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GBCSD Selectis Health

Filed: 18 Nov 20, 5:30pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from _______ to ______

 

Commission file number 0-15415

 

GLOBAL HEALTHCARE REIT, INC.

(Exact name of Registrant as specified in its Charter)

 

Utah 87-0340206

(State or other jurisdiction of

incorporation or organization)

 

I.R.S. Employer

Identification number

 

6800 N. 79th St., Ste. 200,

Niwot, CO

 80503
(Address of principal executive offices) (Zip Code)

 

Issuer’s telephone number: (303) 449-2100

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller Reporting Company [X]

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ] No [X]

 

As of November 18, 2020, the Registrant had 26,866,379 shares of its Common Stock outstanding.

 

 

 

 

 

 

INDEX

 

  Page No.
 PART I — FINANCIAL INFORMATION 
   
Item 1.Consolidated Financial Statements (Unaudited)3
   
 Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 20193
   
 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)4
   
 Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)5
   
 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)6
   
 Notes to Unaudited Consolidated Financial Statements7
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations22
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk32
   
Item 4.Controls and Procedures32
   
 PART II - OTHER INFORMATION 
   
Item 1.Legal Proceedings33
   
Item 1A.Risk Factors34
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds35
   
Item 3.Defaults Upon Senior Securities35
   
Item 4.Removed and Reserved35
   
Item 5.Other Information35
   
Item 6.Exhibits35

 

2

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (Unaudited)

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED BALANCE SHEETS

 

  June 30, 2020  December 31, 2019 
  (Unaudited)    
ASSETS        
Property and Equipment, Net $37,140,599  $36,394,587 
Cash and Cash Equivalents  2,844,515   641,215 
Restricted Cash  424,636   351,298 
Accounts Receivable, Net  1,562,911   1,188,100 
Investments in Debt Securities  24,387   24,387 
Intangible Assets  -   15,258 
Goodwill  379,479   379,479 
Prepaid Expenses and Other  674,404   883,839 
Total Assets $43,050,931  $39,878,163 
         
LIABILITIES AND EQUITY        
Liabilities        
Debt, Net of discount of $450,111 and $493,353, respectively $39,113,315  $36,954,184 
Debt – Related Parties, Net of discount of $5,192 and $0, respectively  1,119,808   1,025,000 
Accounts Payable and Accrued Liabilities  1,011,543   1,241,573 
Accounts Payable – Related Parties  -   32,156 
Dividends Payable  7,500   7,500 
Lease Security Deposit  252,600   251,100 
Total Liabilities  41,504,766   39,511,513 
Commitments and Contingencies        
Equity        
Stockholders’ Equity        
Preferred Stock:        
Series A - No Dividends, $2.00 Stated Value, Non-Voting; 2,000,000 Shares Authorized, 200,500 Shares Issued and Outstanding  401,000   401,000 
Series D - 8% Cumulative, Convertible, $1.00 Stated Value, Non-Voting; 1,000,000 Shares Authorized, 375,000 Shares Issued and Outstanding  375,000   375,000 
Common Stock - $0.05 Par Value; 50,000,000 Shares Authorized, 27,414,525 and 27,441,040 Shares Issued and Outstanding at June 30, 2020 and December 31, 2019, respectively  1,370,726   1,372,052 
Additional Paid-In Capital  10,397,755   10,385,417 
Accumulated Deficit  (10,792,565)  (11,962,220)
Total Global Healthcare REIT, Inc. Stockholders’ Equity  1,751,916   571,249 
Noncontrolling Interests  (205,751)  (204,599)
Total Equity  1,546,165   366,650 
Total Liabilities and Equity $43,050,931  $39,878,163 

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

  Six Months Ended  Three Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
             
Revenue                
Rental Revenue $1,144,605  $1,825,575  $623,593  $930,287 
Healthcare Revenue  7,837,461   1,063,928   4,506,872   684,137 
Total Revenue  8,982,066   2,889,503   5,130,465   1,614,424 
Expenses                
General and Administrative  715,770   570,836   372,707   377,357 
Property Taxes, Insurance and Other Operating  4,985,975   893,019   2,654,231   543,831 
Provision for Bad Debts  263,890   -   57,282   - 
Acquisition Costs  28,654   -   13,763   - 
Depreciation  768,103   645,851   380,885   322,926 
Total Expenses  6,762,392   2,109,706   3,478,868   1,244,114 
Income from Operations  2,219,674   779,797   1,651,597   370,310 
Other (Income) Expense                
Gain on Warrant Liability  -   (2,758)  -   (2,655)
Gain on Extinguishment of Debt  (80,400)  

