “Master Lease”), and the sublease agreement is subject and subordinate to the Master Lease.

The sublease agreement, and the transfer of operations of the Georgia Properties as contemplated thereby, are subject to, among other things, the Landlord’s consent to the sublease agreement and each Wellington Sublessee’s receipt of all licenses and other approvals from the State of Georgia to operate the applicable Georgia Property. The initial term of the sublease agreement commences as of the date the Wellington Sublessees have obtained all necessary licenses and approvals, subject to certain adjustments. The sublease agreement is structured as a triple net lease wherein the Wellington Sublessees are responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial term of the sublease agreement will expire on the tenth anniversary of the commencement date. If the Wellington Sublessor and the Landlord agree to extend the term of the Master Lease, then the Wellington Sublessees have the right to extend the term of the sublease agreement through the end of the applicable renewal term of the Master Lease. The annual rent under the sublease agreement in the first year will be approximately $2.0 million, and shall increase by $5,000 per month in the second year and again by $5,000 per month in the third year. Thereafter, base rent will escalate by 3% per year through the lease term and any renewal term. In connection with the sublease agreement, the Wellington Sublessor and the Wellington Sublessees also entered into operations transfer agreements with respect to the applicable Georgia Properties, containing customary terms and conditions relating to the transfer of operations thereof.

On September 1, 2015, Georgia Sublessor entered into a First Amendment to Sublease Agreement (the "Bonterra/Parkview First Amendment") with Georgia Sublessees. The Bonterra/Parkview First Amendment, among other things: (i) amends the initial term of the sublease to expire on April 30, 2025; and (ii) provides for the security deposit to be paid in 12 equal monthly payments of $14,167 beginning on the first day of the second lease year.

Lumber City

On September 10, 2015, a wholly-owned subsidiary of the Company (the "Lumber City Sublessor") entered into a First Amendment to Sublease Agreement (the "Lumber City First Amendment") with an affiliate of Beacon Health Management, LLC (the "Lumber City Sublessee"). The Lumber City First Amendment, among other things: (i) extends the initial term under the sublease agreement to expire on August 31, 2027, to coincide with the expiration of initial term under the Prime Lease; and (ii) the annual base rent under the sublease agreement shall be equal to: (a) approximately $0.8 million in the first year; (b) 102% of the immediately preceding lease year for years two through five; and (c) 102.5% of the immediately preceding lease year beginning in year six and continuing until the expiration of the sublease agreement.

Thomasville

On September 9, 2015, a wholly-owned subsidiary of the Company (the "Thomasville Sublessor") entered into a Third Amendment to Sublease Agreement (the "Thomasville Third Amendment") with C.R. of Thomasville, LLC (the "Thomasville Sublessee"). The Thomasville Third Amendment, among other things: (i) extends the initial term under the sublease agreement to expire on August 31, 2027, to coincide with the expiration of initial term under the Prime Lease; and (ii) commencing on July 1, 2015, the annual base rent under the sublease agreement shall be equal to: (a) $0.3 million in the first year; (b) 102% of the immediately preceding lease year for years two through five; and (c) 102.5% of the immediately preceding lease year beginning in year six and continuing until the expiration of the sublease agreement.

North Carolina and South Carolina Leases
On February 27, 2015, three wholly owned subsidiaries (each, a “Symmetry Healthcare Sublessor”) of the Company entered into separate sublease agreements (each, as subsequently amended, a "Symmetry Healthcare Sublease") pursuant to which each Symmetry Healthcare Sublessor leases one skilled nursing facility located in North Carolina and two skilled nursing facilities located in South Carolina, respectively, to a wholly-owned subsidiary of Symmetry Healthcare Management (each, a "Symmetry Healthcare Sublessee"). In connection with entering into the Symmetry Healthcare Subleases, each Symmetry Healthcare Sublessor and Symmetry Healthcare Sublessee also entered into an operations transfer agreement with respect to the applicable North Carolina and South Carolina facilities, each containing customary terms and conditions. The subleases for the two South Carolina and one North Carolina skilled nursing facilities commenced on April 1, 2015 and June 1, 2015, respectively. Each Symmetry Healthcare Sublease is structured as triple net lease wherein the Symmetry Healthcare Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. Pursuant to each Symmetry Healthcare Sublease, the initial lease term is fifteen years with a five-year renewal option. The annual rent under all of the Symmetry Healthcare Subleases in the first year will be $1.7 million in the aggregate, and the annual rent under each sublease will escalate at 3% each year through the initial term and upon renewal. The sublease agreements are cross-defaulted.


21
Table of Contents



On May 31, 2015, the Symmetry Healthcare Sublessor for the Mountain Trace Rehabilitation and Nursing Center entered into a Second Amendment to the applicable Symmetry Healthcare Sublease, which amended the sublease agreement to, among other things: (i) reduce the first year base rent from $59,000 to $54,000; and (ii) specify a specific rent of $59,000 for the second year of the lease rather than the prior provision that the second year lease rate shall equal 103% of the base rent payable for the immediately preceding lease year.

Ohio Leases
Certain wholly owned subsidiaries of the Company (each, a “Beacon Sublessor”) entered into five sublease agreements, in or around October 2014, pursuant to which those subsidiaries would lease four skilled nursing facilities and one assisted living facility located in Ohio (collectively, the “Beacon Facilities”) to certain affiliates of Beacon Health Management, LLC (each, a “Beacon Sublessee”). On August 1, 2015, the Beacon Sublessors and the Beacon Sublessees entered into new sublease agreements that replaced the existing sublease agreements entered into in or around October 2014. Each of these new sublease agreements became effective on August 1, 2015 and the operations of the Beacon Facilities were transferred to the Beacon Sublessees.

The terms of the sublease agreements for four of the Beacon Facilities known as Eaglewood Village, Hearth and Care of Greenfield, the Pavilion Care Center, and Woodland Manor (collectively, the “EHPW Facilities”) are materially identical and vary slightly from the terms of the sublease agreement for the fifth Beacon Facility, Covington Care Center. Each of the five sublease agreements is structured as triple net lease wherein each Beacon Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. The initial lease term for each of the EHPW Facilities is ten years with a five-year renewal option, and the initial lease term for the Covington Care Center is approximately four years with no renewal option. The aggregate annual base rent under the sublease agreements for the EHPW Facilities in the first year is $2.2 million and it will escalate at 2.5% each year through the initial term. The annual base rent for the Covington Care Center in the first lease year is approximately $0.8 million and it will escalate at an annual rate of $12,000 through the initial term. To establish a fair market base rent under each of the sublease agreements for the EHPW Facilities during any renewal term, the base rent shall be reset and expressed as an annual amount equal to the greater of (i) the fair market rental value of the leased facility as established pursuant to a prescribed formula; or (ii) 102.5% of the base rent due for the immediately preceding lease year. In addition to base rent, the sublease agreements for the EHPW Facilities provides that the sublessees thereunder shall collectively pay to the applicable Beacon Sublessors special rent during the initial term in the amount of $109,632 per year, payable in advance in twelve equal monthly installments on or before the first day of each month (except for the first special rent payment, which shall be subtracted from the lease inducement fee described below). All five of the sublease agreements for the Beacon Facilities are cross-defaulted. Furthermore, the security deposit for any of the Beacon Facilities may be applied to the payment of any default under any one of the sublease agreements (or any other agreement cross-defaulted with the Beacon Facilities’ sublease agreements). In connection with entering into the sublease agreements for the Beacon Facilities, each Beacon Sublessor and Beacon Sublessee also entered into an operations transfer agreement with respect to the applicable facility, each containing customary terms and conditions relating to the transfer of operations thereof.

On August 1, 2015, the Company entered into a Lease Inducement Fee Agreement with certain affiliates of Beacon Health Management, LLC, pursuant to which the Company paid to certain affiliates of Beacon Health Management, LLC a fee of $0.6 million as a lease inducement for the Beacon Sublessees to enter into the sublease agreements described above and to commence such subleases and transfer operations thereunder. The inducement fee was paid net of certain other fees and costs owed by the affiliates of Beacon Health Management, LLC to the Beacon Sublessors, including the first month of base rent for all of the Beacon Facilities and the first month of special rent pertaining to the EHPW Facilities (see Note 13 - Variable Interest Entities).

Oklahoma Leases
On May 1, 2015, two wholly owned subsidiaries (each, an “Oklahoma Sublessor”) of the Company entered into separate sublease agreements with Southwest LTC-Quail Creek, LLC and Southwest LTC-NW OKC, LLC (each, an "Oklahoma Sublessee") pursuant to which each Sublessor will lease one of two skilled nursing facilities. The two facilities are as follows: (i) Quail Creek Nursing Home, a 109-bed skilled nursing facility located in Oklahoma City, OK; and (ii) Northwest Nursing Center, an 88-bed skilled nursing facility located in Oklahoma City OK.

The leases, transfer of operations and commencement dates are subject to, among other things: (i) such Oklahoma Sublessee’s receipt of all licenses and other approvals from the State of Oklahoma to operate such facility; and (ii) approval of the mortgage lender with respect to such facility. Each sublease agreement is structured as triple net lease wherein the Oklahoma Sublessee is responsible for the day-to-day operation, ongoing maintenance, taxes and insurance for the duration of the sublease. Pursuant to each sublease agreement, the initial lease term is ten years with two separate renewal terms of five years each. The annual cash rent under all of the sublease agreements in the first year will be $1.0 million and will escalate thereafter on an annual basis through the initial term and any renewal terms. The sublease agreements are cross-defaulted. In connection with entering into the sublease

22
Table of Contents



agreements, each Oklahoma Sublessor and Oklahoma Sublessee also entered into an operations transfer agreement with respect to the applicable facilities, each containing customary terms and conditions.

As of September 30, 2015, the leases and operations transfer agreements between Oklahoma Sublessors and Oklahoma Sublessees have not commenced.

NOTE 8.                         ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
(Amounts in 000’s) September 30, 2015 December 31, 2014
Accrued payroll related $1,862
 $6,915
Accrued employee benefits 947
 3,405
Real estate and other taxes 792
 1,335
Other accrued expenses 4,167
 3,998
Total accrued expenses(a)
 $7,768
 $15,653
(a) At September 30, 2015 and December 31, 2014, certain accrued expenses include liabilities of the Company's one consolidating VIE (see Note 10 - Discontinued Operations and Note 13 - Variable Interest Entities).
(Amounts in 000’s) March 31, 2016 December 31, 2015
Payroll related $395
 $684
Employee benefits 306
 648
Real estate and other taxes 295
 411
Self-insured reserve 248
 221
Accrued interest 474
 484
Other accrued expenses 609
 677
Total accrued expenses $2,327
 $3,125

NOTE 9.                             NOTES PAYABLE AND OTHER DEBT
 
See Part II, Item 8, Notes to Consolidated Financial Statements, Note 9 - Notes Payable and Other Debt included in the Annual Report for a detailed description of all the Company's debt facilities. 
Notes payable and other debt consistconsists of the following:
following (a):
(Amounts in 000’s) September 30, 2015 December 31, 2014
Revolving credit facilities and lines of credit $842
 $6,832
Senior debt - guaranteed by HUD 25,612
 26,022
Senior debt - guaranteed by USDA 26,625
 27,128
Senior debt - guaranteed by SBA 3,587
 3,703
Senior debt - bonds, net of discount (a)
 12,857
 12,967
Senior debt - other mortgage indebtedness (b) (c)
 54,430
 60,277
Other debt 1,308
 430
Convertible debt issued in 2012 1,500
 7,500
Convertible debt issued in 2014 —
 6,500
Convertible debt issued in 2015 7,700
 —
Total $134,461
 $151,359
Less: current portion 39,992
 22,012
Less: portion included in liabilities of variable interest entity held for sale (a)
 5,871
 5,956
Less: portion included in liabilities of disposal group held for sale (b)
 4,008
 5,197
Less: portion included in liabilities of disposal group held for use (c)
 —
 4,035
Notes payable and other debt, net $84,590
 $114,159
Amounts in (000's) March 31, 2016 December 31, 2015
Senior debt—guaranteed by HUD $25,323
 $25,469
Senior debt—guaranteed by USDA 26,286
 26,463
Senior debt—guaranteed by SBA 3,508
 3,548
Senior debt—bonds, net of discount 7,028
 7,025
Senior debt—other mortgage indebtedness 46,985
 51,128
Other debt 2,562
 2,638
Convertible debt 9,200
 9,200
Deferred financing costs $(2,504) $(2,712)
Total debt $118,388
 $122,759
Current debt 46,919
 50,960
Debt included in liabilities of disposal group held for sale 949
 958
Notes payable and other debt, net of current portion $70,520
 $70,841
(a)
United States ("U.S.") Department of Housing and Urban Development ("HUD"), U.S. Department of Agriculture("USDA"), U.S. Small Business Administration ("SBA").

(a)  The senior debt - bonds, net of discount includes $5.9 million at September 30, 2015 and $6.0 million at December 31, 2014 related to the Company's consolidated VIE, Riverchase Village ADK, LLC ("Riverchase"), revenue bonds issued by the Medical Clinical Board of the City of Hoover in the State of Alabama, which the Company has guaranteed the obligation under such bonds.
(b)  At December 31, 2014, the senior debt - other mortgage indebtedness includes $5.0 million related to the outstanding loan entered into in conjunction with the acquisition of Companions, a skilled nursing facility located in Tulsa, Oklahoma, as well as a related $0.2 million outstanding line of credit balance. At September 30, 2015, the senior debt - other mortgage indebtedness includes $3.0 million related to the outstanding loan entered into in conjunction with the acquisition of the Companions facility, as well as $1.0 million related to the outstanding loan on one of the two office buildings located in Roswell, Georgia.
(c)  At December 31, 2014, the senior debt - other mortgage indebtedness includes $4.0 million related to the outstanding loans entered into in conjunction with the acquisition of a skilled nursing facility located in Bentonville, Arkansas and one of the two office buildings located in Roswell, Georgia. During the nine months ended September 30, 2015, the Bentonville, Arkansas facility was sold and the outstanding loan on the office building in Roswell, Georgia was reclassified to liabilities held for sale.

2319
Table of Contents



The following is a detailed listing of the debt facilities that comprise each of the above categories:

Amounts in (000's)        March 31, December 31,
Facility Lender Maturity 
Interest Rate (a)
 2016 2015
Senior debt - guaranteed by HUD          
The Pavilion Care Center Red Mortgage 12/01/2027  Fixed 4.16% $1,510
 $1,534
Hearth and Care of Greenfield Red Mortgage 08/01/2038  Fixed 4.20% 2,236
 2,251
Woodland Manor Heartland Bank 10/01/2044  Fixed 3.75% 5,529
 5,556
Glenvue Heartland Bank 10/01/2044  Fixed 3.75% 8,585
 8,628
Autumn Breeze KeyBank 01/01/2045  Fixed 3.65% 7,463
 7,500
 Total         $25,323
 $25,469
Senior debt - guaranteed by USDA



    
Attalla
Metro City
09/30/2035
Prime + 1.50%
5.50% $7,348
 $7,400
Coosa
Metro City
09/30/2035
Prime + 1.50%
5.50% 6,625
 6,671
Mountain Trace
Community B&T
01/24/2036
Prime + 1.75%
5.75% 4,476
 4,507
Southland
Bank of Atlanta
07/27/2036
Prime + 1.50%
6.00% 4,548
 4,576
Homestead
Square 1
10/14/2036
Prime + 1.00%
5.75% 3,289
 3,309

Total







 $26,286
 $26,463
Senior debt - guaranteed by SBA



    
College Park
CDC
10/01/2031
Fixed
2.81% $1,676
 $1,697
Stone County
CDC
07/01/2032
Fixed
2.42% 1,109
 1,123
Southland
Bank of Atlanta
07/27/2036
Prime + 2.25%5.75% 723
 728
 Total         $3,508
 $3,548
(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
Amounts in (000's)

     March 31, December 31,
Facility Lender Maturity 
Interest Rate (a)
 2016 2015
Senior debt - bonds, net of discount

          
Eaglewood Bonds Series A City of Springfield, Ohio 05/01/2042  Fixed 7.65% $6,449
 $6,449
Eaglewood Bonds Series B City of Springfield, Ohio 05/01/2021  Fixed 8.50% 579
 576
 Total         $7,028
 $7,025
(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.


20
Table of Contents



Amounts in (000's)

    March 31, December 31,
FacilityLenderMaturity
Interest Rate (a)
2016 2015
Senior debt - other mortgage indebtedness



   
Sumter Valley (c)
Private Bank (d)
09/01/2016
LIBOR + 4.25%
4.63%$5,098
 $5,123
Georgetown (c)
Private Bank (d)
09/01/2016
LIBOR + 4.25%
4.63%4,006
 4,026
Northridge (b)
Private Bank (d)
09/01/2016
LIBOR + 4.25%
5.50%3,667
 4,230
Woodland Hills (b)
Private Bank (d)
09/01/2016
LIBOR + 4.25%
5.50%3,083
 3,557
Abington/Cumberland (b)
Private Bank (d)
09/01/2016
LIBOR + 4.25%
5.50%3,493
 4,029
Heritage Park (b)
Private Bank (d)
09/01/2016
LIBOR + 3.50%
6.00%2,886
 3,370
River Valley (b)
Private Bank (d)
09/01/2016
LIBOR + 3.50%
6.00%3,505
 3,989
Quail Creek (e)
Congressional Bank09/27/2016
LIBOR + 4.75%
5.75%5,000
 5,000
Little Rock/West Markham (b)
Private Bank (d)
12/31/2016
LIBOR + 4.00%
6.00%9,901
 11,399
NorthwestFirst Commercial12/31/2017
Prime
5.00%1,268
 1,285
Stone CountyMetro City06/08/2022
Prime + 2.25%
6.25%1,688
 1,697
College ParkBank of Las Vegas05/01/2031
Prime + 2.00%
6.25%2,441
 2,465
Hembree Rd. BuildingFidelity Bank12/01/2017
 Fixed
5.50%949
 958
 Total      $46,985
 $51,128
(a)
Represents cash interest rates as of March 31, 2016 as adjusted for applicable interest rate floor limitations within the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
(b)
On March 24, 2016, the Company received a commitment from a lender to refinance the Bentonville, Heritage Park and River Valley Credit Facility (under which only two facilities remain financed upon the sale of the Bentonville facility in 2015), the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of $25.4 million of debt subject to definitive documentation and certain closing conditions.

(c)
On March 24, 2016, the Company obtained a lender commitment to extend the maturity date of the Georgetown and Sumter Credit Facility from September 2016 to June 2017 subject to definitive documentation and certain closing conditions.

(d)
On March 24, 2016, the Company obtained the release of approximately $3.9 million of restricted cash funds and applied the amounts as additional principal payments related to certain of the above debt facilities with Private Bank.

(e)
On March 29, 2016, the Company obtained a lender commitment to extend the maturity date of the Quail Creek Credit facility from September 2016 to September 2018 subject to definitive documentation and certain closing conditions.
Amounts in (000's)          
Lender Maturity 
Interest Rate (a)
 March 31, 2016 December 31, 2015
Other debt          
First Insurance Funding 02/29/2017  Fixed 3.99% $206
 $14
Key Bank 08/25/2016  Fixed — 680
 680
Reliant Rehabilitation 11/15/2016  Fixed 7.00% 758
 944
Pharmacy Care of Arkansas 02/08/2018  Fixed 2.00% 918
 1,000
Total       $2,562
 $2,638
(a)
Represents cash interest rates as of March 31, 2016 in accordance with the lender agreements. The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.


21
Table of Contents



Amounts in (000's)          
Facility Maturity 
Interest Rate (a)
 March 31, 2016 December 31, 2015
Convertible debt          
Issued July 2012 10/31/2017  Fixed 10.00% $1,500
 $1,500
Issued March 2015 04/30/2017  Fixed 10.00% 7,700
 7,700
 Total       $9,200
 $9,200
(a)
Represents cash interest rates as of March 31, 2016 in accordance with the lender agreements.The rates exclude amortization of deferred financing costs which range from 0.08% to 1.92% per annum.
The Company was in compliance with all applicable debt covenants as of March 31, 2016.  
Scheduled Maturities
The 2016 maturities, as described below, include the outstanding loans of an aggregate $4.0 million related to the Companions facility and one of the two office buildings located in Roswell, Georgia, which are classified as liabilities of a disposal group held for sale at September 30, 2015, and $5.9 million related to the Riverchase bonds classified as liabilities of a VIE held for sale at September 30, 2015.
The schedule below summarizes the scheduled maturities for the twelve months ended September 30March 31 of the respective year:
 (Amounts in 000’s)
2016$50,040
201720,672
20184,383
20191,834
20201,926
Thereafter55,983
Subtotal134,838
Less: unamortized discounts ($169 classified as current)(377)
   Total$134,461

Debt Covenant Compliance
Asyear (not adjusted for commitments to refinance or extend the maturities of September 30, 2015, the Company (including its consolidated VIE) has approximately 41 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries)as noted above). The subsidiary level requirements are further defined in the table below as follows: (i) financial covenants measured against subsidiaries of the Company ("Subsidiary"); and (ii) financial covenants measured against third-party operator performance ("Operator"). Some covenants are based on annual financial metric measurements whereas others are based on quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of September 30, 2015, the Company has not been in compliance with certain financial covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including, as necessary, modifications to future covenant requirements or the elimination of certain requirements in future periods.
The table below indicates which of the Company's credit-related instruments are not in compliance as of September 30, 2015:
Credit Facility Balance at
September 30, 2015
(000's)		 Subsidiary or Operator Level Covenant Requirement Financial Covenant Min/Max
Financial
Covenant
Required		 Financial
Covenant
Metric
Achieved		   Future
Financial
Covenant
Metric
Required
PrivateBank - Line of Credit - HUD $842
 Subsidiary Minimum Coverage of Rent and Debt Service 1.50
 0.85
 (a)  n/a
PrivateBank - Mortgage Note - Valley River Nursing, LLC; Park Heritage Nursing, LLC; Benton Nursing, LLC $7,401
 Subsidiary Minimum Operator EBITDAR (000s) $265
 $78
 (a) $265
PrivateBank - Mortgage Note - APH&R Property Holdings, LLC; Northridge HC&R Property Holdings, LLC; Woodland Hills HC Property Holdings, LLC $11,871
 Subsidiary Minimum Operator EBITDAR (000s) $450
 $327
 (a) $450
PrivateBank - Mortgage Note - Little Rock HC&R Nursing, LLC $11,456
 Subsidiary Minimum Operator EBITDAR (000s) $358
 $(45) (a) $358
(a) Waiver for violation of covenant obtained.