-

   (80,400)  - 
Gain on Sale of Investments  -   (1,069)  -   - 
Gain on Proceeds from Insurance Claim  -   (270,264)  -   - 
Interest Income  -   (7,003)  -   (1,536)
Interest Expense  1,116,571   1,070,860   611,301   544,625 
Total Other (Income) Expense  1,036,171   789,766   530,901   540,434 
Net Income (Loss)  1,183,503   (9,969)  1,120,696   (170,124)
Net Loss Attributable to Noncontrolling Interests  1,152   6,010   2,859   1,869 
Net Income (Loss) Attributable to Global Healthcare REIT, Inc.  1,184,655   (3,959)  1,123,555   (168,255)
Series D Preferred Dividends  (15,000)  (15,000)  (7,500)  (7,500)
Net Income (Loss) Attributable to Common Stockholders $1,169,655  $(18,959) $1,116,055  $(175,755)
Per Share Data:                
Net Income (Loss) per Share Attributable to Common Stockholders:                
Basic $0.04  $(0.00) $0.04  $(0.01)
Diluted $0.04  $(0.00) $0.04  $(0.01)
Weighted Average Common Shares Outstanding:                
Basic  27,427,928   27,122,607   27,414,816   27,347,134 
Diluted  27,810,428   27,122,607   27,797,316   27,347,134 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

 

  Series A Preferred Stock  Series D Preferred Stock  Common Stock  Additional     Global
Healthcare
REIT, Inc.
  Non-    
  Number
of Shares
  Amount  Number
of Shares
  Amount  Number
of Shares
  Amount  Paid-In Capital  Accumulated Deficit  Stockholders’ Equity  controlling Interests  Total Equity 
                                  
Balance, December 31, 2019  200,500  $401,000   375,000  $375,000   27,441,040  $1,372,052  $10,385,417  $(11,962,220) $571,249  $(204,599) $366,650 
Relative Fair Value of Warrants Issued with Senior Secured Notes  -   -   -   -   -   -   19,762   -   19,762   -   19,762 
Series D Preferred Dividends  -   -   -   -   -   -   -   (7,500)  (7,500)  -   (7,500)
Net Income  -   -   -   -   -   -   -   61,100   61,100   1,707   62,807 
Balance, March 31, 2020  200,500  $401,000   375,000  $375,000   27,441,040  $1,372,052  $10,405,179  $(11,908,620) $644,611  $(202,892) $441,719 
Share Based Compensation – Restricted Stock Awards (Forfeitures)  -   -   -   -   (26,515)  (1,326)  (7,424)  -   (8,750)  -   (8,750)
Series D Preferred Dividends  -   -   -   -   -   -   -   (7,500)  (7,500)  -   (7,500)
Net Income (Loss)  -   -   -   -   -   -   -   1,123,555   1,123,555   (2,859)  1,120,696 
Balance, June 30, 2020  200,500  $401,000   375,000  $375,000   27,414,525  $1,370,726  $10,397,755  $(10,792,565) $1,751,916  $(205,751) $1,546,165 

  

  Series A Preferred Stock  Series D Preferred Stock  Common Stock  Additional     Global
Healthcare
REIT, Inc.
  Non-    
  Number
of Shares
  Amount  Number
of Shares
  Amount  Number
of Shares
  Amount  Paid-In Capital  Accumulated Deficit  Stockholders’ Equity  controlling Interests  Total Equity 
                                  
Balance, December 31, 2018  200,500  $401,000   375,000  $375,000   26,804,677  $1,340,234  $10,137,148  $(11,070,606) $1,182,776  $(198,182) $984,594 
Share Based Compensation – Restricted Stock Awards and Stock Options  -   -   -   -   272,727   13,636   36,893   -   50,529   -   50,529 
Series D Preferred Dividends  -   -   -   -   -   -   -   (7,500)  (7,500)  -   (7,500)
Net Income (Loss)  -   -   -   -   -   -   -   164,296   164,296   (4,141)  160,155 
Balance, March 31, 2019  200,500  $401,000   375,000  $375,000   27,077,404  $1,353,870  $10,174,041  $(10,913,810) $1,390,101  $(202,323) $1,187,778 
Share Based Compensation – Restricted Stock Awards and Stock Options  -   -   -   -   272,727   13,637   110,813   -   124,450   -   124,450 
Series D Preferred Dividends  -   -   -   -   -   -   -   (7,500)  (7,500)  -   (7,500)
Net Loss  -   -   -   -   -   -   -   (168,255)  (168,255)  (1,869)  (170,124)
Balance, June 30, 2019  200,500  $401,000   375,000  $375,000   27,350,131  $1,367,507  $10,284,854  $(11,089,565) $1,338,796  $(204,192) $1,134,604 