The measurement period for each covenant requirement in the table above is on a quarterly basis.


24
Table of Contents



Revolving Credit Facilities and Lines of Credit

Gemino-Northwest Credit Facility
On May 30, 2013, NW 61st Nursing, LLC (“Northwest”), a wholly owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC ("Gemino"). The Northwest Credit Facility provided for a2017 maturities include $1.0 million principal amount senior-secured revolving credit facility.
The Northwest Credit Facility matured on January 31, 2015. Interest accrued on the principal balance thereof at an annual rate of 4.75% plus the current LIBOR rate. Northwest also paid to Gemino: (i) a collateral monitoring fee equal to 1.0% per annum of the daily outstanding balance of the Northwest Credit Facility; and (ii) a fee equal to 0.5% per annum of the unused portion of the Northwest Credit Facility. The Northwest Credit Facility was secured by a security interest in the accounts receivable and the collections and proceeds thereof relatingrelated to the Company’s skilled nursing facility located in Oklahoma City, Oklahoma known as the Northwest Nursing Center. AdCare had unconditionally guaranteed all amounts owing under the Northwest Credit Facility. 
On January 30, 2015 and March 25, 2015, Northwest and Gemino amended the Northwest Credit Facility to extend its term to March 31, 2015 and to April 30, 2015, respectively.
On April 30, 2015, the outstanding principal amount of $1.0 million under the Northwest Credit Facility was repaid in full.
Gemino-Bonterra Credit Facility

On September 20, 2012, Bonterra entered into a Second Amendment to the Credit Agreement with Gemino, which amended the original Credit Agreement dated April 27, 2011 between Bonterra and Gemino ("Gemino-Bonterra Credit Facility"). The Gemino-Bonterra Credit Facility was a secured credit facility for borrowings up to $2.0 million. The amendment extended the term of the Gemino-Bonterra Credit Facility from October 29, 2013 to January 31, 2014 and amended certain financial covenants regarding Bonterra's fixed charge coverage ratio, maximum loan turn days and applicable margin. Interest accrued on the principal balance outstanding at an annual rate equal to the LIBOR rate plus the applicable margin of 4.75% to 5.00%, which fluctuated depending upon the principal amount outstanding.
On May 30, 2013, Bonterra, entered into a Fourth Amendment to Credit Agreement with Gemino, which among other things: (i) extended the term of the Gemino-Bonterra Credit Facility from January 31, 2014 to January 31, 2015; (ii) amended certain financial covenants regarding Bonterra’s fixed charge coverage ratio and maximum loan turn days; and (iii) amended the Gemino-Bonterra Credit Facility to include the Northwest Credit Facility as an affiliated credit agreement in determining whether certain financial covenants are being met.
On January 30, 2015, March 31, 2015, and May 1, 2015, Bonterra and Gemino amended the Gemino-Bonterra Credit Facility to extend its term to March 31, 2015, April 30, 2015, and June 30, 2015, respectively.

On July 1, 2015, the outstanding principal amount of $0.4 million under the Gemino-Bonterra Credit Facility was repaid in full.
PrivateBank Credit Facility
On April 1, 2015, certain wholly owned subsidiaries (the “PrivateBank Borrowers”) the Company entered into a Eighth Modification Agreement (the “Eighth Modification”) with The PrivateBank and Trust Company (“PrivateBank”), which modified that certain Loan Agreement, dated September 20, 2012, between the PrivateBank Borrowers, PrivateBank and the Company, as guarantor (as amended, the “PrivateBank Credit Facility”). Under the Eighth Modification:(i) PrivateBank consented to the transfer of operations to new operators and the amendment of the related leases; (ii) the outstanding amount owing under the PrivateBank Credit Facility was reduced from $8.8 million to $6.0 million, effective April 1, 2015; and (iii) the outstanding amount owing under the PrivateBank Credit Facility was reduced from $6.0 million to $5.8 million, effective August 1, 2015.

On May 1, 2015, the PrivateBank Borrowers entered into a Ninth Modification Agreement (the “Ninth Modification”) with PrivateBank, which modified the PrivateBank Credit Facility. Under the Ninth Modification: (i) PrivateBank consented to the transfer of operations to new operators and the amendment of the related leases; and (ii) the outstanding amount owing under the PrivateBank Credit Facility was reduced from $5.8 million to $3.8 million.

On July 30, 2015, the PrivateBank Borrowers entered into a Tenth Modification Agreement (the “Tenth Modification”) with PrivateBank, which modified the PrivateBank Credit Facility. Under the Tenth Modification: (i) the outstanding amount owing under the PrivateBank Credit Facility was reduced to $3.8 million, effective July 30, 2015; and (ii) the PrivateBank Borrowers shall not have the right to receive any additional cash borrowings under the PrivateBank Credit Facility.

25
Table of Contents




On September 2, 2015, the PrivateBank Borrowers entered into a Eleventh Modification Agreement (the “Eleventh Modification”) with PrivateBank, which modified the PrivateBank Credit Facility. Under the Eleventh Modification: (i) the outstanding amount owing under the PrivateBank Credit Facility was reduced to $1.8 million, effective September 2, 2015; and (ii) the face value of one of the two lettersoffice buildings located in Roswell, Georgia which is classified in liabilities of credit outstanding underdisposal group held for sale. In April 2016, the PrivateBank Credit Facilityoffice building was reduced by $2.0 million.

As of September 30, 2015, there were no cash borrowings outstanding under the PrivateBank Credit Facility. As of September 30, 2015, the Company had $1.8 million of outstanding letters of credit related to this credit facility. At September 30, 2015, the Company was in compliance with all covenants contained in the PrivateBank Credit Facility.
PrivateBank-Woodland Nursing and Glenvue Nursing Credit Facility
On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Loan and Security Agreement (the “Woodland Nursing and Glenvue Nursing Credit Facility”) with PrivateBank. The Woodland Nursing and Glenvue Nursing Credit Facility provides for a $1.5 million principal amount senior secured revolving credit facility.

The Woodland Nursing and Glenvue Nursing Credit Facility matures on September 24, 2017. Interest on the Woodland Nursing and Glenvue Nursing Credit Facility accrues on the principal balance thereof at a rate of interest equal to the greater of: (i) a floating per annum rate of interest equal to the prime rate plus 1.0%; or (ii) 5.0% per annum. These certain wholly-owned subsidiaries of the Company paid to PrivateBank: (i) a one time non-refundable loan fee in the amount of $11,250 and (ii) a fee equal to 0.5% per annum of the unused portion of the Woodland Nursing and Glenvue Nursing Credit Facility. The Woodland Nursing and Glenvue Nursing Credit Facility is secured by a security interest in, without limitation, the accounts receivablesold and the collections and proceeds thereof relating to the Company’s two skilled nursing facilities located in Springfield, Ohio, known as the Eaglewood Care Center, and Glennville, Georgia, known as the Glenview Health and Rehabilitation Center. AdCare has unconditionally guaranteed all amounts owing under the Woodland Nursing and Glenvue Nursing Credit Facility.

The Woodland Nursing and Glenvue Nursing Credit Facility contains customary events of default, including material breach of representations and warranties, failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. Upon the occurrence of an event of default, PrivateBank may terminate the Woodland Nursing and Glenvue Nursing Credit Facility.

As of September 30, 2015, $0.8 million wasrelated outstanding at an interest rate of 5.0% per annum under the Woodland Nursing and Glenvue Nursing Credit Facility, subject to borrowing base limitations. The $0.8 million principal outstanding under the loan is included in the current portion of debt disclosed in the table above. At September 30, 2015, the Company was not in compliance with all covenants contained in the Woodland Nursing and Glenvue Nursing Credit Facility and has obtained a waiver from PrivateBank.
Contemporary Healthcare Loan
On August 17, 2012, in conjunction with the acquisition of Companions, a wholly owned subsidiary of the Company entered into a Loan Agreement with Contemporary Healthcare Capital LLC ("Contemporary") and issued a promissory note in favor of Contemporary with a principal amount of $0.6 million ("Contemporary $0.6 million Loan"). The Contemporary $0.6 million Loan was to mature on August 20, 2015 and interest accrued on the principal balance at an annual rate of 9.0%. Payments for the interest and a portion of the principal in excess of the borrowing base were payable monthly, commencing on September 20, 2012.
On May 14, 2015, the outstanding principal amount of $0.2 million under the Contemporary $0.6 million Loan was repaid in full.
Senior Debt—Other Mortgage Indebtedness
Companions Specialized Care
In August 2012, a wholly owned subsidiary of the Company financed the acquisition of Companions by entering into a loan agreement for $5.0 million ("Contemporary Loan") with Contemporary. The loan had an original maturity date of August 20, 2015 with a required final payment of $5.0 million. The loan accrued interest at a fixed rate of 8.5% per annum. Deferred financing costs incurred on the loan amounted to $0.2 million and were amortized to interest expense over the life of the loan. The loan was secured by the Companions facility and guaranteed by AdCare.
On August 12, 2015, a wholly owned subsidiary of the Company entered into a First Amendment with Contemporary, which modified the Contemporary Loan. Under the First Amendment: (i) the outstanding amount owing under the Contemporary Loan was reduced from $5.0 million to $3.0 million; (ii) restricted assets related to the loan of $2.0 million were used to reduce the outstanding amount owing under the Contemporary Loan, thus eliminating all restricted assets related to the loan; and (iii) the maturity date of the Contemporary Loan was extended from August 20, 2015 to November 20, 2015.

26
Table of Contents



As of September 30, 2015, $3.0 million was outstanding under the Companions loan. On October 30, 2015, the Company completed the sale of Companions and repaid in full the $3.0 million outstanding under the Contemporary Loan.
Northridge, Woodland Hills and Abington Credit Facility
On February 25, 2015, three wholly owned subsidiaries of the Company entered into a Loan Agreement (the "Northridge, Woodland Hills and Abington Credit Facility") with PrivateBank, which provides for a $12.0 million principal amount secured credit facility. The credit facility is secured by real property.
The Northridge, Woodland Hills and Abington Credit Facility matures on September 1, 2016. Interest accrues on the principal balance thereof at the LIBOR rate plus 4.25%. Principal and interest payments on the loan are due and payable monthly, beginning on March 1, 2015. The facility is also secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Northridge, Woodland Hills and Abington Credit Facility.
AdCare has unconditionally guaranteed all amounts owing under the Northridge, Woodland Hills and Abington Credit Facility. Proceeds from the Northridge, Woodland Hills and Abington Credit Facility were used to pay off all amounts outstanding under a separate $12.0 million credit facility with KeyBank National Association ("KeyBank") under which certain subsidiaries of the Company were borrowers.
As of September 30, 2015, $11.9 million was outstanding, at an interest rate of approximately 4.4% per annum, of the maximum borrowing amount of $12.0 million under the Northridge, Woodland Hills and Abington Credit Facility.The $11.9 million principal outstanding under the loan is included in the current portion of debt disclosed in the table above. As of September 30, 2015, the Company had $2.0 million of outstanding restricted assets related to this credit facility. At September 30, 2015, the Company was not in compliance with a covenant contained in the Northridge, Woodland Hills and Abington Credit Facility and has obtained a waiver from PrivateBank.
On October 30, 2015, three wholly owned subsidiaries of the Company entered into a Modification Agreement with PrivateBank, which modified the Northridge, Woodland Hills and Abington Credit Facility (see Note 16 - Subsequent Events).
Little Rock Credit Facility
On March 30, 2012, Little Rock HC&R Property Holdings, LLC ("Little Rock") and two other wholly owned subsidiaries of the Company, in connection with the Company's April 2012 acquisition of three skilled nursing facilities located in Arkansas, entered into a loan agreement for $21.8 million with PrivateBank (the "Little Rock Credit Facility"). The Little Rock Credit Facility, as amended on December 28, 2012, matures in December 2016 with a required final payment of $13.7 million. The Little Rock Credit Facility accrues interest at the LIBOR rate plus 4%with a minimum rate of 6% per annum and requires monthly principal payments plus interest for total current monthly payments of $0.2 million. Deferred financing costs incurred on the loan amounted to $0.4 million and are being amortized to interest expense over the life of the loan. The Little Rock Credit Facility is secured by the three facilities and guaranteed by Little Rock HC&R Nursing, LLC and AdCare. The facility is also secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Little Rock Credit Facility. A portion of the Little Rock Credit Facility with respect to the Northridge facility and Woodland Hills facility was paid off and refinanced with a portion of the proceeds from a new credit facility with KeyBank.
On May 1, 2015, Little Rock entered into a Fifth Modification Agreement with PrivateBank, which modified the Little Rock Credit Facility. The Fifth Modification, among other things: (i) provided for PrivateBank's consent to the sublease of the Company’s Little Rock Health & Rehabilitation Center to an affiliate of Aria Health Group, LLC; and (ii) amended the minimum EBITDAR covenant discussed in the Little Rock Credit Facility to reflect a new facility operator, Highlands of Little Rock West Markham, LLC.
The Company has $2.1 million of restricted assets related to this loan. As of September 30, 2015, $11.5 million was outstanding at an interest rate of 6.0% per annum under loan agreement. At September 30, 2015, the Company was not in compliance with a covenant contained in the loan agreement and has obtained a waiver from PrivateBank.
On October 30, 2015, Little Rock and two other wholly owned subsidiaries of the Company entered into a Sixth Modification Agreement with PrivateBank, which modified the Little Rock Credit Facility (see Note 16 - Subsequent Events).
Bentonville, Heritage Park and River Valley
On May 1, 2015, Benton Property Holdings, LLC, Park Heritage Property Holdings, LLC, and Valley River Property Holdings, LLC, each a wholly owned subsidiary of the Company (collectively, the “Benton Borrower Group”), entered into a Loan Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 1, 2011, as amended, between the Benton Borrower Group and PrivateBank (the "Bentonville, Heritage Park and River Valley Credit Facility"). The Loan Modification, among other things: (i) provided for PrivateBank's consent to the sublease of the Company’s Heritage Park

27
Table of Contents
 (Amounts in 000’s)
2017$47,867
201812,502
20191,778
20201,866
20211,969
Thereafter55,112
Subtotal$121,094
Less: unamortized discounts(202)
Less: deferred financing costs$(2,504)
Total notes and other debt$118,388



Nursing Center to an affiliate of Aria Health Group, LLC; and (ii) amended the minimum EBITDA covenant described in the Bentonville, Heritage Park and River Valley Credit Facility to (a) reflect a new facility operator, Highlands of Rogers Dixieland, LLC, and (b) change the minimum EBITDA covenant to a “Minimum EBITDAR/Management Fee” covenant, which modifies minimum EBITDAR to take into account management fees equal to the greater of the operator’s actual management fees for such period or imputed management fees equal to 5% of such operator’s gross income for such period, as determined in accordance with generally accepted accounting principles.

On July 1, 2015, the Company completed the sale of its Bentonville, Arkansas skilled nursing facility consisting of 83 licensed beds for $3.4 million net of customary closing and certain real property apportionments. Net proceeds were used to repay certain mortgage indebtedness under the Bentonville, Heritage Park and River Valley Credit Facility.
As of September 30, 2015, $9.9 million was outstanding at an interest rate of 6.0% per annum under the Bentonville, Heritage Park and River Valley Credit Facility. The $9.9 million principal outstanding under the loan is included in the current portion of debt disclosed in the table above. At September 30, 2015, the Company was not in compliance with a covenant contained in the loan agreement and has obtained a waiver from PrivateBank.
On October 30, 2015, Benton Borrower Group entered into a Second Modification Agreement with PrivateBank, which modified the Bentonville, Heritage Park and River Valley Credit Facility (see Note 16 - Subsequent Events).
Other Debt
Insurance Funding
In March 2015, the Company obtained financing from IPFS Corporation and entered into a Commercial Insurance Premium Finance Security Agreement for several insurance programs, including property, casualty, and crime, effective March 1, 2015 and maturing on December 31, 2015. The total amount financed was approximately $0.4 million requiring monthly payments with interest of 3.29% starting April 2015.
In May 2015, the Company obtained additional financing from IPFS Corporation, effective May 1, 2015 and maturing on April 30, 2016. The additional amount financed was approximately $1.0 million requiring monthly payments with interest of 3.29% starting June 2015. At September 30, 2015, the combined outstanding principal and interest was approximately $0.6 million under the Commercial Insurance Premium Finance Security Agreement.
KeyBank Promissory Notes
On February 25, 2015, the Company entered into four separate unsecured Promissory Note Agreements (the "KeyBank Promissory Notes") with KeyBank for an aggregate principal amount of $0.7 million. The indebtedness represents the portion of certain deferred exit fees owed by the Company to KeyBank in connection with the February 2015 repayment of a credit facility with KeyBank. The KeyBank Promissory Notes mature on August 25, 2016, at which time the entire principal balance of the non-interest-bearing notes then unpaid shall be due. If, prior to the maturity date, certain refinancing agreements are entered into with KeyBank as lender, affiliate of lender, or by an agency financing originated by KeyBank or any affiliate of KeyBank, then and in such an event the entire remaining principal amount of the KeyBank Promissory Notes shall be forgiven.
On April 3, 2015, the Company entered into five separate unsecured Amended and Restated Promissory Note Agreements with KeyBank, which amend the KeyBank Promissory Notes to include a fifth note with the aggregate principal total of $0.7 million remaining unaltered. The amendments restate the principal balances on the original notes in order to include a fifth note.
Convertible Debt
Convertible Subordinated Notes Issued in 2012 (the "2012 Notes")

On June 30, 2015, the Company entered into prepayment agreements with Anthony Cantone and CAM in connection with the Company's 8% Subordinated Convertible Notes due July 31, 2015 issued to them with an aggregate original principal amount of approximately $6.4 million (the "Cantone Notes"). In connection therewith, the Company made principal prepayments in aggregate of approximately $1.5 million with respect to the Cantone Notes. On August 21, 2014, Mr. Cantone and certain of his affiliates filed a Schedule 13G/A with the SEC reporting ownership in excess of 5% of the common stock. On October 5, 2015, Mr. Cantone and certain of his affiliates filed a Schedule 13G/A with the SEC reporting ownership of less than 5% of the common stock (see Note 15 - Related Party Transactions).


28
Table of Contents



On July 30, 2015, the Company and CAM amended the terms of that certain 8% subordinated convertible note, issued by the Company to CAM and due July 31, 2015, with a principal payment amount as of such date of $4.8 million, which was repaid, to: (i) extend the maturity date with respect to $1.5 million of the principal amount of the Note to October 31, 2017; (ii) increase the interest rate from 8.0% to 10.0% per annum; and (iii) increase the conversion price from $3.97 to $4.25 per share.

Additionally, the amendment modifies the Company’s right to prepay the note so that the Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to the note; provided, however, that: (i) the shares of the common stock issuable upon conversion of the note have been registered for resale under the Securities Act; (ii) at any time after the issue date of the note, the volume-weighted average price of the common stock for 10 consecutive trading days has equaled or exceeded 150% of the then-current conversion price; and (iii) such prepayment may not be effected prior to July 31, 2016. The amendment also affords each of CAM and the Company the right to cause the redemption of all or any portion of the principal amount of the note upon a change of control (as defined in the note) at a redemption price equal to 115% of the sum of (i) outstanding principal amount to be redeemed, plus (ii) the amount of accrued and unpaid interest thereon.

Pursuant to the amendment, the Company paid to Cantone Research, Inc. (“CRI”), an affiliate of CAM, a fee equal to $37,500. The amendment also amends that certain Consulting Agreement, dated July 2, 2012, between the Company and CRI to: (i) reduce the annual consulting fee payable thereunder to $15,000 and further reduce such fee proportionately upon each repayment, redemption or conversion of the principal amount of the note; and (ii) terminate the Consulting Agreement upon the earlier of October 31, 2017, or the conversion, redemption or prepayment of the entire principal amount of the note.
Convertible Subordinated Notes Issued in 2014(the "2014 Notes")
On April 30, 2015, the Company repaid the outstanding principal amount of $6.5 million under the 2014 Notes plus all interest accrued and unpaid thereunder. Of the $6.5 million outstanding principal amount, $0.8 million was repaid in cash and $5.7 million was repaid through the setoff of amounts owed to the Company by the noteholders.
Convertible Subordinated Notes Issued in 2015 (the "2015 Notes")
On March 31, 2015, the Company entered into Subscription Agreements for $8.5 million of the 2015 Notes with certain accredited investors, including certain holders of the 2014 Notes. In connection therewith, the Company issued approximately $1.7 million in principal amount of 2015 Notes on March 31, 2015 and approximately $6.0 million in principal amount of 2015 Notes on April 30, 2015. Accepted subscriptions for $0.8 million in principal amount of 2015 Notes were not funded by the April 30, 2015 payment deadline, and 2015 Notes were not issued in respect thereof.
The 2015 Notes are convertible at the option of the holder into shares of common stock at an initial conversion price equal to $4.25 per share. If, prior to September 30, 2015, the Company issued or sold any shares of common stock or common stock equivalents (excluding certain excluded securities, as defined in the 2015 Notes) for a consideration per share (the “New Issuance Price”) less than the conversion price then in effect immediately prior to such issuance or sale, then immediately after such issuance or sale the conversion price then in effect shall be reduced to an amount equal to the New Issuance Price (an “Adjustment for Dilutive Issuances”). Notwithstanding the foregoing, no Adjustment for Dilutive Issuances would be effected to the extent it would cause the number of shares of common stock issued, plus the number of shares of common stock issuable, in respect of all 2015 Notes in the aggregate to exceed 3,850,405 shares of common stock. As of September 30, 2015, no Adjustment for Dilutive Issuances was made. In addition, the conversion price will be subject to adjustment for any subdivision (by stock dividend, stock split or similar corporation action) or combination (by reverse stock split or similar corporate action) of the common stock.

The Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2015 Note; provided, however, that: (i) the shares of common stock issuable upon conversion of any 2015 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act; or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; (ii) at any time after the issue date of such 2015 Note, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded 125% of the then-current conversion price; and (iii) such prepayment may not be effected prior to March 31, 2016.

The holders holding a majority of the outstanding principal amount with respect to all the 2015 Notes may require the Company to redeem all or any portion of the 2015 Notes upon a change of control (as defined in the 2015 Notes) for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. In addition, upon a change of control, the Company may redeem all or any portion of the 2015 Notes for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.

During the existence and continuance of an event of default under a 2015 Note, the outstanding principal amount of such 2015 Note shall incur interest at a rate of 14% per annum, and the holder of such 2015 Note may require the Company to redeem all or

29
Table of Contents



any portion of such 2015 Note at a redemption price in cash equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. An “event of default,” with respect to a 2015 Note includes: (i) the Company’s failure to pay to the holder of such 2015 Note any amount of principal or interest by the seventh business day following the date when due under such 2015 Note; and (ii) specific events of bankruptcy, insolvency, reorganization or liquidation.

In the offering, the Company accepted Subscription Agreements from certain related parties (see Note 15 - Related Party Transactions).

NOTE 10.                      DISCONTINUED OPERATIONS

On April 1, 2015, the subleases commenced and operations transferred for four skilled nursing facilities located in Georgia and two skilled nursing facilities located in South Carolina (see Note 7 - Leases).
On April 29, 2015, a wholly-owned subsidiary of the Company (the “Companions Seller”) entered into an asset purchase agreement (the “Companions Sale Agreement”) with Gracewood Manor, LLC, an Oklahoma limited liability company (the “Companions Purchaser”), to sell Companions, a 102-bed skilled nursing facility located in Tulsa, Oklahoma, for a sale price of $3.5 million. In connection with entering into the Companions Sale Agreement, the Companions Seller and Companions Purchaser entered into an operations transfer agreement to transfer the operations of Companions concurrent with the closing of the asset purchase agreement. On October 30, 2015, the Company completed the sale of Companions and transferred the operations to the Companions Purchaser (see Note 16 - Subsequent Events).
On May 1, 2015, the subleases commenced and operations transferred for seven skilled nursing facilities and one assisted living facility located in Arkansas (see Note 7 - Leases).
On May 15, 2015, a wholly-owned subsidiary of the Company (the “Bentonville Seller”) entered into an asset purchase agreement (the “Bentonville Sale Agreement”) with Bozeman Development, LLC, a Texas limited liability company (the “Bentonville Purchaser”), to sell Bentonville. The transaction closed on July 1, 2015 and the net sales proceeds of $3.4 million were remitted to the Bentonville Seller. In connection with entering into the Bentonville Sale Agreement, the Bentonville Seller and Bentonville Purchaser entered into an operations transfer agreement to transfer the operations of Bentonville Manor concurrent with the closing of the asset purchase agreement.

On June 1, 2015, the sublease commenced and operations transferred for one skilled nursing facility located in North Carolina (see Note 7 - Leases).

On June 11, 2015, Riverchase entered into an asset purchase agreement (the "Riverchase Sale Agreement") with Omega Communities, LLC ("Omega") to sell the Riverchase Village facility, a 105-bed assisted living facility located in Hoover, Alabama. The purchase price for the Riverchase Village facility was $6.8 million and was originally scheduled to close on or before July 31, 2015, subject to the purchaser's right to extend the closing date to August 31, 2015. The sale is subject to the completion of satisfactory due diligence, the receipt of required licenses and other state regulatory approvals, and the satisfaction of other customary closing conditions.

On August 6, 2015, Riverchase entered into a First Amendment to Asset Purchase Agreement ("First Amendment") with Omega, which amended the Riverchase Sale Agreement. Under the First Amendment: (i) the closing date of the Riverchase Sale Agreement was extended to August 31, 2015, subject to the purchaser's right to extend the closing date to September 30, 2015, upon completion of conditions set forth in the agreement; (ii) Omega transferred $0.1 million in additional earnest money to Riverchase, to extend the Riverchase Sale Agreement to August 31, 2015; and (iii) the total purchase price, inclusive of the additional earnest money, increased by $0.1 million to $6.9 million.

On September 30, 2015, Riverchase entered into a Second Amendment to Asset Purchase Agreement ("Second Amendment") with Omega, which amended the Riverchase Sale Agreement. Under the Second Amendment: (i) the closing date of the Riverchase Sale Agreement was extended to November 30, 2015; and (ii) Omega transferred $0.2 million in additional earnest money to Riverchase, to extend the Riverchase Sale Agreement to November 30, 2015.

On July 1, 2015, the sublease commenced and operations transferred for one skilled nursing facility located in Georgia (see Note 7 - Leases).

On August 1, 2015, the subleases commenced and operations transferred for four skilled nursing facilities and one assisted living facility located in Ohio (see Note 7 - Leases).

On September 1, 2015, the subleases commenced and operations transferred for two skilled nursing facilities located in Georgia (see Note 7 - Leases).

On September 30, 2015, the sublease commenced and operations transferred for one skilled nursing facility located in Georgia (see Note 7 - Leases).

On November 1, 2015, the sublease commenced and operations transferred for one skilled nursing facility located in Arkansas (see Note 7 - Leases and Note 16 - Subsequent Events).

For the discontinued operations, the patient care revenue, related cost of services, and facility rental expense prior to the commencement of subleasing are classified in the activities below. For a historical listing and description of the Company's discontinued entities, see Part II, Item 8, Notes to Consolidated Financial Statements, - Note 11 - Discontinued Operations, ofincluded in the Annual Report.
The following table summarizes thecertain activity of discontinued operations for the three and nine months ended September 30, 2015March 31, 2016 and 20142015:
  Three Months Ended September 30, Nine Months Ended September 30,
(Amounts in 000’s) 2015 2014 2015 2014
Total revenues from discontinued operations $8,158
 $53,677
 $71,826
 $158,364
Net income (loss) from discontinued operations $(3,228) $6,850
 $(2,694) $19,034
Interest expense, net from discontinued operations $265
 $313
 $881
 $933
  Three Months Ended March 31,
(Amounts in 000’s) 2016 2015
Total revenues $—
 $46,862
Cost of services 519
 42,930
Net income (loss) (528) 2,266
Interest expense, net 8
 313

At March 31, 2016, the Company had two office buildings held for sale. The Company completed the sale of one of these buildings on April 25, 2016 for $0.7 million. Debt obligations on the transaction exceeded proceeds by $0.2 million. The other office building is unencumbered and under contract for a sales price of $0.2 million. The Company expects to complete the sale of the second office building in the second quarter of 2016.

22
Table of Contents



On January 21, 2015,February 9, 2016, the Company listedsold an office building in Arkansas for sale its two$0.3 million. The office buildings located in Roswell, Georgia as part of its transition to a healthcare property holding and leasing company. During the three and nine months ended September 30, 2015, the Company recognized an impairment charge of approximately $0.2 million and $0.3 million, respectively, to write down the carrying value of its two office buildings. The assets and liabilities of the two office buildings have been reclassified to assets and liabilities of disposal groups held for sale as of September 30, 2015.space was unencumbered.
Assets and liabilities of the disposal groupsgroup held for sale at September 30, 2015March 31, 2016 and December 31, 20142015, are as follows: 
(Amounts in 000’s) September 30, 2015 December 31, 2014 March 31, 2016 December 31, 2015
Property and equipment, net (a)
 $4,868
 $3,777
 $1,237
 $1,249
Other assets 121
 2,036
Assets of disposal groups held for sale $4,989
 $5,813
 $1,237
 $1,249
        
Notes payable $4,008
 $5,000
 $949
 $958
Line of credit —
 197
Liabilities of disposal group held for sale $4,008
 $5,197
 $949
 $958

(a)NOTE 11. PropertyCOMMON AND PREFERRED STOCK

Common Stock Repurchase Activity

In the three months ended March 31, 2016, the Company repurchased 150,000 shares of common stock pursuant to the share repurchase program announced on November 12, 2015 (the “Repurchase Program”) at an average purchase price of approximately $2.05 per share, exclusive of commissions and equipment, net includesrelated fees. Pursuant to the CON relatedRepurchase Program, the Company is authorized to Companions.repurchase up to 500,000 shares of its outstanding common stock during a twelve-month period. Share repurchases may be made from time to time through open market transactions, block trades or privately negotiated transactions and are subject to market conditions, as well as corporate, regulatory and other considerations. The Repurchase Program may be suspended or discontinued at any time. As of March 31, 2016, a maximum 350,000 shares may yet be purchased under the Repurchase Program.

Assets and liabilitiesPreferred Stock

The liquidation preference of the VIE held for saleCompany's Series A Preferred Stock is $25 per share. Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25 liquidation preference per share. The dividend rate may increase under certain circumstances.

Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a "Change of Control," as defined in the Company's Articles of Incorporation. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25 per share, plus any accrued and unpaid dividends to the redemption date.

The change-in-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, September 30, 2015SEC Staff Announcement: Classification and December 31, 2014Measurement of Redeemable Securities, requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are as follows:outside of the issuer's control. The assessment of whether the redemption of an equity security could occur outside of the issuer's control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable.
Amounts in (000's) September 30, 2015 December 31, 2014
Property and equipment, net $5,918
 $5,893
Other assets —
 31
Assets of variable interest entity held for sale $5,918
 $5,924
     
Bonds payable $5,871
 $5,956
Liabilities of variable interest entity held for sale $5,871
 $5,956

Preferred Stock Offerings and Dividends

The following table summarizes the shares of preferred stock issued by the Company and net proceeds received from issuance and dividends paid on the Company's preferred stock for the three months ended March 31, 2016:


3023
Table of Contents



NOTE 11.DIVIDENDS AND PREFERRED STOCK
  Shares Issued & OutstandingNet Proceeds from Issuance (in 000's)Dividends Paid (in 000's)
Balances, December 31, 2015 2,426,930
$54,714
 
     
At-The-Market offering 186,905
$3,677
 
Dividends paid during 2016   $1,777
     
Balances, March 31, 2016 2,613,835
$58,391
 

Common Stock

On March 31, 2015, the Board of Directors declared a cash dividend of $0.05 per share to shareholders of common stock of record as of April 15, 2015. The cash dividend was paid on April 30, 2015.

On June 30, 2015, the Board of Directors declared a cash dividend of $0.055 per share to shareholders of common stock of record as of July 15, 2015. The cash dividend was paid on July 31, 2015.

On September 29, 2015, the Board of Directors declared a cash dividend of $0.06 per share to shareholders of common stock of record as of October 15, 2015. The $1.2 million dividend payable is recorded as part of accrued expenses at September 30, 2015. The cash dividend was paid on October 31, 2015.

Preferred Stock

On March 31, 2015, the Company paid a quarterly dividend of $0.68 per share on approximately 1.0 million shares of its Series A Preferred Stock to shareholders of record as of March 20, 2015.

On April 13, 2015, the Company issued and sold 575,000 shares of Series A Preferred Stock in a “best efforts” registered public offering for a public offering price of $25.75 per share. In connection therewith, the Company received net proceeds of $13.8 million, after the payment of underwriting commissions and discounts and other offering expense payable by the Company.

On June 2, 2015, the Company issued and sold 588,235 shares of Series A Preferred Stock in a “best efforts” registered public offering for a public offering price of $25.50 per share. In connection therewith, the Company received net proceeds of $14.2 million, after the payment of underwriting commissions and discounts and other offering expense payable by the Company.

On June 30, 2015, the Company paid a quarterly dividend of $0.68 per share on approximately 2.1 million shares of its Series A Preferred Stock to shareholders of record as of June 19, 2015.

On July 21, 2015, the Company entered into separate Sales Agreements with each of its Agents, pursuant to which the Company may offer and sell, from time to time, up to 800,000 shares of Series A Preferred Stock under its ATM through the Agents.

Sales of the shares pursuant to the Sales Agreements, if any, may be made in negotiated transactions or any method permitted by Rule 415 under the Securities Act, including sales made directly on the NYSE MKT or sales made to or through a market maker other than on an exchange. The Agents are not required to sell any specific number of shares, but each Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices and in accordance with the terms set forth in the Sales Agreements. The Company will instruct each Agent as to the number of shares to be sold by it. Additionally, the Company may instruct the Agents not to sell the shares if the sales cannot be effected at or above the price designated by the Company in its instructions to the Agents. On any given day, only one Agent may sell the shares pursuant to the Sales Agreements. Under the Sales Agreements, the applicable Agent will be entitled to compensation of up to 2.0% of the gross sales price of all shares sold through it as Agent.

The Sales Agreements contains customary representations and warranties of the parties and indemnification and contribution under which the Company, on the one hand, and the Agents, on the other hand, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

For the three months ended September 30, 2015, the Company sold 90,136 shares of Series A Preferred Stock under its ATM at an average sale price of $24.91 per share. In connection therewith, the Company received net proceeds of approximately $2.2 million, after payment of underwriting commissions and discounts and other offering expenses incurred by the Company.

On September 30, 2015, the Company paid a quarterly dividend of $0.68 per share on approximately 2.2 million shares of its Series A Preferred Stock to shareholders of record as of September 18, 2015.


31
Table of Contents



NOTE 12.                      STOCK BASED COMPENSATION

For the three and nine months ended September 30, 2015March 31, 2016 and 20142015, the Company recognized stock-based compensation expense as follows: 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
(Amounts in 000’s) 2015 2014 2015 2014 2016 2015
Employee compensation:  
  
  
  
  
  
Restricted stock $111
 $63
Stock options $11
 $88
 $56
 $276
 85
 44
Warrants 55
 43
 139
 133
 246
 33
Restricted stock 109
 10
 301
 112
Total employee stock-based compensation expense $175
 $141
 $496
 $521
 $442
 $140
Non-employee compensation:          
  
Board restricted stock $57
 $42
 $144
 $268
 $26
 $51
Board stock options 13
 61
 37
 182
 12
 12
Warrants —
 —
 —
 12
Total non-employee stock-based compensation expense $70
 $103
 $181
 $462
 $38
 $63
Total stock-based compensation expenseTotal stock-based compensation expense$245
 $244
 $677
 $983
Total stock-based compensation expense$480
 $203

Stock Incentive PlansPlan
The Company has twoone active employee stock option plans:
The 2005 Stock Incentive Plan, which expired September 30, 2015 and provided for a maximum of 578,812 shares of common stock to be issued.plan:
The 2011 Stock Incentive Plan, which expires March 28, 2021 and provides for a maximum of 2,152,500 shares of common stock to be issued.
Both plans permitThe 2011 Stock Incentive Plan permits the granting of incentive or nonqualified stock options. The 2011 Stock Incentive Plan also permitsoptions and the granting of restricted stock. The plans areplan is administered by the Board of Directors which has the authority to determine the employees to whom awards will be made, the amounts of the awards, and the other terms and conditions of the awards. The Company uses only the 2011 Stock Incentive Plan to make future grants. The number of securities remaining available for future issuance is 483,923.634,384. 
In addition to the Company's stock option plans,plan, the Company grants stock warrants to officers, directors, employees and certain consultants to the Company from time to time as determined by the Board of Directors and, when appropriate, the Compensation Committee of the Board of Directors. The Board of Directors administers the granting of warrants, determines the persons to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards.Board.
The assumptions used in calculating the fair value of employee common stock options and warrants granted during the ninethree months ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, using the Black-Scholes-Merton option-pricing model, are set forth in the following table:
Nine Months Ended September 30,Three Months Ended March 31,
2015 20142016 2015
Dividend yield4.76% n/a
—% —%
Expected volatility38.6% 51%41% 51%
Risk-free interest rate1.09% 1.73%1.43% 1.73%
Expected term3.9 years
 5.2 years
5.0 years
 5.2 years
Common Stock Options

24
Table of Contents



The following table summarizes the Company's common stock option activity for the three months ended March 31, 2016:
  Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in 000's)
Outstanding, December 31, 2015266,514
 $3.96
    
 Granted141,507
 $2.07
    
 Exercised—
 $—
    
 Forfeited(8,334) $4.06
    
 Expired(26,250) $3.93
    
Outstanding, March 31, 2016373,437
 $3.24
 6.0 $37
Vested at March 31, 2016298,946
 $3.07
 5.4 $37
On January 27, 2016, the Board granted 77,186 and 64,321 common stock options to its Chief Executive Officer and Chief Financial Officer, respectively, as part of their 2015 performance bonuses. The options vested immediately upon grant and are exercisable at $2.07 per share. The weighted-average grant date fair value for the options granted was approximately $0.78 per option.
The following table summarizes the common stock options outstanding and warrants granted duringexercisable as of March 31, 2016:
 Stock Options Outstanding Options Exercisable
Exercise PriceNumber of Shares Weighted Average Remaining Contractual Term (in years) Weighted Average Exercise Price Vested at March 31, 2016 Weighted Average Exercise Price
$1.301,989
 0.1 $1.30
 1,989
 $1.30
$1.31 - $3.99289,337
 6.0 $3.01
 220,183
 $2.73
$4.00 - $4.3082,111
 6.0 $4.11
 76,774
 $4.09
Total373,437
 6.0 $3.24
 298,946
 $3.07
For options unvested at March 31, 2016, $0.1 million in compensation expense will be recognized over the ninenext 1.7 years.
Common Stock Warrants
The following table summarizes the Company's common stock warrant activity for the three months ended September 30, 2015 was approximately $0.85 per share.March 31, 2016:

32
  Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in 000's)
Outstanding, December 31, 20152,051,475
 $3.46
    
 Granted—
 $—
    
 Exercised—
 $—
    
 Forfeited—
 $—
    
 Expired—
 $—
    
Outstanding, March 31, 20162,051,475
 $3.46
 4.5 $249
Vested at March 31, 20161,576,475
 $3.19
 3.2 $249

25
Table of Contents



Common Stock Options
NoThe following table summarizes the common stock options were awarded duringwarrants outstanding and exercisable as of March 31, 2016:
 Warrants Outstanding Warrants Exercisable
Exercise PriceNumber of Shares Weighted Average Remaining Contractual Term (in years) Weighted Average Exercise Price Vested at March 31, 2016 Weighted Average Exercise Price
$0 - $1.99327,664
 1.6 $1.56
 327,664
 $1.56
$2.00 - $2.99335,354
 2.3 $2.58
 335,354
 $2.58
$3.00 - $3.99500,355
 3.6 $3.59
 500,355
 $3.59
$4.00 - $4.99864,769
 7.0 $4.37
 389,769
 $4.40
$5.00 - $5.9023,333
 7.1 $5.90
 23,333
 $5.90
Total2,051,475
 4.5 $3.46
 1,576,475
 $3.19
For warrants unvested at March 31, 2016, $0.4 million in compensation expense will be recognized over the ninenext 1.7 years.
Restricted Stock
The following table summarizes the Company's restricted stock activity for the three months ended September 30, 2015. At September 30, 2015, there were 744,172 outstanding optionsMarch 31, 2016:
  Number of Shares Weighted Avg. Grant Date Fair Value
Unvested at December 31, 2015294,021
 $4.19
 Granted196,251
 $2.14
 Vested(53,141) $2.07
 Forfeited—
 $—
Unvested at March 31, 2016437,131
 $3.53
On January 1, 2016, the Company granted to purchaseits Chief Accounting Officer and certain employees 7,792 and 26,622 shares of commonrestricted stock, respectively, with a weighted average exercise pricegrant-date fair value of $5.15$2.49 per share.
Common Stock Warrants
On April 1,share, as part of their 2015 the Company granted a warrant to purchase 275,000performance bonuses. The restricted shares of common stock to its President and Chief Financial Officer at an exercise price equal to the closing stock price at March 25, 2015 of $4.25 per share. The warrant shall vest as to one-third of the total shares granted on each ofDecember 31, 2016, December 31, 2017 and December 31, 2018.
On January 27, 2016, the three subsequent anniversaries ofBoard granted to the grant date. At September 30, 2015, there were 2,126,475 outstanding warrants to purchaseCompany's Chief Executive Officer and Chief Financial Officer 28,986 and 24,155 shares of commonrestricted stock, respectively, with a weighted average exercise pricegrant-date fair value of $3.47$2.07 per share.
Restricted Stockshare, as part of their 2015 performance bonuses. The restricted shares vested immediately upon grant.
On January 1, 2015, pursuant to the 2011 Stock Incentive Plan, the Company granted 50,000 shares of common stock with a three-year restriction to its Chairman and Chief Executive Officer. The restricted stock shall vest as to one-third27, 2016, three non-management members of the shares onBoard were each of the three subsequent anniversaries of the grant date and has all the rights of a shareholder from the date of grant including, without limitation, the right to receive dividends and the right to vote. The Company determined the fair value of the restricted stock at date of grant to be equal to the closing stock price at December 31, 2014 of $4.01 per share.
On April 1, 2015, pursuant to the 2011 Stock Incentive Plan, the Company granted 125,000 shares of common stock with a three-year restriction to its President and Chief Financial Officer. The restricted stock shall vest as to one-third of the shares on each of the three subsequent anniversaries of the grant date and has all the rights of a shareholder from the date of grant including, without limitation, the right to receive dividends and the right to vote. The Company determined the fair value of the restricted stock at date of grant to be equal to the closing stock price at March 25, 2015 of $4.25 per share.
On May 12, 2015, pursuant to the 2011 Stock Incentive Plan, the Company granted 6,157 shares of common stock with a three-year restriction to its Chairman and Chief Executive Officer. The restricted stock vested immediately and has all the rights of a shareholder from the date of grant including, without limitation, the right to receive dividends and the right to vote. The Company determined the fair value of the restricted stock at date of grant to be equal to the grant date closing stock price of $4.06 per share.
At September 30, 2015, there were 382,693 unvested36,232 shares of restricted stock with a weighted average grant-date fair value of $4.24$2.07 per share.share, as compensation for their services as Directors. The restricted shares vest on the following schedule: (i) 12,077 shares on January 27, 2017; (ii) 12,077 shares of January 27, 2018; and (iii) 12,078 shares on January 27, 2019.
For restricted stock unvested at March 31, 2016, $1.2 million in compensation expense will be recognized over the next 2.6 years.
NOTE 13. .                     VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entity
As further described in Note 15 to our Consolidated Financial Statements in the Annual Report, the Company has one consolidated VIE, Riverchase, that is required to be consolidated because AdCare has control as primary beneficiary. A “primary beneficiary” is the party that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
In May 2015, the Company paid 2014 property taxes on behalf of Riverchase totaling approximately $84,342. At the time of payment, the Company and Riverchase recorded an increase to the outstanding principal owed under the promissory note issued by Riverchase to the Company (the "Riverchase Promissory Note") by $84,342. On October 1, 2015, the Riverchase Promissory Note was amended and restated to increase the principal amount from $177,323 to $261,665 and to provide for certain additional events of default (see Note 16 - Subsequent Events).
The following summarizes the assets and liabilities of the consolidated VIE included in the consolidated balance sheets:
(Amounts in 000’s) September 30, 2015 December 31, 2014
Assets of variable interest entity held for sale 5,918
 5,924
Other assets 322
 343
Total assets $6,240
 $6,267
     
Accounts payable $349
 $1,923
Accrued expenses 1,470
 651
Current portion of notes payable 262
 177
Liabilities of variable interest entity held for sale 5,871
 5,956
Non-controlling interest (1,712) (2,440)
Total liabilities and non-controlling interest $6,240
 $6,267
Non-consolidated Variable Interest Entities
Aria
Aria. On April 30, 2015, the Company entered into the Ariaa lease inducement (the "Aria Lease InducementInducement") with Aria Health Consulting, LLC.LLC with respect to the Aria Subleases. The Aria Lease Inducement provided for a one-time payment from the Company to Aria Health Consulting, LLC equal to $2.0 million minus the security deposits and first month's base and special rent for all Aria Sublessees. On April 30, 2015, in connection with the Aria Lease Inducement, the eight sublease agreements with Aria Sublessees were amended to, among other things, provide that the Aria Sublessees shall, collectively, pay to the Aria Sublessors special rent in the amount of $29,500 per month payable in advance on or before the first day of each month (except for the first special rent payment, which shall bewas subtracted from the lease inducement fee paid by the Company under the Aria Lease Inducement).