 

5

 

 

GLOBAL HEALTHCARE REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  Six Months Ended June 30, 
  2020  2019 
Cash Flows From Operating Activities:        
Net income (loss) $1,183,503  $(9,969)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:        
Depreciation  768,103   645,851 
Amortization of Deferred Loan Costs and Debt Discount  90,907   71,231 
Provision for Bad Debt  263,890   - 
Stock Based Compensation (Forfeitures)  (8,750)  174,979 
Gain on Sale of Investments  -   (1,069)
Gain on Extinguishment of Debt  (80,400)  - 
Gain on Derivative Liability  -   (2,758)
Changes in Operating Assets and Liabilities, Net of Assets and Liabilities Acquired:        
Accounts and Rents Receivable  (638,701)  (358,523)
Prepaid Expenses and Other Assets  115,786   (121,818)
Deferred Rent Receivables  (23,851)  (42,019)
Accounts Payable and Accrued Liabilities  (262,051)  74,934 
Lease Security Deposits  1,500   (30,000)
Cash Provided by Operating Activities  1,409,936   400,839 
Cash Flows From Investing Activities:        
Issuance of Note Receivable  -   (143,666)
Purchase of Investments in Debt Securities  -   (910)
Proceeds from Sale of Investment in Debt Securities  -   151,041 
Net Cash Paid in Higher Call Asset Acquisition  (1,045,767)  - 
Capital Expenditures on Property and Equipment Additions  (185,590)  (1,464,562)
Cash Used in Investing Activities  (1,231,357)  (1,458,097)
Cash Flows From Financing Activities:        
Proceeds from Issuance of Debt, Related Party  100,000   - 
Proceeds from Issuance of Debt, Non-Related Party  2,721,890   1,676,354 
Payments on Debt, Non-Related Party  (675,736)  (273,550)
Deferred Loan Costs Paid  (33,095)  (8,885)
Dividends Paid on Preferred Stock  (15,000)  (15,000)
Cash Provided by Financing Activities  2,098,059   1,378,919 
Net Increase in Cash  2,276,638   321,661 
Cash and Cash Equivalents and Restricted Cash at Beginning of the Period  992,513   1,307,207 
Cash and Cash Equivalents and Restricted Cash at End of the Period $3,269,151  $1,628,868 
Supplemental Disclosure of Cash Flow Information        
Cash Paid for Interest $1,025,664  $1,094,089 
Cash Paid for Income Taxes $-  $- 
Cash and Cash Equivalents $2,844,515  $1,314,364 
Restricted Cash  424,636   314,504 
Total Cash and Cash Equivalents and Restricted Cash $3,269,151  $1,628,868 
Supplemental Schedule of Non-Cash Investing and Financing Activities        
Dividends declared on Series D Preferred Stock $15,000  $15,000 
Non-cash owner financing for fixed assets purchase  150,000   - 
Prepaid deposit exchanged for fixed asset acquisition  117,500   - 
Relative Fair Value of Warrants Issued with Senior Secured Notes  19,762   - 
Interest on debt capitalized into principal  

135

    

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

GLOBAL HEALTHCARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of the Business

 

Global Healthcare REIT, Inc. (“we”, “our”, the “Company” or “Global”) was organized with the intent of operating as a real estate investment trust (REIT) for the purpose of investing in real estate and other assets related to the healthcare industry. The Company’s focus has partially shifted from leasing nursing home assets to independent operators toward owning and operating its real estate assets itself. As a result, the Company no longer intends to elect to qualify as a REIT, and is currently considering changing its name and other charter provisions to better reflect its current business model.

 

Prior to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as a reverse acquisition whereby WPF was deemed to be the accounting acquirer.

 

The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. As of June 30, 2020, the Company owned twelve healthcare properties which are either leased or managed by third-party operators under triple-net operating terms or operated directly by the Company. The Company operates the facilities internally when advantageous and expedient.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary to make the consolidated financial statements not misleading have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission.

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2020. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

2. GOING CONCERN

 

The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern.