26
Table of Contents



On July 17, 2015, the Company made a short-term loan to Highlands Arkansas Holdings, LLC, an affiliate of Aria (“HAH”)HAH, for working capital purposes, and, in connection therewith, HAH executed a promissory note in the amount $1.2 million (the "Aria Note")Note in favor of the Company. Interest accrues onSince July 17, 2015, the unpaidNote has been amended from time to time and currently has an outstanding principal balanceamount of $1.75 million and had a maturity date of December 31, 2015. On October 6, 2015, HAH and the note atCompany entered into a ratesecurity agreement, whereby HAH granted the Company a security interest in all accounts arising from the business of 12.5% per annum. The principalHAH and interest thereon was originally payable on August 13, 2015. Until all amounts due and owing under the note have been paid, neither the Aria Sublessees, norand all rights to payment from patients, residents, private insurers and others arising from the Highland Sublessee will pledge,business of HAH and the Aria Sublessees (including any proceeds thereof), as security anyfor payment of the accounts receivable relating to the respective facilities that such entity subleases fromNote, as amended, and certain rent and security deposit obligations of the Aria Sublessors orSublessees under Aria Subleases. The Company is currently seeking the Highland Sublessor, as applicable. Until all principalrepayment of the Note in accordance with its terms and interest under the note is paid, the Company and its affiliates may retain as collateral all funds received by them from Medicare for the benefit of HAH or its affiliates with respect to the properties leased to the affiliates of Aria Health Group, LLC. If the note is not paid inexpects full by the maturity date, then the Company may apply such funds to principal and interest due under the note.repayment.

The Aria Note was subsequently amended to extend the maturity date of the note to October 31, 2015, and to modify the outstanding principal owing thereunder. As of September 30, 2015, the principal amount outstanding on the Aria Note was $1.6 million.

On November 1, 2015, the Aria Note was further amended to: (i) increase the principal amount owing under the Aria Note to $1.8 million; (ii) extend the maturity date to November 30, 2015; and (iii) increase the annual interest rate to 13.5%.

The Aria Lease Inducement and Aria Note entered into by the Company create a variable interest that may absorb some or all of a VIE’svariable interest entity's ("VIE") expected losses. The Company does not consolidate the operating activities of the Aria Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance (seeperformance.

Effective February 3, 2016, each Aria Sublessor terminated the applicable Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease.

Beacon. Note 7 - Leases and Note 16 - Subsequent Events).
Beacon
On August 1, 2015, the Company entered into a Lease Inducement Fee Agreement with certain affiliates of Beacon Health Management, LLC ("Beacon"), pursuant to which the Company paid to certain affiliates of Beacon Health Management, LLC a fee of $0.6 million as a lease inducement for thecertain affiliates of Beacon Sublessees(the "Beacon Sublessees") to enter into the sublease agreements and to commence such subleases and transfer operations thereunder (see Note 7 - Leases).thereunder. The inducement fee was paid net of certain other fees and costs owed by the affiliates of, Beacon Health Management, LLC to the Beacon Sublessors, including the first month of base rent for all of the Beacon Facilitiesfacilities and the first month of special rent pertaining to the EHPW Facilities.four of such facilities.


33
Table of Contents



On August 1, 2015, the Company made a short-term loan to certain affiliates of Beacon Health Management, LLC (collectively, the "Beacon Affiliates") and, in connection therewith, Beacon Affiliates executed a promissory note maturing on May 31, 2016 in the amount $0.6 million (the "Beacon Note"), as amended, in favor of the Company. Interest accrues on the unpaid principal balance of the note at a rate of 12.5%18% per annum. The principal and interest thereon was originally payable on October 1, 2015, and the maturity date could be extended for two separate periods of 30 days each upon by written request and the approval of the Company. Until all amounts due and owing under the note have been paid, the Beacon Sublessees will not pledge, as security, any of the accounts receivable relating to the respective facilities that such entity subleasesentities sublease from the Beacon Sublessors, as applicable. Until all principal and interest under the note is paid, the Company and its affiliates may retain as collateral all funds received by them from Medicare for the benefit of the Beacon Sublessees or its affiliates with respect to the properties leased to the affiliates of Beacon Health Management, LLC. If the note is not paid in full by the maturity date, then the Company may apply such funds to principal and interest due under the note.

The Beacon Note maturity date was extended, upon written request by the Beacon Affiliates, to November 30, 2015.Company. As of September 30, 2015,March 31, 2016, the principal amount outstanding on the Beacon Note was $0.6 million.

The Beacon Lease Inducement and Beacon Note entered into by the Company create a variable interest that may absorb some or all of a VIE’s expected losses. The Company does not consolidate the operating activities of the Beacon Sublessees as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance (see Note 7 - Leases and Note 16 - Subsequent Events).performance.

NOTE 14.                      COMMITMENTS AND CONTINGENCIES

Regulatory Matters

Laws and regulations governing federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. In March 2016, the Centers for Medicare and Medicaid Services ("CMS") decertified the Jeffersonville facility meaning the facility can no longer accept Medicare or Medicaid patients. The operator is considering appealing the decision by CMS.

The Company believes that it is in compliance in all material respects with all applicable laws and regulations.

Legal Matters

The skilled nursingCompany is party to various legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of business, involves a significant risk of liability due to the age and health of the Company’s patients and residents andincluding claims that the services the Company provides. The Company and others inprovided during the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, which may allege that services havetime it operated skilled nursing facilities resulted in personal injury elder abuse, wrongfulor death or otherto the residents of the Company's facilities and claims related claims. The defenseto employment, staffing requirements and commercial matters. Although the Company intends to vigorously defend itself in these matters, there is no assurance that the outcomes of these lawsuits may result in significant legal costs, regardlessmatters will not have a material adverse effect on the Company's business, results of the outcome,operations and can result in large settlement amounts or damage awards.financial condition.

The Company previously operated, and the Company's tenants now operate, in an industry that is extremely regulated. As such, in the ordinary course of business, the Company's tenants are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition, we believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the potential lawsuits andarea of Medicare/Medicaid false claims, described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payer. A violation may provide the basis for exclusion from federally funded healthcare programs. As of September 30, 2015, the Company does not have any material loss contingencies recorded or requiring disclosure based upon the evaluation of the probability of loss from known claims, exceptwell as disclosed below. an

Amy Cleveland et. al. v APH&R Nursing, LLC et. al.

The Company is a defendant in a lawsuit captioned, Angela Burnett as Special Administratrix of the Estate of Amy Cleveland, and on behalf of the wrongful death beneficiaries of Amy Cleveland; Myrtle Briley as Special Administratrix of the Estate of Sam Briley, deceased; Lavern Coleman as Special Administratrix of the Estate of Freddie Fowlkes Thomas, deceased; Barbara Giffen as Special Administratrix of the Estate of Willie Thomas, deceased; Vivian Swopes as Special Administratrix of the Estate of Ellen Shepherd, deceased; Marilyn Cabaniss as Special Administratrix of the Estate of Mary May Blood, deceased vs. APH&R Nursing, LLC d/b/a Cumberland Health and Rehabilitation Center and/or Abington Place Health and Rehab Center; Benton Nursing, LLC d/b/a Bentonville Manor Nursing Home; Homestead Nursing, LLC d/b/a Homestead Manor Nursing Home; Little Rock HC&R Nursing, LLC d/b/a West Markham Sub Acute and Rehabilitation Center; Mountain View Nursing, LLC d/b/a Stone County Nursing and Rehabilitation Center; Northridge HC&R Nursing, LLC d/b/a Northridge Healthcare and Rehabilitation; Park Heritage Nursing, LLC d/b/a Heritage Park Nursing Center; Valley River Nursing, LLC d/b/a River Valley Health and Rehabilitation Center; Woodland Hills HC Nursing, LLC d/b/a Woodland Hills Healthcare and Rehabilitation; APH&R Property Holdings, LLC; Benton Property Holdings, LLC; Homestead Property Holdings, LLC; Little Rock HC&R Property Holdings, LLC; Mt. V Property Holdings, LLC; Northridge HC&R Property Holdings, LLC; Park Heritage Property Holdings, LLC; Valley River Property Holdings, LLC; Woodland Hills HC Property Holdings, LLC; AdCare Administrative Services, LLC; AdCare Consulting, LLC; AdCare Operations, LLC; AdCare Health Systems, Inc.; Boyd P. Gentry; Christopher Brogdon; David A. Tenwick; Melinda Calaway; John Beaudrie; Cyndie L. Lyon; Debbie K. George-Fort; Kitty Gantner; Gaylon Gammill; Bennett; Brenda Barrientos; Deanna Shackleford; Rose Gean; Sherry Duncan; Tracey Tidwell; Zahid Abbasi; Jill Madden; Becky Jo Miller; Deborah Tyler; Matthew Manning; Rickey Griffin; Mincie Thomas; Deborah Hicks; Mary D. Huntsman-Hartfield; Dana Thompson Baker;

3427
Table of Contents



Christine Wilson; Glenn Clark; Kimberly Franklin-Bruce; Deborah Thornton; Denene Hurst; Christopher Johnson; Pamela Murphy; Matthew Stevens; Tammy Romero; Brenda Huntsinger; Tammy Watkins; Gale Woodell; Nadine Huddleston; Michael Harrison; Chris Titsworth; Peggy McLelland;increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations against or involving the Company, for the Company's prior operations, or the Company's tenants, whether currently asserted or arising in the future, could have a material adverse effect on the Company's business, results of operations and Patricia Lamb, Case No. 60CV-14-3741, financial condition.

The Company is a defendant in a purported class action lawsuit captioned Amy Cleveland et. al. v. APHR&R Nursing, LLC et al filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit (the “Complaint”). The Complaint asserts claims againstCircuit. On December 16, 2015, the Company's insurance carrier reached a purported class which consistssettlement with each of the residents at: (i) Stone County Nursing and Rehabilitation Center; (ii) Bentonville Manor Nursing Home; (iii) Heritage Park Nursing Center; (iv) Homestead Manor Nursing Home; (v) River Valley Health and Rehabilitation Center; (vi) Northridge Healthcare and Rehabilitation; (vii) Woodland Hills Healthcare and Rehabilitation; (viii) West Markham Sub Acute and Rehabilitation Center; and (ix) Cumberland Health and Rehabilitation Center, all of which were managed by subsidiaries or affiliates of the Company. The lawsuit alleges that the nine facilities were understaffed during the class period which resulted in breaches or violation of the nursing home admission agreements, the Arkansas Deceptive Trade Practices Act, and the Long Term Care Facilities Residents' Act. The Complaint also includes individual negligence claimsplaintiffs on behalf of former deceased resident Amy Cleveland. The commencement date of the class period begins at different times during 2011Company and 2012 for each facility and continues through a dateall other defendants pursuant to which separate payments are to be determinedmade by the court. The Complaint seeks certification of a class of residents consisting of all residents of the facilities during the class period, judgment against all defendants for actual, compensatory and punitive damages and attorney fees. With respectCompany's carrier to the allegations concerning Amy Cleveland,plaintiffs. The individual settlements are contingent on approval by the Complaint seeks damages for injuries, general and special damages, prejudgment and post-judgment interest, attorney fees and punitive damages. The Company intends to vigorously defend itself against the claims.

Ohio Facilities
On March 7, 2014, the Company responded to a letter received from the Ohio Attorney General ("OAG") dated February 25, 2014 demanding repayment of approximately $1.0 million as settlement for alleged improper Medicaid payments related to seven Ohio facilities affiliated with the Company. The OAG alleged that the Company had submitted improper Medicaid claims for independent laboratory services for glucose blood tests and capillary blood draws. The Company intends to defend itself against the claims. The Company has not recorded a liability for this matter because the liability, if any, and outcome cannot be determined at this time.
Oklahoma Facilities
On June 24, 2013, South Star Services, Inc. (“SSSI”), Troy Clanton and Rose Rabon (collectively, the “Plaintiffs”) filed a complaint in the District Court of Oklahoma County, State of Oklahoma against: (i) AdCare, certain of its wholly owned subsidiaries and AdCare’s former Chief Executive Officer (collectively, the “AdCare Defendants”); (ii) Christopher Brogdon (a director of the Company, owner of greater than 5% of the outstanding shares of AdCare Health Systems, Inc. common stock and former Chief Acquisition Officer of the Company) and his wife; and (iii) five entities controlled by Mr. and Mrs. Brogdon, which entities own five skilled-nursing facilities located in Oklahoma that were previously managed by an AdCare subsidiary (the "Oklahoma Facilities").
On February 10, 2015, Plaintiffs and the defendants participated in a voluntary mediation in an attempt to resolve the case. Although the case did not settle at the mediation, Plaintiffs and defendants continued to negotiateprobate courts having jurisdiction over the following weeks and executed a settlement agreement ondeceased plaintiffs' respective estates, if applicable. As of March 30, 2015 (the "Clanton Settlement Agreement") to settle31, 2016, all claims for a lump sum payment of $2.0 million. In April 2015, under the Clanton Settlement Agreement, the Company paid $0.6 million to the Plaintiffs with the balance thereof to be paid bybut two of the Company's insurance carriers. The Companyindividual settlement agreements had been approved and the other defendants insettlement consideration paid to the matter deny all of the Plaintiff's claims and any wrongdoing but agreed to settle the matter to avoid the continued expense and unpredictability of litigation.plaintiffs.

NOTE 15.                      RELATED PARTY TRANSACTIONS
Settlement and Indemnification AgreementPersonal Guarantor on Loan Agreements
On March 26, 2015, the Company and certain entities controlled by
Christopher Brogdon, a former director of the Company and a greater than 5% beneficial owner of 5% of the outstanding common stock, entered into a Settlement and Indemnification Agreement with respect to the Oklahoma facilities litigation described in Note 14 - Commitments and Contingencies. Pursuant to the Settlement and Indemnification Agreement, the Company agreed to contribute up to $0.6 million towards the settlement of the litigation, and Mr. Brogdon and the Brogdon entities agree to release the Company from any and all claims arising in connection with the management agreements and to indemnify the Company with respect to the AdCare Indemnified Claims.
Riverchase
Riverchase is a consolidated VIE that is controlled by Mr. Brogdon and currently under contract to be sold (see Note 10 - Discontinued Operations, Note 13 - Variable Interest Entities and Note 16 - Subsequent Events).

Personal Guarantor on Loan Agreements
Mr. Brogdon serves as personal guarantor on certain loan agreements, entered into by the Company prior to 2015, related to the following properties: (i) one of the two office buildings located in Roswell, Georgia; (ii) College Park, a 95-bed skilled nursing facility located in College Park, Georgia; (iii) Attalla, a 182-bed skilled nursing facility located in Attalla, Alabama; and (iv) Coosa Valley, 122-bed skilled nursing facility located in Glencoe, Alabama. At September 30, 2015,March 31, 2016, the total outstanding principal owed under the loans was approximately $17.6$17.5 million.
Park City Capital
Consulting Agreements
On March 27, 2014,
The Company had a Consulting Agreement (as amended, the Company accepted a Subscription Agreement from Park City Capital Offshore Master, Ltd. (“Park City Offshore”"Consulting Agreement"), an affiliate of Michael J. Fox, the Lead Director of the Board of Directors, with Mr. Brogdon pursuant to which Mr. Brogdon was compensated by the Company issuedfor providing consulting services related to Park City Offshore inthe acquisition and financing of skilled nursing facilities. On March 2014 $1.0 million in principal amount of the 2014 Notes. Mr. Fox is a director of Park City Offshore and a director of21, 2016, the Company and Mr. Brogdon entered into a beneficial ownerletter agreement whereby the Company and Mr. Brogdon agreed that the Consulting Agreement was terminated as of 5%November 20, 2015. As of March 31, 2016, the Company had an outstanding common stock. Thebalance of $0.3 million receivable from Mr. Brogdon for a prior promissory note was offerednote. For further details, see Part II, Item 8, Notes to and sold to Park City Offshore on the same terms and conditions as all other buyersConsolidated Financial Statements, Note 18 - Related Party Transactions included in the offering.

On March 31, 2015, the Company accepted a Subscription Agreement from Park City Capital Offshore, for 2015 Notes with an aggregate principal amount of $1.0 million. The 2015 Note was offered to Park City Offshore on the same terms and conditions as all other investors in the offering except the 2015 Note to be issued to Park City Capital Offshore is not subject to any Adjustment for Dilutive Issuances.

Doucet Asset Management, LLCAnnual Report.

On May 5, 2015, Doucet Capital, LLC, Doucet Asset Management, LLC, Christopher L. Doucet and Suzette A. Doucet jointly filed with the SEC a Schedule 13D reporting beneficial ownership of greater than 5% of the common stock.
On March 31, 2015, the Company accepted Subscription Agreements from Christopher L. Doucet and Suzette A. Doucet for 2015 Notes with an aggregate principal amount of $0.3 million. The 2015 Notes were offered to them on the same terms and conditions as all other investors in the offering. With respect to the offering of 2015 Notes, Doucet Asset Management, LLC served as the selected dealer.

Cantone

On June 30, 2015, the Company entered into prepayment agreements with Anthony Cantone and CAM, an affiliate of Mr. Cantone in connection with the Cantone Notes. In connection therewith, the Company made principal prepayments in aggregate of approximately $1.5 million with respect to the Cantone Notes. On October 5, 2015, Mr. Cantone, CRI and CAM, and certain other reporting persons filed with the SEC a Schedule 13G/A, which reported beneficial ownership of less than 5% of the common stock. For a description of certain transactions with Mr. Cantone and his affiliates, see Item 13, Certain Relationships and Related Party Transactions, and Director Independence –Related Party Transactions – Cantone, of the Annual Report.

NOTE 16.                      SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the SEC. The following is a summary of the material subsequent events.

Arkansas LeaseOffice Building Sale
On November 1, 2015,April 25, 2016, the River Valley Sublease become effective and operations transferredCompany completed the sale of one of its office buildings located in Roswell, Georgia for $0.7 million. The Company’s debt obligations with respect to the Highlands Sublessee.building exceeded the proceeds of the sale by $0.2 million (see Note 15 - Related Party Transactions).

AriaArkansas Facilities Sale Agreement
As described previously, on April 1, 2016, the Skyline Lessors entered into the Skyline Lease pursuant to which each Skyline Lessor leases one of the Arkansas Facilities to the Skyline Lessee (see Note 7 - Leases). In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which the Purchaser had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million, which the Purchaser could exercise in accordance with such agreement until May 1, 2016. Pursuant to such purchase option, the purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to evidenced by a promissory note executed by the Purchaser.

On November 1, 2015,April 22, 2016, the Aria Note was amended to: (i) increasePurchaser delivered notice to the principal amount owing underCompany of its intent to exercise its option to purchase the Aria Note to $1.8 million; (ii) extend the maturity date to November 30, 2015; and (iii) increase the annual interest rate to 13.5%.Arkansas Facilities.

Pursuant to such purchase option, on May 10, 2016, the Skyline Lessors and the Purchaser entered into a Purchase and Sale Agreement (the “Purchase Agreement”) whereby the Skyline Lessors agreed to sell, and the Purchaser agreed to buy, the Arkansas

3528
Table of Contents



Common Stock DividendsFacilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the nursing home business at such facilities, for an aggregate purchase price of $55.0 million, subject to the terms and conditions set forth in the Purchase Agreement The purchase price consists of: (i) a deposit of $1.0 million deposited by the Purchaser with an escrow agent at the time of the Purchaser’s exercise of the purchase option; (ii) cash consideration of $51.0 million; and (iii) a promissory note from the Purchaser in favor of the Skyline Lessors with a principal amount of $3,000,000, to be executed and delivered at closing (the “Skyline Note”). The Skyline Note shall be paid in twenty-four (24) equal monthly installments of interest only at the rate of ten percent (10%) per annum, with the principal balance to be due and payable in full on August 1, 2018. The Skyline Note shall be personally guaranteed by Joseph Schwartz.

The sale of the Arkansas Facilities is subject to customary conditions and termination rights for transactions of this type. The closing of the transaction is required to occur on or before August 1, 2016. The Skyline Lease shall remain in full force and effect through the closing date and, upon the closing, the Skyline Lease shall either terminate or be assigned to the Purchaser’s entities, at the Purchaser’s option. If the closing does not occur, the Skyline Lease shall remain in full force and effect in accordance with its terms.