 

For the six months ended June 30, 2020, the Company had net income of $1,183,503 and reported net cash provided by operations of $1,409,936. However, the Company has incurred net losses in each of the previous five fiscal years and, as of June 30, 2020, had an accumulated deficit of $10,792,565. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues and cash flows to operate profitably and meet contractual obligations or raise additional capital through debt financing or through sales of common stock.

 

Failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

7

 

 

3. ASSET ACQUISITION – HIGHER CALL NURSING CENTER

 

Effective March 2, 2020, the Company, through its newly formed wholly-owned subsidiary, Global Quapaw, LLC (“Quapaw”), completed the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center (“Higher Call”) located in Quapaw, Oklahoma for the purchase price of $1.3 million. Quapaw has entered into an operating lease agreement with Global Higher Call Nursing, LLC, a wholly owned subsidiary of the Company, as lessee, to be the operator of the facility. The acquisition represents the consummation of an Asset Purchase Agreement dated October 21, 2019 between Higher Call Nursing Center, Inc., as Seller, and Quapaw, as Buyer. The purchase was accounted for as an asset acquisition in accordance with ASC 805. Accordingly, on the acquisition date, the Company recorded property and equipment in the amount of $1.3 million in connection with the asset acquisition which consists of the purchase consideration of $1.3 million and acquisition costs of $13,267. In connection with the acquisition, the Company paid net cash of $1,045,767, relinquished a prepaid cash deposit of $117,500, and agreed to non-cash owner financing debt of $150,000.

 

4. PROPERTY AND EQUIPMENT

 

The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of June 30, 2020 and December 31, 2019 are as follows:

 

  June 30, 2020  December 31, 2019 
       
Land $1,676,692  $1,597,500 
Land Improvements  242,000   242,000 
Buildings and Improvements  39,710,962   38,362,127 
Furniture, Fixtures and Equipment  1,778,755   1,707,925 
Construction in Progress  3,185,068   3,185,068 
   46,593,477   45,094,620 
         
Less Accumulated Depreciation  (7,892,878)  (7,140,033)
Less Impairment  (1,560,000)  (1,560,000)
         
  $37,140,599  $36,394,587 

 

  For the Six Months Ended June 30, 
  2020  2019 
       
Depreciation Expense $752,845  $645,851 
Cash Paid for Capital Expenditures $185,590  $1,464,562 

 

5. INVESTMENTS IN DEBT SECURITIES

 

On June 30, 2020 and December 31, 2019, the Company held investments in debt securities that were classified as held-to-maturity and carried at amortized costs. Held-to-maturity securities consisted of the following:

 

  June 30, 2020  December 31, 2019 
      
States and Municipalities $24,387  $24,387 

 

Contractual maturity of held-to-maturity securities at June 30, 2020 is $24,387, all due in one year or less, and total value of securities at their respective maturity dates is $24,387. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

6. INTANGIBLE ASSETS

 

As part of the acquisition of the operations at Southern Hills Rehab Center, LLC (“SHR”), the Company recognized certain intangible assets related to the potential net income from the existing patients in the facility. The Company estimated the value of these contracts to be $42,185 based on historical net revenues and census information provided by the seller. The asset was depreciated on a straight-line basis over 47 days, starting from December 1, 2019. Accordingly, the Company recognized depreciation expense of $15,258 during the six months ended June 30, 2020. The intangible asset was fully depreciated as of June 30, 2020.

 

8

 

 

7. GOODWILL

 

The Company recorded Goodwill because of the acquisition of the operations at SHR in December 2019. Goodwill is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the six months ended June 30, 2020, the Company recorded no impairment of Goodwill.

 

8. DEBT AND DEBT - RELATED PARTIES

 

The following is a summary of the Company’s debt outstanding as of June 30, 2020 and December 31, 2019:

 

  June 30, 2020  December 31, 2019 
       
Senior Secured Promissory Notes $1,545,000  $1,485,000 
Senior Unsecured Promissory Notes  300,000   300,000 
Senior Secured Promissory Notes - Related Parties  975,000   875,000 
Fixed-Rate Mortgage Loans  29,399,050   22,427,949 
Variable-Rate Mortgage Loans  5,663,646   4,618,006 
Line of Credit, Senior Secured  

-

   7,230,582 
Other Debt, Subordinated Secured  1,045,561   1,386,000 
Other Debt, Subordinated Secured - Related Parties  150,000   150,000 
Paycheck Protection Program Loans  1,610,169   - 
   40,688,426   38,472,537 
Unamortized Discount and Debt Issuance Costs  (455,303)  (493,353)
         
  $40,233,123  $37,979,184 
As presented in the Consolidated Balance Sheets:        
         
Debt, Net $39,113,315  $36,954,184 
         
Debt - Related Parties, Net  1,119,808   1,025,000 
  $40,233,123  $37,979,184 

 

Corporate Senior and Senior Secured Promissory Notes

 

In 2017, $600,000 in notes were sold and issued, of which $425,000 were to related parties. On December 31, 2017, there were outstanding an aggregate of $1.2 million in senior secured notes. The maturity date of all the senior secured notes was extended to December 31, 2018 prior to their original maturity date. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise price of $0.75 per share. The warrants have a cashless exercise provision and were valued using the Black-Scholes pricing model. The maturity date of the 1.2 million warrants issued along with the notes was extended to December 31, 2018, 225,000 warrants of which occurred in 2018. As of December 31, 2019, the Company had not renewed or repaid $125,000 in 10% notes with a maturity date of December 31, 2018, and those notes were technically in default. Effective January 28, 2020, the Company exchanged $100,000 in outstanding senior secured 10% Notes and Warrants that had matured on December 31, 2018 for 11% Senior Secured Promissory Notes and issued 100,000 cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021. As of June 30, 2020, the Company had not renewed or repaid $25,000 in 10% notes with a maturity date of December 31, 2018, and those notes were technically in default.

 

In October 2017, the Company sold an aggregate of $300,000 in senior unsecured notes. The notes bear interest at the rate of 10% per annum and are due in October 2020. For every $1.00 in principal amount of note, investors got one warrant exercisable for one year to purchase an additional share of common stock at an exercise price of $0.75 per share. The warrants have a cashless exercise provision. All notes remain outstanding as of June 30, 2020. Effective October 31, 2020, the Company exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that had matured on October 31, 2020 for 11% Senior Secured Promissory Notes and issued 150,000 cashless exercise warrants for purchase of the Company’s common stock at $0.50 per share, expiring October 31, 2021. The Company also repaid the remaining $150,000 of 10% Senior Unsecured Notes.

 

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In October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, (October 31, 2021) and one Warrant for each $1.00 in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share. The Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants. The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600, and issued 111,000 warrants to the Placement Agent with $21,453 of the fair value of the warrants recorded as loan cost. The Offering also included the exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants for Units in the Offering. No proceeds were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. During 2018, among the $1.075 million senior secured notes that were extended to October 31, 2021 by virtue of the exchange, $875,000 were to related parties.

 

On January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering of 11% Senior Secured Notes. The total amount of the Offering has been increased to $2,500,000 and the offering period will continue until terminated by the Board of Directors. Effective February 5, 2020 and March 3, 2020, the Company completed the sale of $60,000 and $100,000, respectively, of Units in the Offering. The sale of $100,000 Units on March 3, 2020 was to a related party. Effective October 31, 2020 the Company completed the exchange of $150,000 of Units in the Offering for matured Senior Unsecure notes. No fees or commissions were paid on the sale of the Units. The proceeds will be used for general working capital.

 

The value of the warrants issued to the note holders during the six months ended June 30, 2020 was calculated using the Black-Scholes pricing model using the following significant assumptions:

 

Volatility  115.2% - 117.3%
Risk-free Interest Rate  0.71% - 1.45%
Exercise Price $0.50 
Fair Value of Common Stock $0.20 - $0.24 
Expected Life  1.7 – 1.8 years 

 

During the year ended December 31, 2018, the Company issued 1,160,000 warrants with a value on the issue date estimated to be $207,025 bifurcated from the value of the note and exchanged 1,075,000 existing warrants for new warrants in connection with its note offerings. During the six months ended June 30, 2020, the Company issued 160,000 warrants, 100,000 of which to related parties, with a value on the issue date estimated to be $11,616 bifurcated from the value of the note and exchanged 100,000 existing warrants for new warrants with a value on the issue date estimated to be $8,146 in connection with its note offerings. For all notes issued with warrants, the relative fair value of the warrants issued were recorded as debt discounts. As of June 30, 2020, the unamortized balance of discount on notes was $90,302. Amortization expense was $40,696 and $36,089 for the six months ended June 30, 2020 and 2019, respectively.