Notice of Non-Compliance from NYSE MKT

On September 29,April 18, 2016, the Company received notice from NYSE Regulation, Inc. that it is not in compliance with certain NYSE MKT (the “NYSE MKT”) continued listing standards relating to stockholders’ equity. Specifically, the Company is not in compliance with Section 1003(a)(i) (requiring stockholders’ equity of $2.0 million or more if an issuer has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring stockholders’ equity of $4.0 million or more if an issuer has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years) and Section 1003(a)(iii) (requiring stockholders’ equity of $6.0 million or more if an issuer has reported losses from continuing operations and/or net losses in its five most recent fiscal years) of the NYSE MKT Company Guide (the “Company Guide”) because the Company reported a stockholders’ deficit of $23.8 million as of December 31, 2015 and net losses for the Boardlast five (5) fiscal years. As a result, the Company has become subject to the procedures and requirements of Directors declaredSection 1009 of the Company Guide and is required to submit a cash dividendplan by May 18, 2016 advising the NYSE MKT of $0.06 per sharethe actions the Company has taken or will take to shareholders ofregain compliance with the NYSE MKT’s continued listing standards by October 18, 2017.

The Company intends to submit a plan by the May 18, 2016 deadline. The Company’s common stock of record as of October 15, 2015. The cash dividend was paidand Series A Preferred Stock will continue to be listed on October 31, 2015.

Companions Specialized Care

On October 30, 2015,the NYSE MKT while the Company completed the sale of Companions for $3.5 million less customary closing and certain real property apportionments. The Company received $0.4 million net cash from the sale and proceeds were used for working capital purposes. Concurrentseeks to regain compliance with the closing of the sale, the operations of Companions were transferredlisting standards noted, subject to the Companions Purchaser andCompany’s compliance with other continued listing requirements. If the Contemporary Loan was repaid.
New BeginningsCompany fails to submit a plan or if the Company’s plan is not accepted, then the NYSE MKT may commence delisting procedures. Furthermore, the NYSE MKT may commence delisting procedures, if it deems appropriate, if the Company does not regain compliance by October 18, 2017 or if the Company does not make progress consistent with its plan during the plan period.

As previously disclosed, on December 1, 2012, ADK subleased one skilled nursingDecertification of Oceanside Facility

On May 9, 2016, New Beginnings received a Notice of Involuntary Termination from CMS indicating that its operations at the Oceanside facility locatedwere not in Jeffersonville, Georgia to Jeff Co. Nursing, LLC (“Jeff Co”). On June 30, 2013, ADK subleased two skilled nursing facilities located in Tybee Island, Georgia to Tybee NH, LLC (“Tybee NH”).substantial compliance with CMS Requirements and that its provider agreements with CMS are terminated as of such date. The three facilities are currently leased by ADK, as tenant, pursuantletter noted that any decertification or further remedial action would be subject to the Prime Leasestays issued in the Bankruptcy Court’s order (see Note 7 - Leases,). The three sublease agreements between ADK as sublessor and Jeff Co and Tybee NH as sublessees (collectively, the "Sublease Agreements") were set to expire on the same day and adhered to all of the terms, covenants, and conditions as the Prime Lease. Jeff Co and Tybee NH had further subleased these facilities to affiliates of New Beginnings Care, LLC (the “Operators”) under separate sublease agreements (the “Sub-sublease Agreements”)Beginnings).

On October 15, 2015, ADK terminated the Sublease Agreements pursuant to their terms because Jeff Co and Tybee NH failed to pay rent and other amounts due to the Company thereunder. On November 3, 2015, ADK entered into a single master sublease agreement with the Operators (the “Master Sublease Agreement”), whereby the facilities are subleased directly to the Operators commencing on November 1, 2015. The annual rent under the Master Sublease Agreement in the first year will be approximately $1.3 million in the aggregate and will escalate 2.5% each year commencing thereafter through the end of term on July 31, 2020.

In connection with entering into the Master Sublease Agreement, on November 1, 2015, the Operators executed a replacement promissory note in favor of the Company with a principal amount of $0.5 million, which accrues interest at an annual rate of 13.5% and matures on October 31, 2016. This replacement promissory note replaces the promissory note originally issued by the Operators in favor of the Company on August 1, 2015, with a principal amount of $0.1 million, which accrued interest at an annual rate of 6.0% and originally matured on August 31, 2016. The notes were issued by the Operators to the Company in respect of lease payments, security deposits and other monies owed pursuant to operations transfer agreements.

PrivateBank

On October 30, 2015, three wholly owned subsidiaries of the Company entered into a Modification Agreement with PrivateBank, which modified the Northridge, Woodland Hills and Abington Credit Facility to, among other things: (i) provide lender consent for the sublease of three skilled nursing facilities to new operators; (ii) establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility; (b) the Little Rock Credit Facility; and (c) Bentonville, Heritage Park and River Valley Credit Facility; and (iii) establish an excess rent account to capture monthly cash rent proceeds from operators in excess of the monthly debt payments payable under the Northridge, Woodland Hills and Abington Credit Facility and the Little Rock Credit Facility.

On October 30, 2015, Little Rock and two other wholly owned subsidiaries of the Company entered into a Sixth Modification Agreement with PrivateBank, which modified the Little Rock Credit Facility to, among other things: (i) provide lender consent for the sublease of three skilled nursing facilities to new operators; (ii) establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility; (b) the Little Rock Credit Facility; and (c) Bentonville, Heritage Park and River Valley Credit Facility; and (iii) establish an excess rent account to capture monthly cash rent proceeds from operators in excess of the monthly debt payments payable under the Northridge, Woodland Hills and Abington Credit Facility and the Little Rock Credit Facility.

On October 30, 2015, Benton Borrower Group entered into a Second Modification Agreement with PrivateBank, which modified the Bentonville, Heritage Park and River Valley Credit Facility to, among other things: (i) provide lender consent for the sublease of three skilled nursing facilities to new operators; and (ii) establish a single cash collateral account to combine and collectively share the restricted cash reserves related to the following loans: (a) the Northridge, Woodland Hills and Abington Credit Facility; (b) the Little Rock Credit Facility; and (c) Bentonville, Heritage Park and River Valley Credit Facility.


3629
Table of Contents



Riverchase

As previously disclosed, Riverchase financed its acquisition of the Riverchase Village facility using the proceeds of revenue bonds issued by the Medical Clinic Board of the City of Hoover (approximately $5.8 million of First Mortgage Healthcare Facility Revenue Bonds (Series 2010 A) and approximately $0.5 million of First Mortgage Revenue Bonds (Series B) (collectively, the “Riverchase Bonds”)). It has come to the Company’s attention that, on September 3, 2015, the trustee with respect to the Riverchase Bonds (as to which the Company is a guarantor) issued to bondholders an informational notice indicating that certain defaults had occurred with respect to the Riverchase Bonds, including a debt service reserve deficiency of approximately $300,000, failure to pay ad valorem taxes and failure to provide certain financial and other information to the trustee. It is the Company’s understanding that Riverchase is working with the trustee to cure the defaults.
On October 30, 2015, the trustee notified the Company that there were insufficient funds in the interest account with respect to the Riverchase Bonds to pay the bond payment due November 1, 2015, and demanded that the Company pay the shortfall in the amount of $39,739 pursuant to the Company’s guaranty. The Company paid such amount as demanded by the trustee and, in connection therewith, the Riverchase Promissory Note was amended and restated on November 2, 2015, to increase the principal amount from $261,665 to $301,404. As previously disclosed, Riverchase is the Company’s consolidated VIE and is owned and controlled by Christopher Brogdon, a director of the Company and greater than 5% holder of the common stock. For a description of certain arrangements between the Company and Mr. Brogdon, see “Certain Relationships and Related Party Transactions” included in the Company’s Definitive Proxy Statement for its 2015 Annual Meeting of Shareholders, filed with the SEC on October 26, 2015.


37
Table of Contents



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
AdCare Health Systems, Inc. (“AdCare”)The Company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”) own, lease, operate or manage for third-parties skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, North Carolina, Ohio, Oklahoma and South Carolina.
In July 2014, we announced that the Board of Directors had approved a strategic plan to transition the Company to a healthcare property holding and leasing company. Through a seriessenior living. Our business primarily consists of leasing and subleasing transactions, we aresuch facilities to third-party tenants. As of March 31, 2016, the Company owned, leased, or managed for third parties 38 facilities primarily in the process of transitioning to third-parties the operationsSoutheast. The operators of the Company’s currently owned and operated healthcare facilities. In furtherance of this strategic plan, the Company is now focused on the ownership, acquisition and leasing of healthcare related properties.
During the nine months ended September 30, 2015, we entered into certain leasing and operations transfer agreements for facilities located in Arkansas, Georgia, North Carolina, Ohio and South Carolina, which are described below. Subsequent to September 30, 2015, the Company completed the sale of Companions, a 102-bed skilled nursing facility located in Tulsa, Oklahoma ("Companions"), and transferred the operations of Companions and one additional facility to new operators (see Note 7 - Leases and Note 16 - Subsequent Events, located inPart I, Item 1., Notes to Consolidated Financial Statements).
Leasing and Subleasing Activities
As of September 30, 2015, we leased nineteen owned and subleased eleven leased skilled nursing facilities and leased two owned assisted living facilities to local third-party operators in the states of Alabama, Arkansas, Georgia, North Carolina and South Carolina.
The following table provides summary information regarding the number of operational beds at our facilities leased and subleased to third parties as of September 30, 2015:
    Number of Facilities Leased and Subleased to Third-Parties
State Number of
Operational
Beds/Units		 Owned Leased Total
Alabama 304
 2
 —
 2
Arkansas 829
 8
 —
 8
Georgia 1,631
 4
 10
 14
North Carolina 106
 1
 —
 1
Ohio 373
 4
 1
 5
South Carolina 180
 2
 —
 2
Total 3,423
 21
 11
 32
Facility Type Number of
Operational
Beds/Units		 Owned Leased Total
Skilled Nursing 3,311
 19
 11
 30
Assisted Living 112
 2
 —
 2
Total 3,423
 21
 11
 32

Operating Activities
As of September 30, 2015, we operated or managed six facilities comprised of five skilled nursing facilities and one independent living/senior housing facility, excluding one skilled nursing facility held for sale. OurCompany's facilities provide a range of health care and related services to patients and residents, including skilled nursing and independentassisted living services, social services, various therapy services, and other rehabilitative and healthcare services. Asservices for both long-term and short-stay patients and residents.

The following table provides summary information regarding the number of September 30, 2015, of the six facilities, we owned and operated three facilities and managed three facilities for a third party.related beds/units as of March 31, 2016:
  Owned Leased Managed for Third Parties Total
  Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units
State                
Arkansas 9
 958
 —
 —
 —
 —
 9
 958
Alabama 2
 304
 —
 —
 —
 —
 2
 304
Georgia 4
 463
 10
 1,168
 —
 —
 14
 1,631
North Carolina 1
 106
 —
 —
 —
 —
 1
 106
Ohio 4
 279
 1
 94
 3
 332
 8
 705
Oklahoma 2
 197
 —
 —
 —
 —
 2
 197
South Carolina 2
 180
 —
 —
 —
 —
 2
 180
Total 24
 2,487
 11
 1,262
 3
 332
 38
 4,081
Facility Type                
Skilled Nursing 22
 2,375
 11
 1,262
 2
 249
 35
 3,886
Assisted Living 2
 112
 —
 —
 —
 —
 2
 112
Independent Living —
 —
 —
 —
 1
 83
 1
 83
Total 24
 2,487
 11
 1,262
 3
 332
 38
 4,081

Liquidity OverviewThe following table provides summary information regarding the number of facilities and related beds/units by operator affiliation as of March 31, 2016:
Operator Affiliation Number of
Facilities		 Beds / Units
Aria Health Group / Skyline Healthcare (1)
 9
 958
Beacon Health Management 7
 585
C.R. Management 7
 830
Wellington Health Services 4
 641
New Beginnings Care (2)
 3
 252
Symmetry Healthcare 3
 286
Southwest LTC 2
 197
Subtotal 35
 3,749
AdCare Managed 3
 332
Total 38
 4,081

(1)
AdCare subleased through its subsidiaries nine facilities located in Arkansas to affiliates of Aria pursuant to separate sublease agreements. Eight of the Aria Subleases commenced on May 1, 2015 and one Aria Sublease commenced on November 1, 2015. Effective February 3, 2016, each Aria Sublease was terminated due to the failure to pay rent pursuant to the terms of such sublease. Subsequently, on February 5, 2016, the Company entered into the Skyline Lease with respect to such facilities,

3830
Table of Contents



The Company has and continues to undertake measures to streamline operations and cost infrastructure in connection with its new business model transition, which include: (i) continuing to reduce and ultimately eliminate patient care revenues and related costs while increasing rental revenues; (ii) refinance or repay current maturities to reduce interest costs and reduce mandatory principal repayments through refinancing transactions with the United States Department of Housing and Urban Development or other lending sources; (iii) reducing general and administrative expenses.

which commenced on April 1, 2016 (see Note 7 - Leases, to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q).

(2)
On January 22, 2016, New Beginnings Care ("New Beginnings") filed a petition to reorganize its finances under the Bankruptcy Code. To date, New Beginnings has neither affirmed nor rejected the Master Lease entered into on November 3, 2015 with respect to the Jeffersonville, Oceanside, and Savannah Beach facilities. The Company is in discussions with New Beginnings and other potential operators about renting such facilities. For a more detailed discussion, see Note 7 - Leases, to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Liquidity Overview
At September 30, 2015,March 31, 2016, we had $4.3$2.3 million in cash and cash equivalents as well as restricted cash of $12.2$8.9 million. Over the next twelve months, we anticipate both access to and receipt of several sources of liquidity.liquidity, including cash flows from operations, and sales of Series A Preferred Stock pursuant to an At-The-Market shelf registration. We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. During the remainder of 20152016 and into the first quarter of 2016,2017, we anticipate net proceeds of approximately $1.6$9.1 million on the refinancing of existing debt with such government guaranteed lending programs. At September 30, 2015,March 31, 2016, we had $134.5$118.4 million in indebtedness of which the current portion is $49.9$47.9 million. We anticipate our operating cash requirements in 2016over the next twelve months as being less than in 2015the comparative prior twelve months due to the Company's transition to a healthcare property holding and leasing company.completion of the Transition. We expect sufficient funds for our operations and scheduled debt service, and capital expenditures at least through the next twelve months. We have been successful in recent years in raising new equity capital and believe, based on recent discussions, that these markets will continue to be available to us for raising capital in 20152016 and beyond. We believe our long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.

The Company has absorbed negative cash flows from operations in the past, including the three months ended March 31, 2016, but anticipates a reversal to a positive cash flow from operations during the remainder of 2016. In order to satisfy the Company's capital needs, the Company seeks to: (i) continue improving operating results through its leasing and subleasing transactions executed with favorable terms and consistent and predictable cash flow; (ii) expand borrowing arrangements with certain lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. The Company anticipates that these actions, if successful, will provide the opportunity to maintain liquidity on a short and long-term basis, thereby permitting the Company to meet our operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful or that anticipated operating results of the Transition. If the Company is unable to expand existing borrowing agreements, refinance current debt, or raise capital through the issuance of securities, then the Company may be required to restructure its outstanding indebtedness, (forimplement further cost reduction initiatives or sell assets.

On March 24, 2016, we received a commitment to refinance the Bentonville, Heritage Park and River Valley Credit Facility, the Little Rock Credit Facility, and the Northridge, Woodland Hills and Abington Credit Facility for a combined total of $25.4 million of debt, subject to definitive documentation and certain closing conditions. On March 24, 2016, we also obtained a lender commitment to extend the maturity date of the Georgetown and Sumter Credit Facility from September 2016 to June 2017 subject to definitive documentation and certain closing conditions. On March 29, 2016, we obtained a lender commitment to extend the maturity date of the Quail Creek Credit Facility from September 2016 to September 2018 subject to definitive documentation and certain closing conditions.

For a more detailed discussion, see Note 3 - Liquidity and Profitability, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements).Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Divestitures
For information regarding the Company's divestitures, please refer tosee Note 10 - Discontinued Operationsand Note 16 - Subsequent Events, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Critical Accounting Policies
 
We prepare our financial statements in accordance with Generally Accepted Accounting Principles ("GAAP").GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis we

31
Table of Contents



review our judgments and estimates, including, but not limited to, those related to doubtful accounts, income taxes, stock compensation, intangible assets and loss contingencies. We base our estimates on historical experience, business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change.
DuringWe believe that the nine months ended September 30, 2015, we adopted Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, which amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU is applied prospectively and is effective for the Company for the 2015 annual and interim periods.following represents our critical accounting policies.
For a discussion on recent accounting pronouncements not yet adopted by the Company, see Note 1 - Organization and Significant Accounting Policies, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements.Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Results of Operations  

ComparisonThree Months Ended March 31, 2016 and 2015
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein.

As a result of the Transition, the amounts presented below are not reflective of our ongoing annualized performance due to leasing activity throughout the periods. Revenues and expenses related to facility operations during the three months ended March 31, 2015 were reclassed to discontinued operations.

Certain reclassifications have been made to the 2015 financial information to conform to the 2016 presentation with no effect on the Company's consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities, or stockholders' equity. Reclassifications were made to the Consolidated Statements of Operations for three months ended March 31, 2015 to reflect the same facilities in discontinued operations for both periods presented.
  Three Months Ended March 31, Increase (Decrease)
(Amounts in 000’s) 2016 2015 Amount Percent
Revenues:  
  
  
  
Rental revenues $6,849
 $1,340
 $5,509
 411.1 %
Management fee and other revenues 233
 218
 15
 6.9 %
Total revenues 7,082
 1,558
 5,524
 354.6 %
Expenses:  
  
  
  
General and administrative expenses 2,542
 3,331
 (789) (23.7)%
Facility rent expense 2,179
 487
 1,692
 347.4 %
Depreciation and amortization 1,713
 1,675
 38
 2.3 %
Other operating expenses 203
 102
 101
 99.0 %
Total expenses 6,637
 5,595
 1,042
 18.6 %
Income (loss) from operations 445
 (4,037) 4,482
 111.0 %
Other expense:  
  
  
  
Interest expense, net 1,825
 2,490
 (665) (26.7)%
Loss on extinguishment of debt —
 680
 (680) (100.0)%
Other expense 42
 288
 (246) (85.4)%
Total other expense, net 1,867
 3,458
 (1,591) (46.0)%
Loss from continuing operations before income taxes (1,422) (7,495) (6,073) (81.0)%
Income tax benefit —
 20
 20
 (100.0)%
Loss from continuing operations (1,422) (7,515) (6,053) (80.5)%
(Loss) income from discontinued operations, net of tax (528) 2,266
 2,794
 123.3 %
Net loss $(1,950) $(5,249) $(3,259) (62.1)%

Rental Revenues—Total rental revenue increased by $5.5 million, or 411.1%, to $6.8 million for the three months ended September 30, 2015 and 2014
The table below summarizes the operating results of continuing operationsMarch 31, 2016, compared with $1.3 million for the three months ended September 30, 2015same period in 2015. The increase reflects the completion of the Transition and 2014:the


3932
Table of Contents



  Three Months Ended September 30,
(Amounts in 000’s) 2015 2014 Change Percent Change
Revenues:  
  
  
  
Rental revenues $5,826
 $388
 $5,438
 1,401.5 %
Patient care revenues 4,290
 4,359
 (69) (1.6)%
Management revenues 218
 354
 (136) (38.4)%
Other revenues 86
 —
 86
 100.0 %
Total revenues 10,420
 5,101
 5,319
 104.3 %
Expenses:  
  
  
  
Cost of services (exclusive of facility rent, depreciation and amortization) 4,354
 4,168
 186
 4.5 %
General and administrative expense 2,101
 3,575
 (1,474) (41.2)%
Facility rent expense 1,802
 385
 1,417
 368.1 %
Depreciation and amortization 1,912
 1,861
 51
 2.7 %
Salary retirement and continuation costs 21
 1,488
 (1,467) (98.6)%
Total expenses 10,190
 11,477
 (1,287) (11.2)%
         
Income (loss) from operations 230
 (6,376) 6,606
 103.6 %
Other expense:  
  
  
  
Interest expense, net (1,830) (2,594) (764) (29.5)%
Acquisition costs —
 (8) (8) (100.0)%
Loss on extinguishment of debt —
 (1,220) (1,220) (100.0)%
Other expense (269) (444) (175) (39.4)%
Total other expense, net (2,099) (4,266) (2,167) (50.8)%
         
Loss from continuing operations before income taxes (1,869) (10,642) (8,773) (82.4)%
Income tax benefit —
 244
 244
 (100.0)%
Loss from continuing operations $(1,869) $(10,398) $(8,529) (82.0)%

resulting increase in leasing of facilities to third-party operators. As of March 31, 2016, we have leased or subleased all of our facilities. As of March 31, 2015, we had leased three owned and subleased five leased skilled nursing and rehabilitation facilities to third-party operators. The Company recognizes all rental revenues on a straight line rent accrual basis except with respect to the Aria Subleases, for which rental revenue is recognized based on cash amount owed, and the New Beginnings Sublease, for which rental revenue is recognized when cash is received.
RentalManagement Fee and Other Revenues—RentalManagement revenues increased by $5.4$0.02 million, or 1,401.5%6.9%, to $0.2 million for the three months ended September 30, 2015, asMarch 31, 2016, compared with $0.2 million for the same period in 2014. The increase reflects the Company's continuing transition to a healthcare property holding and leasing company in 2015. For the quarter ended September 30, 2015, rental revenues accounted for 55.9% of the total revenues earned during the period.

Patient Care Revenues—Total patient care revenues decreased by $0.1 million, or 1.6%, for the three months ended September 30, 2015, as compared with the same period in 2014. A 4.4% increase in overall occupancy was offset by an 11.3% decrease in Medicare A and certain Managed Care covered patient days (the "skilled patient days") for the three months ended September 30, 2015, as compared with the same period in 2014.
Management Revenues—Management revenues decreased by $0.14 million, or 38.4%, for the three months ended September 30, 2015, as compared with the same period in 2014. The decrease is primarily due to the discontinuance of a management agreement effective as of December 31, 2014.

Other Revenues—Other revenues increased by $0.1 million, or 100.0%, for the three months ended September 30, 2015, as compared with the same period in 2014. The increase reflects interest on lease inducements and short-term notes and other miscellaneous revenues earned during the period (see Note 13 - Variable Interest Entities, located inPart I, Item 1., Notes to Consolidated Financial Statements).

Cost of Services—Cost of services increased by $0.2 million, or 4.5%, during the three months ended September 30, 2015, as compared with the same period in 2014. The increase is primarily due to the following: (i) an increase of $0.1 million in nursing expense;slight increases to management fee revenue and (ii) an increase of $0.1 million in bad debt on rental revenues receivable (see Note 1 - Organization and Significant Accounting Policies, located inPart I, Item 1., Notes to Consolidated Financial Statements).asset management fee revenues.

40
Table of Contents



General and Administrative—General and administrative costs decreased by $1.5$0.8 million or 41.2%23.7%, duringto $2.5 million for the three months ended September 30, 2015, asMarch 31, 2016, compared with $3.3 million for the same period in 2014.2015. The net decrease is primarily due to the following: (i) a decrease in salaries, wages and employee benefitscontract services expense of approximately $1.1$0.6 million; (ii) a decrease of $0.2 million in legal expenses; (iii) a decrease of approximately $0.1 million in IT-related expenses; and (iv) a decrease of approximately $0.1 million in director fees and other related expenses.

Facility Rent Expense —Facility rent expense increased by $1.4 million, or 368.1%, during the three months ended September 30, 2015, as compared with the same period in 2014. The increase is primarily due to lease extensions and amendments entered into during the quarter (see Note 7 - Leases, located inPart I, Item 1., Notes to Consolidated Financial Statements).

Depreciation and Amortization—Depreciation and amortization increased by $0.1 million, or 2.7%, during the three months ended September 30, 2015, as compared with the same period in 2014. The increase is primarily due to an impairment charge of approximately $0.2 million on certain office space held for sale, partially offset by a decrease in capital expenditures for the three months ended September 30, 2015, as compared with the same period in 2014 (see Note 10 - Discontinued Operations, located inPart I, Item 1., Notes to Consolidated Financial Statements).

Interest Expense, net—Interest expense, net decreased by $0.8 million, or 29.5%, during the three months ended September 30, 2015, as compared with the same period in 2014. The decrease is primarily due to the extinguishment of certain debt (see Note 9 - Notes Payable and Other Debt, located inPart I, Item 1., Notes to Consolidated Financial Statements).

Comparison for the nine months ended September 30, 2015 and 2014

The table below summarizes the operating results of continuing operations for the nine months ended September 30, 2015 and 2014:

  Nine Months Ended September 30, Increase (Decrease)
(Amounts in 000’s) 2015 2014 Amount Percent 
Revenues:  
  
  
  
Rental revenues $11,322
 $980
 $10,342
 1,055.3 %
Patient care revenues 12,532
 12,621
 (89) (0.7)%
Management revenues 692
 1,140
 (448) (39.3)%
Other revenues 135
 —
 135
 100.0 %
Total revenues 24,681
 14,741
 9,940
 67.4 %
Expenses:  
  
  
  
Cost of services (exclusive of facility rent, depreciation and amortization) 12,887
 10,964
 1,923
 17.5 %
General and administrative expenses 7,782
 12,313
 (4,531) (36.8)%
Facility rent expense 3,618
 1,044
 2,574
 246.6 %
Depreciation and amortization 5,385
 5,570
 (185) (3.3)%
Salary retirement and continuation costs (27) 2,770
 (2,797) (101.0)%
Total expense 29,645
 32,661
 (3,016) (9.2)%
         
Loss from operations (4,964) (17,920) 12,956
 (72.3)%
Other expense:  
  
    
Interest expense, net (6,600) (7,770) (1,170) (15.1)%
Acquisition costs, net of gains —
 (8) (8) (100.0)%
Loss on extinguishment of debt (680) (1,803) (1,123) (62.3)%
Other expense (749) (635) 114
 18.0 %
Total other expense, net (8,029) (10,216) (2,187) (21.4)%
Loss from continuing operations before income taxes (12,993) (28,136) (15,143) (53.8)%
Income tax (expense) benefit (20) 236
 256
 108.5 %
Loss from continuing operations $(13,013) $(27,900) $(14,887) (53.4)%

41
Table of Contents



Rental Revenues—Rental revenues increased by $10.3 million, or 1,055.3%, for the nine months ended September 30, 2015, as compared with the same period in 2014.   The increase reflects the Company's continuing transition to a healthcare property holding and leasing company in 2015. For the nine months ended September 30, 2015, rental revenues accounted for 45.9% of the total revenues earned during the period.

Patient Care Revenues—Total patient care revenues decreased by $0.1 million, or 0.7%, for the nine months ended September 30, 2015 as compared with the same period in 2014. A 4.4% increase in overall occupancy was offset by a 5.3% decrease in skilled patient days for the nine months ended September 30, 2015 as compared with the same period in 2014.
Management Revenues—Management revenues decreased approximately $0.4 million, or 39.3%, for the nine months ended September 30, 2015, as compared with the same period in 2014. The decrease is primarily due to the discontinuance of managements agreement effective as of March 1, 2014 and December 31, 2014.
Other Revenues—Other revenues increased by $0.1 million, or 100.0%, for the nine months ended September 30, 2015, as compared with the same period in 2014. The increase reflects interest on lease inducements and short-term notes and other miscellaneous revenues earned during the period (see Note 13 - Variable Interest Entities, located inPart I, Item 1., Notes to Consolidated Financial Statements).

Cost of Services—Cost of services increased approximately $1.9 million, or 17.5%, for the nine months ended September 30, 2015, as compared with the same period in 2014. The increase is primarily due to the following: (i) an increase of $0.7 million in bad debt expense; (ii) an increase of $0.6 million in nursing and pharmaceutical expenses; (iii) an increase of $0.4 million in facility operations and administrative expenses; and (iv) an increase of $0.2 million in insurance expense. 
General and Administrative—General and administrative costs decreased by approximately $4.5 million, or 36.8%, for the nine months ended September 30, 2015, as compared with the same period in 2014. The net decrease is primarily due to the following: (i) a decrease in salaries, wages and employee benefits expense of approximately $3.6$0.3 million, partiallywhich is offset by an increase in contract servicesemployee stock-based compensation expense of approximately $0.7$0.3 million; (ii) a decrease of $0.5 million in legal expenses;and (iii) a decrease in IT-related expenses of approximately $0.3 million in stock-based compensation; (iv) a decrease of approximately $0.3 million in travel and other reimbursable expenses; (v) a decrease of approximately $0.3 million in IT-related expenses; and (vi) a decrease of approximately $0.2 million in director fees and other related expenses.$0.1 million.
Facility Rent Expense—Facility rent expense increased by approximately $2.6$1.7 million or 246.6%347.4%, to $2.2 million for the ninethree months ended September 30, 2015, asMarch 31, 2016, compared with $0.5 million for the same period in 2014.2015. The increase is primarily due toto: (i) an increase of $0.3 million in rent expense resulting from lease extensions and amendments entered into during the quartersubsequent to March 31, 2015 (see Note 7 - Leases, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements).Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q); and (ii) $1.4 million of rent expense reported in discontinued operations for the three months ended March 31, 2015.
Depreciation and Amortization—Depreciation and amortization decreasedincreased by $0.2$0.04 million or 3.3%2.3%, during the nine months ended September 30, 2015, as compared with the same period in 2014. The decrease is primarily due to certain assets becoming fully depreciated in 2014, partially offset by an impairment charge of approximately $0.3 million on certain office space held for sale, for the nine months ended September 30, 2015, as compared with the same period in 2014.

Interest Expense, net—Interest expense, net decreased by $1.2 million, or 15.1%, during the nine months ended September 30, 2015, as compared with the same period in 2014. The decrease is primarily due to the extinguishment of certain debt and refinancing of certain loan agreements to more favorable terms (for further information, see Note 9 - Notes Payable and Other Debt, located in Part I, Item 1., Notes to Consolidated Financial Statements and Item 8, Notes to Consolidated Financial Statements - Note 9 - Notes Payable and Other Debt, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
Loss on Extinguishment of Debt—The Company recognized a loss on extinguishment of debt of approximately $0.7$1.7 million for the ninethree months ended September 30, 2015,March 31, 2016, compared with approximately $1.8$1.7 million for the same period in 2014.2015. The increase is primarily due to certain equipment purchases subsequent to March 31, 2015.
Other Operating Expenses—Other operating expense increased by $0.1 million or 99.0%, to $0.2 million for the three months ended March 31, 2016, compared with $0.1 million for the same period in 2015. The increase is primarily due to an increase in debt-related legal expenses of approximately $0.1 million.
Interest Expense, Net—Interest expense, net decreased by $0.7 million lossor 26.7%, to $1.8 million for the three months ended March 31, 2016, compared with $2.5 million for the same period in 2015. The decrease is primarily due to: (i) the repayment in full of four lines of credit with an aggregate outstanding principal totaling $4.9 million at March 31, 2015; and (ii) the repayment of $6.8 million in convertible notes subsequent to March 31, 2015.
Loss on Debt Extinguishment—Loss on extinguishment of debt decreased by $0.7 million or 100.0%, to $0.0 million for the three months ended March 31, 2016, compared with $0.7 million for the same period in 2015. The decrease is primarily due to the February 2015 issuance of promissory notes related to the refinancing of certain loan agreements with one of our lenders (for further information, see(see Note 9 - Notes Payable and Other Debt, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements)Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q).
Other Expense—Other expense decreased by $0.25 million or 85.4%, to $0.04 million for the three months ended March 31, 2016, compared with $0.29 million for the same period in 2015. The decrease is primarily due to a reduction in transition-related legal expenses incurred during 2016.
Liquidity and Capital Resources

For information regarding the Company's liquidity, please refer to Note 3 - Liquidity and Profitability, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q and Liquidity Overview, located in Part I, Item 2.,to the Company's Management’s Discussion and Analysis of Financial Condition and Results of Operations located in Part I, Item 2, of this Quarterly Report on Form 10-Q.


4233
Table of Contents



Cash Flows
The following table presents selected data from our consolidated statement of cash flows for the periods presented:
 Nine Months Ended September 30, Three Months Ended March 31,
(Amounts in 000’s) 2015 2014 2016 2015
Net cash used in operating activities - continuing operations $(13,381) $(17,160) $(941) $(5,248)
Net cash provided by (used in) operating activities - discontinued operations (750) 11,186
Net cash provided by (used in) investing activities - continuing operations (4,768) 2,406
Net cash provided by (used in) investing activities - discontinued operations 5,678
 (928)
Net cash provided by (used in) financing activities - continuing operations 12,379
 (1,794)
Net cash (used in) provided by operating activities - discontinued operations (639) 4,645
Net cash provided by investing activities - continuing operations 4,145
 331
Net cash used in investing activities - discontinued operations (1) (44)
Net cash (used in) provided by financing activities - continuing operations (2,752) 277
Net cash used in financing activities - discontinued operations (5,618) (217) (268) (16)
Net change in cash and cash equivalents (6,460) (6,507) (456) (55)
Cash and cash equivalents at beginning of period 10,735
 19,374
 2,720
 10,735
Cash and cash equivalents at end of period $4,275
 $12,867
 $2,264
 $10,680
 
NineThree Months Ended September 30, 2015March 31, 2016
 
Net cash used in operating activities—continuing operations for the ninethree months ended September 30, 2015,March 31, 2016, was approximately $13.4$0.9 million,, consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, rent revenue and expense in excess of cash paid,received, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity. Net cash used in operating activities—discontinued operations was approximately $0.8 million. 
Net cash used inprovided by investing activities—continuing operations for the ninethree months ended September 30, 2015,March 31, 2016, was approximately $4.8$4.1 million. This is primarily the result of a net increaserelease in restricted cash deposits of approximately $3.4$3.8 million and capital expenditures of approximately $1.3 million. Net cash provided by investing activities—discontinued operations was approximately $5.7 million. This is primarily the result of the $3.4 millionproceeds from sale of the Company's Bentonville, Arkansas skilled nursing facilityproperty and a releaseequipment of approximately $2.0 million of restricted cash related to the Companions loan.$0.3 million.
Net cash provided byused in financing activities—continuing operations was approximately $12.4$2.8 million for the ninethree months ended September 30, 2015.March 31, 2016. This is primarily the result of repayments of existing debt obligations and payments of dividends. These uses were offset by cash proceeds received from preferred stock issuances and additional debt borrowings. These proceeds were offset primarily by repayments of existing debt obligations and payments of dividends. Net cash used in financing activities—discontinued operations was $5.6$0.3 million. This is primarily the result of a loan repayment of approximately $3.0 million related to the Company's Bentonville, Arkansas skilled nursing facility and a reduction of approximately $2.0 million in the outstanding loan principal on Companions.
NineThree Months Ended September 30, 2014March 31, 2015
 
Net cash used in operating activities—continuing operations for the ninethree months ended September 30, 2014,March 31, 2015, was $17.2$5.2 million, consisting primarily of our loss from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, rent revenue and expense in excess of cash paid, and amortization of debt discounts and related deferred financing costs) all primarily the result of routine operating activity. Net cash provided by operating activities—discontinued operations was approximately $11.2$4.6 million. This is primarily the result of the discontinuation of profitable operating entities which are now subleased to our third-party operators.
Net cash provided by investing activities—continuing operations for the ninethree months ended September 30, 2014,March 31, 2015, was approximately $2.4$0.3 million. This is primarily the result of a net decrease in restricted cash deposits of approximately $5.8$0.7 million , partially offset by capital expenditures of approximately $3.4$0.4 million. Net cash used in investing activities—discontinued operations was approximately $0.9 million. This is primarily the result of an increase of $0.7 million in collateralized restricted cash related to the Companions loan.
Net cash used inprovided by financing activities—continuing operations was approximately $1.8$0.3 million for the ninethree months ended September 30, 2014.March 31, 2015.  This is primarily the result of repayments of existing debt obligations and payments of preferred stock

43
Table of Contents



dividends, partially offset by cash proceeds received from additional debt borrowings and exercises of stock-based compensation awards. Net cash used in financing activities—discontinued operations was $0.2 million.These sources were offset by repayments of existing debt obligations and payments of preferred stock dividends.
Notes Payable and Other Debt

For information regarding the Company's debt financings, please refer to Note 9 - Notes Payable and Other Debt, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Receivables

The Company’s
34
Table of Contents




Our operations could be adversely affected if we experience significant delays in: (i) collectionin receipt of rentrental income from third-party operators; or (ii) reimbursement from Medicare, Medicaid or other third-party revenue sources. As the Company continues its transition to a healthcare property holding and leasing company, our operations will become less dependent upon patient care reimbursements and increasingly dependent upon the collection of rent. The Company’soperators. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and accounts receivable) and current liabilities.liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity.

Accounts receivable, net totaled $11.0$8.6 million at September 30, 2015, compared to $24.3March 31, 2016 and $8.8 million at December 31, 2014.2015 of which $6.5 million and $8.0 million, respectively, related to patient care receivables from our legacy operations.
The allowance for doubtful accounts was $13.0$11.3 million and $6.7$12.5 million at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. As facility operations transfer, older receivables become increasingly difficult to collect. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regardhistorical collection trends after facility operations transfer to third-party payors, as well as other factors.operators. We continue to evaluate and implement additional processes to strengthen our collection efforts and reduce the incidence of uncollectible accounts.
Inflation

Certain of our facilities are financed under various debt obligations subject to variable interest rates, which may increase in the future. For information regarding the Company's debt financings, please refer to Note 9 - Notes Payable and Other Debt, located inPart I, Item 1., Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q and Item 8, Notes to Consolidated Financial Statements - Note 9 - Notes Payable and Other Debt, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Upon the completion of our transition to a healthcare property holding and leasing company, rental revenues from our leased and subleased facilities will provide our primary source of revenues. Each of our leased and subleased facilities are subject to certain annual or periodic rent escalators, which will provide increased future cash flows. However, there is no guarantee these rent escalators will provide protection from future increases in inflation.
We have historically derived a substantial portion of our revenues from the Medicare program, state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. 
Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We may not be successful in offsetting future cost increases.
Off-Balance Sheet Arrangements
There were $1.8 million of outstanding letters of credit at September 30, 2015 and $3.8 million of outstanding letters of credit at December 31, 2014. For the period ended September 30, 2015, the outstanding letter of credit were fully collateralized with restricted cash deposits. For the period ended December 31, 2014, the outstanding letters of credit were fully collateralized with accounts receivable.

Operating Leases
For information regarding the Company's operating leases, please refer to Note 7 - Leases, located inPart I, Item 1.,to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q.10-Q

Adjusted EBITDA from continuing operations

44

Due to the material amount of non-cash related items included in the Company’s results of operations, we have developed an Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA from continuing operations”)  metric which provides management with a clearer view of operational uses of cash (see the table below). 
“Adjusted EBITDA from continuing operations” is a measure of operating performance that are not calculated in accordance with GAAP. We define “Adjusted EBITDA from continuing operations” as net income (loss) from continuing operations before interest expense, income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), loss on extinguishment of debt, and other non-routine adjustments.  We have provided below supplemental financial disclosure for these measures, including the most directly comparable GAAP measure (Net Loss) and an associated reconciliation.
The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA from continuing operations for the three and nine months ended September 30, 2015 and 2014:
  Three Months Ended September 30, Nine Months Ended September 30,
(Amounts in 000’s) 2015 2014 2015 2014
Condensed Consolidated Statements of Operations Data:  
  
  
  
Net loss $(5,097) $(3,548) $(15,707) $(8,866)
Discontinued operations 3,228
 (6,850) 2,694
 (19,034)
Net loss from continuing operations (Per GAAP) (1,869) (10,398) (13,013) (27,900)
Add back:  
  
  
  
Interest expense, net 1,830
 2,594
 6,600
 7,770
Income tax (benefit) expense —
 (244) 20
 (236)
Amortization of stock based compensation 245
 244
 677
 983
Depreciation and amortization 1,912
 1,861
 5,385
 5,570
Loss on extinguishment of debt —
 1,220
 680
 1,803
Other adjustments 71
 201
 296
 393
New business model expenses 198
 251
 453
 251
Salary retirement and continuation costs 21
 1,488
 (27) 2,770
Adjusted EBITDA from continuing operations $2,408
 $(2,783) $1,071
 $(8,596)
Adjusted EBITDA from continuing operations should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided by, or used in, operations as determined in accordance with GAAP. 
We believe Adjusted EBITDA from continuing operations is useful to investors in evaluating the Company’s performance, results of operations and financial position for the following reasons: 
It is helpful in identifying trends in the Company’s day-to-day performance because the items excluded have little or no significance to the Company’s day-to-day operations;
It provides an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance; and
It provides data that assists management determine whether or not adjustments to current spending decisions are needed.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
Disclosure in response to Item 3. of Form 10-Q is not required to be provided by smaller reporting companies.


4535

Item 4.  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
    
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report (the "Evaluation Date"). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting  

There were no changes in the Company's internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

4636

Part II.  Other Information

Item 1.  Legal Proceedings.

Amy Cleveland et. al. v APH&R Nursing, LLC et. al.The Company is party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including claims that the services the Company provides during the time it operated skilled nursing facilities resulted in injury or death to the residents of the Company's facilities and claims related to employment, staffing requirements and commercial matters. Although the Company intends to vigorously defend itself in these matters, there is no assurance that the outcomes of these matters will not have a material adverse effect on the Company's business, results of operations and financial condition.

The Company previously operated, and the Company's tenants now operate, in an industry that is extremely regulated. As such, in the ordinary course of business, the Company's tenants are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition, we believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations against or involving the Company, for the Company's prior operations, or the Company's tenants, whether currently asserted or arising in the future, could have a material adverse effect on the Company's business, results of operations and financial condition.

The Company is a defendant in a purported class action lawsuit captioned Angela Burnett as Special Administratrix of the Estate of Amy Cleveland and on behalf of the wrongful death beneficiaries of Amy Cleveland; Myrtle Briley as Special Administratrix of the Estate of Sam Briley, deceased; Lavern Coleman as Special Administratrix of the Estate of Freddie Fowlkes Thomas, deceased; Barbara Giffen as Special Administratrix of the Estate of Willie Thomas, deceased; Vivian Swopes as Special Administratrix of the Estate of Ellen Shepherd, deceased; Marilyn Cabaniss as Special Administratrix of the Estate of Mary May Blood, deceased vs. APHet. al. v. APHR&R Nursing, LLC d/b/a Cumberland Health and Rehabilitation Center and/or Abington Place Health and Rehab Center; Benton Nursing, LLC d/b/a Bentonville Manor Nursing Home; Homestead Nursing, LLC d/b/a Homestead Manor Nursing Home; Little Rock HC&R Nursing, LLC d/b/a West Markham Sub Acute and Rehabilitation Center; Mountain View Nursing, LLC d/b/a Stone County Nursing and Rehabilitation Center; Northridge HC&R Nursing, LLC d/b/a Northridge Healthcare and Rehabilitation; Park Heritage Nursing, LLC d/b/a Heritage Park Nursing Center; Valley River Nursing, LLC d/b/a River Valley Health and Rehabilitation Center; Woodland Hills HC Nursing, LLC d/b/a Woodland Hills Healthcare and Rehabilitation; APH&R Property Holdings, LLC; Benton Property Holdings, LLC; Homestead Property Holdings, LLC; Little Rock HC&R Property Holdings, LLC; Mt. V Property Holdings, LLC; Northridge HC&R Property Holdings, LLC; Park Heritage Property Holdings, LLC; Valley River Property Holdings, LLC; Woodland Hills HC Property Holdings, LLC; AdCare Administrative Services, LLC; AdCare Consulting, LLC; AdCare Operations, LLC; AdCare Health Systems, Inc.; Boyd P. Gentry; Christopher Brogdon; David A. Tenwick; Melinda Calaway; John Beaudrie; Cyndie L. Lyon; Debbie K. George-Fort; Kitty Gantner; Gaylon Gammill; Bennett; Brenda Barrientos; Deanna Shackleford; Rose Gean; Sherry Duncan; Tracey Tidwell; Zahid Abbasi; Jill Madden; Becky Jo Miller; Deborah Tyler; Matthew Manning; Rickey Griffin; Mincie Thomas; Deborah Hicks; Mary D. Huntsman-Hartfield; Dana Thompson Baker; Christine Wilson; Glenn Clark; Kimberly Franklin-Bruce; Deborah Thornton; Denene Hurst; Christopher Johnson; Pamela Murphy; Matthew Stevens; Tammy Romero; Brenda Huntsinger; Tammy Watkins; Gale Woodell; Nadine Huddleston; Michael Harrison; Chris Titsworth; Peggy McLelland; and Patricia Lamb, Case No. 60CV-14-3741,et al filed on March 4, 2015 with the Circuit Court of Pulaski County, Arkansas, 16th Division, 6th Circuit (the “Complaint”). The Complaint asserts claims againstCircuit. On December 16, 2015, the Company's insurance carrier reached a purported class which consistssettlement with each of the residents at: (i) Stone County Nursing and Rehabilitation Center; (ii) Bentonville Manor Nursing Home; (iii) Heritage Park Nursing Center; (iv) Homestead Manor Nursing Home; (v) River Valley Health and Rehabilitation Center; (vi) Northridge Healthcare and Rehabilitation; (vii) Woodland Hills Healthcare and Rehabilitation; (viii) West Markham Sub Acute and Rehabilitation Center; and (ix) Cumberland Health and Rehabilitation Center, all of which were managed by subsidiaries or affiliates of the Company. The lawsuit alleges that the nine facilities were understaffed during the class period which resulted in breaches or violation of the nursing home admission agreements, the Arkansas Deceptive Trade Practices Act, and the Long Term Care Facilities Residents' Act. The Complaint also includes individual negligence claimsplaintiffs on behalf of formerthe Company and all other defendants pursuant to which separate payments are to be made by the Company's carrier to the plaintiffs. The individual settlements are contingent on approval by the probate courts having jurisdiction over the deceased resident Amy Cleveland. The commencement dateplaintiffs' respective estates, if applicable. As of March 31, 2016, all but two of the class period begins at different times during 2011individual settlement agreements had been approved and 2012 for each facility and continues through a date to be determined by the court. The Complaint seeks certification of a class of residents consisting of all residents of the facilities during the class period, judgment against all defendants for actual, compensatory and punitive damages and attorney fees. With respectsettlement consideration paid to the allegations concerning Amy Cleveland, the Complaint seeks damages for injuries, general and special damages, prejudgment and post-judgment interest, attorney fees and punitive damages. The Company intends to vigorously defend itself against the claims.plaintiffs.

Item 1A.  Risk Factors.
 
DisclosureThe following are certain additional risk factors that you should carefully in responseaddition to Item 1Athe risk factors discussed in Part I, “Item 1A. Risk Factors” of Form 10-Qthe Annual Report, which are incorporated herein by this reference. The risk factors described below and in the Annual Report should be considered in connection with evaluating the forward-looking statements contained in this Quarterly Report because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. These risk factors are not all the risks applicable to our business, and are intended only as a summary of certain material factors. If any of the risks described below or in the Annual Report actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of the common stock and Series A Preferred Stock could decline.

If we fail to meet all applicable continued listing requirements of the NYSE MKT and the NYSE MKT determines to delist the common stock and Series A Preferred Stock, the delisting could adversely affect the market liquidity of such securities, impair the value of your investment, adversely affect our ability to raise needed funds and subject us to additional trading restrictions and regulations.

On April 18, 2016, the Company received notice from NYSE Regulation, Inc. that it is not in compliance with certain NYSE MKT continued listing standards relating to stockholders’ equity. Specifically, the Company is not in compliance with Section 1003(a)(i) (requiring stockholders’ equity of $2.0 million or more if an issuer has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring stockholders’ equity of $4.0 million or more if an issuer has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years) and Section 1003(a)(iii) (requiring stockholders’ equity of $6.0 million or more if an issuer has reported losses from continuing operations and/or net losses in its five most recent fiscal years) of the Company Guide because the Company reported a stockholders’ deficit of $23.8 million as of December 31, 2015 and net losses for the last five (5) fiscal years. As a result, the Company has become subject to the procedures and requirements of Section 1009 of the Company Guide and is required to submit a plan by May 18, 2016, advising the NYSE MKT of the actions the Company has taken or will take to regain compliance with the NYSE MKT’s continued listing standards by October 18, 2017.

The Company intends to submit a plan by the May 18, 2016 deadline. The common stock and Series A Preferred Stock will continue to be providedlisted on the NYSE MKT while the Company seeks to regain compliance with the listing standards noted, subject to the

37

Company’s compliance with other continued listing requirements. If the Company fails to submit a plan or if the Company’s plan is not accepted, then the NYSE MKT may commence delisting procedures. Furthermore, the NYSE MKT may commence delisting procedures, if it deems appropriate, if the Company does not regain compliance by October 18, 2017 or if the Company does not make progress consistent with its plan during the plan period. We give no assurance that the Company will be able to regain compliance with the applicable NYSE MKT continued listing requirements.

If the common stock and Series A Preferred Stock are delisted from the NYSE MKT, then such securities may trade in the over-the-counter market. If our securities were to trade on the over-the-counter market, selling the common stock and Series A Preferred Stock could be more difficult because smaller reporting companies.quantities of shares would likely be bought and sold, transactions could be delayed, and any security analysts’ coverage of us may be reduced. In addition, in the event the common stock and Series A Preferred Stock are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in such securities, further limiting the liquidity of the common stock and Series A Preferred Stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities. Such delisting from the NYSE MKT and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions. Any such limitations on our ability to raise debt and equity capital could prevent us from making future investments and satisfy maturing debt commitments.

In addition, if the Company fails for 180 or more consecutive days to maintain a listing of the Series A Preferred Stock on a national exchange, then: (i) the annual dividend rate on the Series A Preferred Stock will be increased to 12.875% per annum on the 181st day; and (ii) the holders of the Series A Preferred Stock will be entitled to vote for the election of two additional directors to serve on the Board. Such increased dividend rate and voting rights will continue for so long the Series A Preferred Stock is not listed on a national exchange.

We are exploring strategic alternatives and there is no assurance that we will be successful in identifying or completing any strategic alternative or that any such strategic alternative will yield additional value for shareholders.
 
The Board has commenced a review of strategic alternatives which could result in, among other things, a sale, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. There is no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, then our business, financial condition and results of operations could be adversely affected. We provide no assurance that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
Common stock repurchases made by the Company during the three months ended March 31, 2016 were as follows:
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan 
Maximum Number of Shares That May Yet Be Purchased (a)
January 1, 2016 - January 31, 2016 150,000
 $2.05
 150,000
 350,000
February 1, 2016 - February 29, 2016 —
 —
 —
 —
March 1, 2016 - March 31, 2016 —
 —
 —
 —
Total 150,000
 $2.05
 150,000
 350,000
(a) On JuneNovember 12, 2015, the Company issuedannounced that the Board authorized a stock repurchase plan (the "Repurchase Program") that enables the Company to one current director 5,151 and 5,151repurchase up to 500,000 shares of its outstanding common stock upon exercise of warrants with exercise prices of $1.04during a twelve-month period ending November 12, 2016. Share repurchases may be made from time to time through open market transactions, block trades or privately negotiated transactions and $1.93, respectively. On July 7, 2015, the Company issuedare subject to one former director 58,884 shares of common stock upon exercise of warrants with an exercise price of $1.04.market conditions, as well as corporate, regulatory and other considerations. The warrants were originally issued to the recipients in November 2007, and subsequently amended in November 2009, as partial compensation for service to the Company. The shares of common stock were issued without registration under the Securities Act in reliance upon the exemption from the registration requirements of Section 4(a)(2) of the Securities Act. The Company based such reliance upon, among other things, the isolated and private nature of the transaction and upon the recipients’ status and relationship to the Company and representations made by them regarding investment intent, sophistication, and access to information.Repurchase Program may be suspended or discontinued at any time.

Item 3.  Defaults upon Senior Securities.
 

38

None. 

Item 4.  Mine Safety Disclosures.
 
Not applicable.

Item 5.  Other Information.

Common Stock Repurchase ProgramAs described previously, on April 1, 2016, the Skyline Lessors entered into the Skyline Lease pursuant to which each Skyline Lessor leases one of the Arkansas Facilities to the Skyline Lessee (see Note 7 - Leases, to the Company's Notes to Consolidated Financial Statements located in Part I, Item 1, of this Quarterly Report on Form 10-Q). In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which the Purchaser had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million, which the Purchaser could exercise in accordance with such agreement until May 1, 2016. Pursuant to such purchase option, the purchase price shall be paid by the Purchaser as $52.0 million in cash at closing with the balance of the purchase price to evidenced by a promissory note executed by the Purchaser.

On November 12, 2015,April 22, 2016, the Purchaser delivered notice to the Company announced thatof its intent to exercise its option to purchase the Board of Directors has authorizedArkansas Facilities.

Pursuant to such purchase option, on May 10, 2016, the repurchase of upSkyline Lessors and the Purchaser entered into the Purchase Agreement whereby the Skyline Lessors agreed to 500,000 sharessell, and the Purchaser agreed to buy, the Arkansas Facilities, together with all improvements, fixtures, furniture and equipment pertaining to such facilities (except for certain leased business equipment) and the Skyline Lessors’ intangible assets (including intellectual property) relating to the operation of the outstanding common stock over the next twelve months. The share repurchases may be made from time to time through open market transactions, block trades or privately negotiated transactions and arenursing home business at such facilities, for an aggregate purchase price of $55.0 million, subject to marketthe terms and conditions as well as corporate, regulatory, and other considerations.set forth in the Purchase Agreement. The share repurchase program may be suspended or discontinued at any timepurchase price consists of: (i) a deposit of $1.0 million deposited by the BoardPurchaser with an escrow agent at the time of Directors, without prior notice,the Purchaser’s exercise of the purchase option; (ii) cash consideration of $51.0 million; and (iii) the Company has no obligation to repurchase anySkyline Note, a promissory note from the Purchaser in favor of the Skyline Lessors with a principal amount of common stock under$3,000,000, to be executed and delivered at closing. The Skyline Note shall be paid in twenty-four (24) equal monthly installments of interest only at the program.rate of ten percent (10%) per annum, with the principal balance to be due and payable in full on August 1, 2018. The Company intendsSkyline Note shall be personally guaranteed by Joseph Schwartz.

The purchase and sale of the Arkansas Facilities is subject to make all repurchasescustomary conditions and termination rights for transactions of this type. The closing of the transaction is required to occur on or before August 1, 2016. The Skyline Lease shall remain in compliance with applicable regulatory guidelinesfull force and effect through the closing date and, upon the closing, the Skyline Lease shall either terminate or be assigned to administer the planPurchaser’s entities, at the Purchaser’s option. If the closing does not occur, the Skyline Lease shall remain in full force and effect in accordance with applicable laws, including Rule 10b-18 of the Exchange Act.  Any repurchases are expected to be funded from cash on hand and cash flows from operating activities.its terms.

Riverchase

As previously disclosed, Riverchase financed its acquisition of the Riverchase Village facility using the proceeds of revenue bonds issued by the Medical Clinic Board of the City of Hoover (approximately $5.8 million of First Mortgage Healthcare Facility Revenue Bonds (Series 2010 A) and approximately $0.5 million of First Mortgage Revenue Bonds (Series B) (collectively, the “Riverchase Bonds”)). It has come to the Company’s attention that, on September 3, 2015, the trustee with respect to the Riverchase Bonds (as to which the Company is a guarantor) issued to bondholders an informational notice indicating that certain defaults had occurred with respect to the Riverchase Bonds, including a debt service reserve deficiency of approximately $300,000, failure to pay ad valorem taxes and failure to provide certain financial and other information to the trustee. It is the Company’s understanding that Riverchase is working with the trustee to cure the defaults.

47

On October 30, 2015, the trustee notified the Company that there were insufficient funds in the interest account with respect to the Riverchase Bonds to pay the bond payment due November 1, 2015, and demanded that the Company pay the shortfall in the amount of $39,739 pursuant to the Company’s guaranty. The Company paid such amount as demanded by the trustee and, in connection therewith, the Riverchase Promissory Note was amended and restated on November 2, 2015, to increase the principal amount from $261,665 to $301,404. As previously disclosed, Riverchase is the Company’s consolidated VIE and is owned and controlled by Christopher Brogdon, a director of the Company and greater than 5% holder of the common stock. For a description of certain arrangements between the Company and Mr. Brogdon, see “Certain Relationships and Related Party Transactions” included in the Company’s Definitive Proxy Statement for its 2015 Annual Meeting of Shareholders, filed with the SEC on October 26, 2015.

Item 6.  Exhibits.
 
The agreements included as exhibits to this Quarterly Report are included to provide information regarding the terms of these agreements and are not intended to provide any other factual or disclosure information about the Company, its business or the other parties to these agreements. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and: 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; 
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon by investors. 

4839

EXHIBIT INDEX
 
Exhibit No.DescriptionMethod of Filing
   
2.1Asset
Purchase and Sale Agreement, dated March 17, 2015, by and between CSCCamong Valley River Property Holdings, LLC, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Gracewood Manor, LLC
Incorporated by reference to Exhibit 10.401 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
2.2First Amendment to Asset Purchase Agreement, dated May 19, 2015, by and between CSCC PropertyLittle Ark Realty Holdings, LLC and Gracewood Manor, LLC
Incorporated by reference to Exhibit 2.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
2.3Purchase and Sale Agreement, dated May 15, 2015, by and between Benton Property Holdings, LLC and Bozeman Development, LLC.Incorporated by reference to Exhibit 2.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015Filed herewith
3.1Declaration of Conversion of AdCare Health Systems, Inc., an Ohio corporation, to AdCare Health Systems, Inc., a Georgia corporationIncorporated by reference to Appendix A of the Registrant’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 29, 2013
3.2Certificate of Conversion of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 3.2 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
3.3Certificate for Conversion for Entities Converting Within or Off the Records of the Ohio Secretary of State.Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
3.4Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013Incorporated by reference to Exhibit 3.3 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.5Articles of Correction to Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013.Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.6Bylaws of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 3.4 of the Registrant’s Current report on Form 8-K filed on December 27, 2013
3.7Amendment No. 1 to the Bylaws of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 3.7 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
3.8Articles of Amendment to the Articles of Incorporation of AdCare Health Systems, Inc., as amended, filed with the Secretary of State of the State of Georgia on April 7, 2015.Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on April 13, 2015
3.9Articles of Amendment to the Articles of Incorporation of AdCare Health Systems, Inc., as amended, filed with the Secretary of State of the State of Georgia on May 28, 2015Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on June 2, 2015
3.10Articles of Amendment to the Articles of Incorporation of AdCare Health Systems, Inc., as amended, filed with the Secretary of State of the State of Georgia on December 11, 2015.Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on December 14, 2015
3.11Amendment No. 2 to the Bylaws of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed on December 14, 2015
4.1Specimen Common Stock Certificate of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 3.1 of the Registrant’s Current report on Form 8-K filed on December 18, 2013
4.2*2004 Stock Option Plan of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.3*2005 Stock Option Plan of AdCare Health Systems, Inc.Incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.4*AdCare Health Systems, Inc. 2011 Stock Incentive PlanIncorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011

40

4.5*Form of Non-Statutory Stock Option AgreementIncorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.6*Form of Incentive Stock Option AgreementIncorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-131542) filed October 27, 2011
4.7Form of 8% Subordinated Convertible Note Due 2015 issued by AdCare Health Systems, Inc.Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed July 5, 2012
4.8Form of Warrant to Purchase Common Stock of the CompanyIncorporated by reference to Exhibit 4.3 to the Registrant’s Form S-3 (File No. 333-175541)
4.9Warrant to Purchase 50,000 Shares of Common Stock, dated December 28, 2012, issued by AdCare Health Systems, Inc. to Strome Alpha Offshore Ltd.Incorporated by reference to Exhibit 4.21 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012
4.10Form of Warrant, dated March 28, 2014, issued by AdCare Health Systems, Inc. to the placement agent and its affiliates in connection with the offering of 10% Subordinated Convertible Notes Due April 30, 2015
Incorporated by reference to Exhibit 4.3 of the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2014

4.11Form of Warrant granted to management to Purchase Shares of AdCare Health Systems, Inc. dated November 20, 2007Incorporated by reference to Exhibit 10.19 of the Registrant's annual report on form 10-KSB as amended March 31, 2008
4.12Registration Rights Agreement, dated March 31, 2015, by and among AdCare Health Systems, Inc. and the Purchasers of the Company’s 10% Convertible Subordinated Notes Due April 30, 2017Incorporated by reference to Exhibit 4.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
4.24.13Form of 10% Convertible Subordinated Notes Due April 30, 2017Incorporated by reference to Exhibit 4.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
4.34.14Form of 10% Convertible Subordinated Notes Due April 30, 2017 (Affiliate Form)Incorporated by reference to Exhibit 4.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.1First Amendment to Sublease Agreement, dated February 27, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLCIncorporated by reference to Exhibit 99.12 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.2First Amendment to Sublease Agreement, dated February 27, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLCIncorporated by reference to Exhibit 99.13 of the Registrant's Current Report on Form 8-K filed on May 6, 2015

49

10.3First Amendment to Sublease Agreement, dated February 27, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLCIncorporated by reference to Exhibit 99.14 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.4First Amendment to Sublease Agreement, dated February 27, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLCIncorporated by reference to Exhibit 99.15 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.5First Amendment to Sublease Agreement, dated February 27, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLCIncorporated by reference to Exhibit 99.16 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.6First Amendment to Sublease Agreement, dated February 27, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLCIncorporated by reference to Exhibit 99.17 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.7First Amendment to Sublease Agreement, dated February 27, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLCIncorporated by reference to Exhibit 99.18 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.8First Amendment to Sublease Agreement, dated February 27, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLCIncorporated by reference to Exhibit 99.19 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.9Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLCIncorporated by reference to Exhibit 99.20 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.10Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLCIncorporated by reference to Exhibit 99.21 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.11Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLCIncorporated by reference to Exhibit 99.22 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.12Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLCIncorporated by reference to Exhibit 99.23 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.13Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLCIncorporated by reference to Exhibit 99.24 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.14Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLCIncorporated by reference to Exhibit 99.25 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.15Second Amendment to Sublease Agreement, dated March 31, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLCIncorporated by reference to Exhibit 99.26 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.16Second Amendment to Sublease Agreement, dated March 31, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLCIncorporated by reference to Exhibit 99.27 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.17Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLCIncorporated by reference to Exhibit 99.28 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.18Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLCIncorporated by reference to Exhibit 99.29 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.19Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLCIncorporated by reference to Exhibit 99.30 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.20Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLCIncorporated by reference to Exhibit 99.31 of the Registrant's Current Report on Form 8-K filed on May 6, 2015

50

10.21Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLCIncorporated by reference to Exhibit 99.32 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.22Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLCIncorporated by reference to Exhibit 99.33 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.23Third Amendment to Sublease Agreement, dated April 30, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLCIncorporated by reference to Exhibit 99.34 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.24Third Amendment to Sublease Agreement, dated April 30, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLCIncorporated by reference to Exhibit 99.35 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.25Amended and Restated Promissory Note for exit fees (Cumberland), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National AssociationIncorporated by reference to Exhibit 10.25 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.26Amended and Restated Promissory Note for exit fees (Northridge), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National AssociationIncorporated by reference to Exhibit 10.26 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.27Amended and Restated Promissory Note for exit fees (River Valley), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National AssociationIncorporated by reference to Exhibit 10.27 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.28Amended and Restated Promissory Note for exit fees (Sumter Valley), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National AssociationIncorporated by reference to Exhibit 10.28 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.29Promissory Note for exit fees (Stone County), dated April 3, 2015, by and among AdCare Health Systems, Inc. and KeyBank National AssociationIncorporated by reference to Exhibit 10.29 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.30Eighth Amendment to Credit Agreement, dated March 25, 2015, by and among ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLCIncorporated by reference to Exhibit 10.30 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.31
Fifth Amendment to Credit Agreement, dated March 25, 2015, by and among NW 61ST Nursing, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and Gemino Healthcare Finance, LLC
Incorporated by reference to Exhibit 10.31 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.32Ninth Modification Agreement to Loan and Security Agreement, dated May 1, 2015, by and among ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC , ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC , Mountain Trace Nursing ADK, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Coosa Nursing ADK, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.Incorporated by reference to Exhibit 10.32 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.33Eighth Modification Agreement to Loan and Security Agreement, dated as of April 1, 2015 by and among ADK Lumber City Operator, LLC, ADK Lagrange Operator, LLC , ADK Powder Springs Operator, LLC , ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC , Mountain Trace Nursing ADK, LLC, Mt. Kenn Nursing, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Glenvue H&R Nursing, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.Incorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on April 7, 2015
10.34Sublease Agreement, dated April 1, 2015, by and between ADK Georgia, LLC and C.R. of Lagrange, LLCIncorporated by reference to Exhibit 99.10 of the Registrant's Current Report on Form 8-K filed on April 7, 2015

51

10.35Sublease Agreement, dated as of January 16, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLCIncorporated by reference to Exhibit 10.363 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.36Sublease Agreement, dated as of January 16, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLCIncorporated by reference to Exhibit 10.364 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.37Sublease Agreement, dated as of January 16, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLCIncorporated by reference to Exhibit 10.365 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.38Sublease Agreement, dated as of January 16, 2015, by and among Valley River Property Holdings, LLC, Valley River Nursing, LLC and Highlands of Fort Smith, LLCIncorporated by reference to Exhibit 10.366 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.39Sublease Agreement, dated as of January 16, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLCIncorporated by reference to Exhibit 10.367 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.40Sublease Agreement, dated as of January 16, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLCIncorporated by reference to Exhibit 10.368 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.41Sublease Agreement, dated as of January 16, 2015, by and among Benton Property Holdings, LLC, Benton Nursing, LLC and Highlands of Bentonville, LLCIncorporated by reference to Exhibit 10.369 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.42Sublease Agreement, dated as of January 16, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLCIncorporated by reference to Exhibit 10.370 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.43Sublease Agreement, dated as of January 16, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLCIncorporated by reference to Exhibit 10.371 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.44Sublease Agreement, dated as of January 16, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLCIncorporated by reference to Exhibit 10.372 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.45Loan Agreement, dated January 30, 2015, by and among Georgetown HC&R Property Holdings, LLC, Sumter Valley Property Holdings, LLC and The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.373 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.46Promissory Note, dated January 30, 2015, issued by Georgetown HC&R Property Holdings, LLC, and Sumter Valley Property Holdings, LLC to The PrivateBank and Trust Company in the amount of $9,300,000Incorporated by reference to Exhibit 10.374 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.47Guaranty of Payment and Performance, dated January 30, 2015, issued by AdCare Health Systems, Inc. to and for the benefit of The PrivateBank and Trust Company in the amount of $9,300,000Incorporated by reference to Exhibit 10.375 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.48Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated January 30, 2015, by Georgetown HC&R Property Holdings, LLC to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.376 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.49Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated January 30, 2015, by Sumter Valley Property Holdings, LLC to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.377 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.50Seventh Amendment to Credit Agreement, dated January 30, 2015, by and between ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLCIncorporated by reference to Exhibit 10.378 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.51Fourth Amendment to Credit Agreement, dated January 30, 2015, by and among NW 61st Nursing, LLC, Georgetown HC&R Nursing, LLC, Sumter N&R, LLC and Gemino Healthcare Finance, LLCIncorporated by reference to Exhibit 10.379 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.52Sublease Agreement, dated as of January 31, 2015, by and between ADK Georgia, LLC. and 3460 Powder Springs Road Associates, L.P.Incorporated by reference to Exhibit 10.380 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.53Sublease Agreement, dated as of January 31, 2015, by and between ADK Georgia, LLC. and 3223 Falligant Avenue Associates, L.P.Incorporated by reference to Exhibit 10.381 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

52

10.54Promissory Note for exit fees (Northridge), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000Incorporated by reference to Exhibit 10.382 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.55Promissory Note for exit fees (Cumberland), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000Incorporated by reference to Exhibit 10.383 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.56Promissory Note for exit fees (River Valley), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000Incorporated by reference to Exhibit 10.384 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.57Promissory Note for exit fees (Sumter Valley), dated February 25, 2015, issued by AdCare Health Systems, Inc. to KeyBank National Association in the amount of $170,000Incorporated by reference to Exhibit 10.385 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.58Loan Agreement, dated February 25, 2015, by and among APH&R Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, and The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.386 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.59Promissory Note, dated February 25, 2015, issued by APH&R Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, and Woodland Hills HC Property Holdings, LLC to The PrivateBank and Trust Company in the amount of $12,000,000Incorporated by reference to Exhibit 10.387 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.60Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated February 25, 2015, by Woodland Hills HC Property Holdings, LLC to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.388 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.61Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated February 25, 2015, by APH&R Property Holdings, LLC to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.389 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.62Guaranty of Payment and Performance, dated February 25, 2015, issued by AdCare Health Systems, Inc. to and for the benefit of The PrivateBank and Trust Company in the amount of $12,000,000Incorporated by reference to Exhibit 10.390 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.63Absolute Assignment of Rents and Leases, dated February 25, 2015, by Woodland Hills HC Property Holdings, LLC, to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.391 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.64Absolute Assignment of Rents and Leases, dated February 25, 2015, by APH&R Property Holdings, LLC, to and for the benefit of The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.392 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.65Amendment to Promissory Note, dated March 25, 2015, by and between Riverchase Village ADK, LLC and Adcare Health Systems, Inc.Incorporated by reference to Exhibit 10.393 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.66Amendment to Second Amended and Restated Note, dated March 25, 2015, by and between Christopher F. Brogdon and Adcare Health Systems, Inc.Incorporated by reference to Exhibit 10.394 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.67Third Amendment, dated March 25, 2015, by and among BAN NH, LLC, Senior NH, LLC, Oak Lake, LLC, Kenmetal, LLC, Living Center, LLC, Meeker Nursing, LLC, MCL Nursing, LLC, Harrah Whites Meadows Nursing, LLC, Meeker Property Holdings, LLC, McLoud Property Holdings, LLC, Harrah Property Holdings, LLC, GL Nursing, LLC, Christopher F. Brogdon, AdCare Oklahoma Management, LLC, AdCare Administrative Services, LLC, AdCare Health Systems, Inc., and Hearth & Home of Ohio, Inc.Incorporated by reference to Exhibit 10.395 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.68First Amendment to Executive Employment Agreement, dated March 25, 2015, by and among AdCare Health Systems, Inc. and William McBride, IIIIncorporated by reference to Exhibit 10.396 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.69Employment Agreement between AdCare Health Systems, Inc. and Allan J. Rimland, dated March 25, 2015Incorporated by reference to Exhibit 10.397 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014

53

10.70Settlement Agreement and Release dated March 30, 2015, by and among Troy Clanton, Rose Rabon and South Star Services, Inc., and Chris Brogdon , Connie Brogdon, Kenmetal, LLC, Senior NH, LLC, BAN NH, LLC, Living Center, LLC, and Oak Lake, LLC, and Adcare Oklahoma Management, LLC, Adcare Health Systems, Inc., Adcare Property Holdings, LLC, and Boyd GentryIncorporated by reference to Exhibit 10.398 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.71Settlement Agreement and Release dated March 30, 2015, by and among Starr Indemnity & Liability Company, Columbia Casualty Company, Chris Brogdon, Connie Brogdon, Kenmetal, LLC, Senior NH, LLC, BAN NH, LLC, Living Center, LLC, and Oak Lake, LLC, and AdCare Oklahoma Management, LLC, AdCare Health Systems, Inc., AdCare Property Holdings, LLC, and Boyd GentryIncorporated by reference to Exhibit 10.399 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.72Settlement and Indemnification Agreement dated March 26, 2015, by and between Adcare Health Systems, Inc and its wholly owned subsidiaries and affiliates and Chris Brogdon and any affiliates or entities in which Chris Brogdon has an ownership interestIncorporated by reference to Exhibit 10.400 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.73Lease Agreement, dated February 27, 2015, by and between Georgetown HC&R Property Holdings, LLC and Blue Ridge in Georgetown LLCIncorporated by reference to Exhibit 10.408 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.74First Amendment to Lease Agreement, dated March 20, 2015, by and between Georgetown HC&R Property Holdings, LLC and Blue Ridge in Georgetown, LLCIncorporated by reference to Exhibit 10.409 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.75Lease Agreement, dated February 27, 2015 by and between Sumter Valley Property Holdings, LLC and Blue Ridge of Sumter LLCIncorporated by reference to Exhibit 10.410 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.76First Lease Amendment to Lease Agreement, dated March 20, 2015, by and between Sumter Valley Property Holdings, LLC and Blue Ridge of Sumter, LLCIncorporated by reference to Exhibit 10.411 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.77Lease Agreement dated February 27, 2015 by and between Mountain Trace Nursing ADK, LLC and Blue Ridge on the Mountain LLCIncorporated by reference to Exhibit 10.412 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.78First Amendment to Lease Agreement, dated March 20, 2015 by and between Mountain Trace Nursing ADK,LLC and Blue Ridge on the Mountain, LLCIncorporated by reference to Exhibit 10.413 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.79Sublease Agreement, dated February 18, 2015 by and between CP Nursing, LLC and C.R. of College Park, LLCIncorporated by reference to Exhibit 10.417 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014
10.80Sublease Termination Agreement, dated April 30, 2015, by and among Benton Property Holdings, LLC, Benton Nursing, LLC, and Highlands of Bentonville, LLCIncorporated by reference to Exhibit 99.36 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.81Sublease Termination Agreement, dated April 30, 2015, by and among Valley River Property Holdings, LLC, Valley River Nursing, LLC, and Highlands of Fort Smith, LLCIncorporated by reference to Exhibit 99.37 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.82Lease Inducement Fee Agreement, dated April 30, 2015, by and between AdCare Health Systems, Inc. and Aria Health Consulting, LLCIncorporated by reference to Exhibit 99.38 of the Registrant's Current Report on Form 8-K filed on May 6, 2015
10.83
Sublease Agreement, dated May 1, 2015 by and between NW 61st Nursing, LLC and Southwest LTC-NW OKC, LLC
Incorporated by reference to Exhibit 10.83 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.84Sublease Agreement, dated May 1, 2015 by and between QC Nursing, LLC and Southwest LTC-Quail Creek, LLCIncorporated by reference to Exhibit 10.84 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.85Fifth Modification Agreement, dated May 1, 2015, by and among Little Rock HC&R Property Holdings, LLC, AdCare Health Systems, Inc., Little Rock HC&R Nursing, LLC, and The PrivateBank and Trust CompanyIncorporated by reference to Exhibit 10.85 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015

54

10.86Loan Modification Agreement, dated May 1, 2015, by and among Benton Property Holdings, LLC, Park Heritage Property Holdings, LLC and Valley River Property Holdings, LLC, as borrowers; AdCare Health Systems, Inc., Benton Nursing, LLC, Park Heritage Nursing, LLC, and Valley River Nursing, LLC, as Guarantors; and The PrivateBank and Trust Company, as lenderIncorporated by reference to Exhibit 10.86 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
10.87Underwriting Agreement, dated April 8, 2015, by and between AdCare Health Systems, Inc. and MLV & Co. LLC, as the representative of the several underwriters named therein.Incorporated by reference to Exhibit 1.1 of the Registrant's Current Report on Form 8-K filed on April 13, 2015
10.88Fourth Amendment to Credit Agreement, dated May 30, 2013, by and between ADK Bonterra/Parkview, LLC and Gemino Healthcare Finance, LLCIncorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013
10.89Second Amendment to Lease Agreement, dated May 31, 2015 by and between Mountain Trace Nursing ADK,LLC and Blue Ridge on the Mountain, LLCIncorporated by reference to Exhibit 10.7 of the Registrant's Current Report on Form 8-K filed on June 5, 2015
10.90Sublease Agreement, dated July 1, 2015 by and between 2014 HUD Master Tenant, LLC and C.R. of Glenvue, LLCIncorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on July 7, 2015
10.91Underwriting Agreement, dated May 28, 2015, by and between AdCare Health Systems, Inc and MLV & Co. LLC, as the representative of the several underwriters named therein.Incorporated by reference to Exhibit 1.1 of the Registrant's Current Report on Form 8-K filed on June 2, 2015
10.92At Market Issuance Sales Agreement, dated July 21, 2015, between AdCare Health Systems, Inc. and MLV & Co. LLC.Incorporated by reference to Exhibit 1.1 of the Registrant's Current Report on Form 8-K filed on July 22, 2015
10.93At Market Issuance Sales Agreement, dated July 21, 2015, between AdCare Health Systems, Inc. and JMP Securities LLC.Incorporated by reference to Exhibit 1.2 of the Registrant's Current Report on Form 8-K filed on July 22, 2015
10.94Sublease Agreement, dated August 1, 2015, by and between AdCare Health Systems, Inc. and CC SNF, LLC.Incorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.95Sublease Agreement, dated August 1, 2015, by and between Eaglewood Village, LLC and EW ALF, LLC.Incorporated by reference to Exhibit 99.3 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.96Sublease Agreement, dated August 1, 2015, by and between RMC HUD Master Tenant, LLC and HC SNF, LLC.Incorporated by reference to Exhibit 99.4 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.97Sublease Agreement, dated August 1, 2015, by and between RMC HUD Master Tenant, LLC and PV SNF, LLC.Incorporated by reference to Exhibit 99.5 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.98Sublease Agreement, dated August 1, 2015, by and between 2014 HUD Master Tenant, LLC and EW SNF, LLC.Incorporated by reference to Exhibit 99.6 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.99Lease Inducement Fee Agreement, dated August 1, 2015, by and between the AdCare Health Systems, Inc. and PWW Healthcare, LLC, PV SNF, LLC, HC SNF, LLC, EW SNF, LLC, and EW ALF, LLC.Incorporated by reference to Exhibit 99.7 of the Registrant's Current Report on Form 8-K filed on August 5, 2015
10.100Tenth Modification Agreement to Loan and Security Agreement, dated July 30, 2015, by and among ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC , ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC , Mountain Trace Nursing ADK, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Coosa Nursing ADK, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.Incorporated by reference to Exhibit 10.100 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.101Promissory Note, dated July 17, 2015, by and between Highlands Arkansas Holdings, LLC and AdCare Health Systems, Inc.Incorporated by reference to Exhibit 10.101 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015

55

10.102Letter Agreement to the Equitable Adjustments, dated July 17, 2015, by and between AdCare Health Systems, Inc. and Highlands Arkansas Holdings, LLC.Incorporated by reference to Exhibit 10.102 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.103Promissory Note, dated August 1, 2015, by and between PWW Healthcare, LLC, PV SNF, LLC, HC SNF, LLC, CC SNF, LLC EW SNF, LLC, and EW ALF, LLC, and AdCare Health Systems, Inc.Incorporated by reference to Exhibit 10.103 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.104Sublease Agreement, dated July 20, 2015, by and between ADK Bonterra/Parkview, LLC and 2801 Felton Avenue, L.P., and 460 Auburn Avenue, L.P.Incorporated by reference to Exhibit 10.104 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.1054.15Amendment to Subordinated Convertible Note datedIssued March 31, 2015, Dated July 30, 2015, by and between AdCare Health Systems, Inc., and Cantone Asset Management, LLC and Cantone Research, Inc.Incorporated by reference to Exhibit 10.105 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.10610.1First Amendment to Promissory Note, dated August 12, 2015, by and among CSCC Property Holdings, LLC and CSCC Nursing, LLC, AdCare Health Systems, Inc. and AdCare Oklahoma Management, LLC, and Contemporary Healthcare Senior Lien I, L.P.Incorporated by reference to Exhibit 10.106 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.107Asset PurchaseMaster Lease Agreement, dated June 11, 2015, by and between Riverchase Village ADK, LLC and Omega Communities, LLC.Incorporated by reference to Exhibit 10.107 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.108First Amendment to Asset Purchase Agreement, dated August 6, 2015, by and between Riverchase Village ADK, LLC and Omega Communities, LLC.Incorporated by reference to Exhibit 10.108 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015
10.109Sublease Agreement, dated July 17, 2015,February 5, 2016, by and among Valley River Property Holdings, LLC,Valley River Nursing, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Highlands of Fort Smith,Skyline Healthcare, LLCIncorporated by reference to Exhibit 10.10910.462 of the Registrant's QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended June 30,December 31, 2015
10.11010.2Option Agreement, dated February 5, 2016, by and among Valley River Property Holdings, LLC, Homestead Property Holdings, LLC, Park Heritage Property Holdings, LLC, Mt. V Property Holdings, LLC, Mountain Top Property Holdings, LLC, Little Rock HC&R Property Holdings, LLC, Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, and Joseph SchwartzSecondIncorporated by reference to Exhibit 10.463 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2015
10.3Third Amendment to Lease, dated as of August 14,October 1, 2015, by and between William M. Foster and ADK Georgia, LLCIncorporated by reference to Exhibit 99.1 of the Registrant's Current Report on Form 8-K filed on August 18, 2015Filed herewith
10.11110.4*Lease Guaranty made by AdCare Health Systems, Inc. for the benefit of William M. Foster, effective August 14, 2015Incorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on August 18, 2015
10.112SubleaseLetter Agreement, dated OctoberFebruary 1, 2015,2016, by and between KB HUD Master Tenant 2014, LLC, and C.R. of Autumn Breeze, LLCIncorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K filed on October 6, 2015
10.113First Amendment to Sublease Agreement, dated October 6, 2015, by and among Valley River Property Holdings, LLC, Valley River Nursing, LLC and Highlands of Fort Smith, LLCIncorporated by reference to Exhibit 99.3 of the Registrant's Current Report on Form 8-K filed on November 3, 2015
10.114Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Little Rock HC&R Property Holdings, LLC, Little Rock HC&R Nursing, LLC and Highlands of Little Rock West Markham, LLCFiled herewith
10.115Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Northridge HC&R Property Holdings, LLC, Northridge HC&R Nursing, LLC and Highlands of North Little Rock John Ashley, LLCFiled herewith
10.116Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Woodland Hills HC Property Holdings, LLC, Woodland Hills HC Nursing, LLC and Highlands of Little Rock Riley, LLCFiled herewith
10.117Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Homestead Property Holdings, LLC, Homestead Nursing, LLC and Highlands of Stamps, LLCFiled herewith
10.118Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Mt. View Property Holdings, LLC, Mountain View Nursing, LLC and Highlands of Mountain View SNF, LLCFiled herewith

56

10.119Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Park Heritage Property Holdings, LLC, Park Heritage Nursing, LLC and Highlands of Rogers Dixieland, LLCFiled herewith
10.120Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among APH&R Property Holdings, LLC, APH&R Nursing, LLC and Highlands of Little Rock South Cumberland, LLCFiled herewith
10.121Fourth Amendment to Sublease Agreement, dated October 6, 2015, by and among Mountain Top Property Holdings, LLC, Mountain Top ALF, LLC and Highlands of Mountain View RCF, LLCFiled herewith
10.122Second Amendment to Asset Purchase Agreement, dated September 30, 2015, by and between CSCC Property Holdings, LLC, and Gracewood Manor, LLCIncorporated by reference to Exhibit 99.6 of the Registrant's Current Report on Form 8-K filed on November 3, 2015
10.123Second Amendment to Asset Purchase Agreement, dated September 30, 2015, by and between Riverchase Village ADK, LLC and Omega Communities, LLCFiled herewith
10.124Second Amendment to Lease Agreement, dated September 14, 2015, by and between Coosa Nursing ADK, LLC and C.R. of Coosa Valley, LLCFiled herewith
10.125Second Amendment to Lease Agreement, dated September 14, 2015, by and between Attalla Nursing ADK, LLC and C.R. of Attalla, LLCFiled herewith
10.126First Amendment to Lease Agreement, dated August 14, 2015, by and between 2014 HUD Master Tenant, LLC and C.R. of Glenvue, LLCFiled herewith
10.127Second Amendment to Lease Agreement, dated September 24, 2015, by and between Georgetown HC&R Property Holdings, LLC and Blue Ridge in Georgetown, LLCFiled herewith
10.128First Amendment to Sublease Agreement, dated September 10, 2015, by and between ADK Georgia, LLC and LC SNF, LLCFiled herewith
10.129First Amendment to Sublease Agreement, dated September 14, 2015, by and between ADK Georgia, LLC and C.R. of LaGrange, LLCFiled herewith
10.130First Amendment to Sublease Agreement, dated September 23, 2015, by and between ADK Georgia, LLC and 3460 Powder Springs Road Associates, L.P.Filed herewith
10.131First Amendment to Sublease Agreement, dated September 23, 2015, by and between ADK Georgia, LLC and 3223 Falligant Avenue Associates, L.P.Filed herewith
10.132Third Amendment to Sublease Agreement, dated September 9, 2015, by and between ADK Georgia, LLC and C.R. of Thomasville, LLCFiled herewith
10.133First Amendment to Sublease Agreement, dated September 1, 2015, by and between ADK Bonterra/Parkview, LLC and 2801 Felton Avenue, L.P., and 460 Auburn Avenue, L.P.Filed herewith
10.134Second Amended and Restated Note, dated November 2, 2015, by and between Riverchase Village ADK, LLCE. Clinton Cain and AdCare Health Systems, Inc.Filed herewith
10.135Modification Agreement, dated October 30, 2015, by and among APH&R Property Holdings, LLC, HC&R Property Holdings, LLC, and Woodland Hills HC Property Holdings, LLC, AdCare Health Systems, Inc., and The PrivateBank and Trust Company.Filed herewith
10.136Second Modification Agreement, dated October 30, 2015, by and among Benton Property Holdings, LLC, Park Heritage Property Holdings, LLC, and Valley River Property Holdings, LLC, AdCare Health Systems, Inc., Benton Nursing, LLC, Park Heritage Nursing, LLC, and Valley River Nursing, LLC, and The PrivateBank and Trust Company.Filed herewith
10.137Sixth Modification Agreement, dated October 30, 2015, by and among Little Rock HC&R Property Holdings, LLC, AdCare Health Systems, Inc., Little Rock HC&R Nursing, LLC, and The PrivateBank and Trust CompanyFiled herewith

57

10.138Eleventh Modification Agreement to Loan and Security Agreement, dated July 30, 2015, by and among ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC , ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC, Mountain Trace Nursing ADK, LLC, Erin Nursing, LLC, CP Nursing, LLC, Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC , Coosa Nursing ADK, LLC and QC Nursing, LLC, AdCare Health Systems, Inc., and the Privatebank and Trust Company.Filed herewith
10.139Second Amendment to Third Amended and Restated Multiple Facilities Lease, dated September 1, 2015, by and between Georgia Lessor - Bonterra/Parkview, LLC and ADK Bonterra/Parkview, LLC.Filed herewith
10.140Amendment Regarding Lease and Sublease, dated August 1, 2015, by and among Covington Realty, LLC, and Adcare Health Systems, Inc. and CC SNF, LLCFiled herewith
10.141Master Sublease Agreement, dated November 3, 2015, by and among ADK Georgia, LLC, and Jeffersonville Healthcare & Rehab, LLC, Oceanside Healthcare & Rehab, LLC, and Savannah Beach Healthcare & Rehab, LLC.Filed herewith
10.142Replacement Promissory Note, dated November 1, 2015, by and between New Beginnings Care, LLC, Jeffersonville Healthcare & Rehab, LLC, Oceanside Healthcare & Rehab, LLC, and Savannah Beach Healthcare & Rehab, LLC, and AdCare Health Systems, Inc.Filed herewith
10.143Amended and Restated Note, dated October 1, 2015, by and between Riverchase Village ADK, LLC and AdCare Health Systems, Inc.Filed herewith
31.1Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley ActFiled herewith
31.2Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley ActFiled herewith
32.1Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley ActFiled herewith

41

32.2Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley ActFiled herewith
101The following financial information from AdCare Health Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015,March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, (ii)(iii) Consolidated Balance Sheets asStatements of September 30, 2015 and DecemberStockholders’ Deficit for the three months ended March 31, 2014, (iii)2016 (iv) Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2015March 31, 2016 and 2014, (iv) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2015, and (v) the Notes to Consolidated Financial Statements.
Filed herewith

* Identifies a management contract or compensatory plan or arrangement


5842

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   ADCARE HEALTH SYSTEMS, INC.
   (Registrant)
    
Date:NovemberMay 16, 20152016 /s/ William McBride III
   William McBride III
   Chairman and Chief Executive Officer
   (Principal Executive Officer)
    
Date:NovemberMay 16, 20152016 /s/ Allan J. Rimland
   Allan J. Rimland
   President, and Chief Financial Officer and Corporate Secretary (Principal Financial Officer)
   (Principal Financial
Date:May 16, 2016/s/ E. Clinton Cain
E. Clinton Cain
Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

5943