 

Mortgage Loans and Lines of Credit Secured by Real Estate

 

Mortgage loans and other debts such as line of credit here are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon. Mortgage loans for the periods presented consisted of the following:

 

  Face  Principal Outstanding at  Stated Maturity
Property Amount  June 30, 2020  December 31, 2019  Interest Rate Date
              
Southern Hills Retirement Center (1)(2) $7,227,074  $7,227,074  $7,230,582  4.75% Fixed June 18, 2023
Eastman Nursing Home (1)(3)  3,570,000   3,394,866   3,451,593  5.50% Fixed October 26, 2021
Goodwill Nursing Home (1)(4)  4,268,878   4,242,171   4,286,237  4.75% Fixed April 12, 2025
Warrenton Nursing Home (5)  3,768,600   3,704,959   3,739,942  3.73% Fixed July 1, 2049
Edward Redeemer Health & Rehab(6)  2,065,804   2,065,773   2,074,958  4.75% Fixed June 29, 2021
Glen Eagle Health and Rehab(7)  3,119,214   3,036,436   3,083,006  5.50% Fixed May 25, 2021
Providence of Sparta Nursing Home (8)  3,039,300   2,893,371   2,923,013  3.50% Fixed November 1, 2047
Meadowview Healthcare Center (9)  3,000,000   2,834,400   2,869,200  6.00% Fixed October 30, 2022
GL Nursing Home(10)  5,000,000   4,618,006   4,618,006  Prime Plus 1.50%/ 5.75% Floor August 3, 2037
Higher Call Nursing Center (11)  1,051,721   1,045,640   -  Prime Plus 2.00% March 3, 2040
                 
      $35,062,696  $34,276,537     

 

 (1)Mortgage loans are non-recourse to the Company except for (i) the senior loan held by ServisFirst Bank on Meadowview (Ohio), (ii) the loans held by Colony Bank on Eastman and Glen Eagle, and (iii) the Southern Hills line of credit and Goodwill loan owed to Southern Bank (formerly First Commercial Bank).
 (2)

On October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with Southern Bank (formerly First Commercial Bank) pursuant to a Promissory Note in the principal amount of $7,229,052 (the “Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on its skilled nursing facility in Tulsa for $1,546,801, funded open market and tender offer purchases of its Industrial Revenue Bonds covering the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of June 30, 2020, a total of $7,227,074 was drawn under the Line of Credit, and as of December 31, 2019, a total of $7,230,582 was drawn under the Line of Credit. Modifications to the loan in June 2020 effectively convert it from a line of credit to a term loan.

 

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  The interest rate on the Line of Credit increased from 5.25% to 5.75% effective April 28, 2019 and subsequently was reduced to 4.75% as part of a new three-year loan renewal. Monthly payments of interest began on November 30, 2017 and continue until the Promissory Note is paid in full on the Maturity Date. The Maturity Date was been extended multiple times in three month increments initially from April 30, 2018 to May 5, 2020, and subsequently to June 18, 2023 with a principal amount of $7,227,074. During the six months ended June 30, 2020, the Company capitalized $33,095 in loan costs paid. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for its Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location. With the retirement of the Tulsa Industrial Authority Bonds effective November 1, 2018, Southern Bank (formerly First Commercial Bank) moved into a senior position on the ALF and ILF properties.
   
 (3)The loan at Eastman was renewed on November 26, 2018 with the maturity date extended to October 26, 2021. For the six months ended June 30, 2020, amortization expense related to loan costs totaled $643.
 (4)The maturity date for the loan at Goodwill Nursing was extended to April 12, 2025 in June 2020. The face value of the note was adjusted to the principal outstanding at the time of $4,268,878, and the interest rate was decreased to 4.75%, from 5.50%. The modification of the loan was substantial and resulted in an extinguishment of the original loan.
 (5)The original maturity date for the loan was extended on January 19, 2019 to January 20, 2020 and the Company capitalized $8,885 in loan costs paid. The loan was refinanced in June 2019. The Company has incurred $156,671 in unamortized loan costs to refinance this debt with another lender. The refinance was treated as debt extinguishment, with a new maturity date of July 1, 2049 and an interest rate of 3.73%. For the six months ended June 30, 2020, amortization expense related to loan costs totaled $2,611.
 (6)The maturity date for the loan at Edwards Redeemer was extended to June 29, 2021 in June 2020. The face value of the note was adjusted to the principal outstanding at the time of the modification, $2,065,804, and the interest rate was decreased from 5.50% to 4.75%.
 (7)Amortization expense related to loan costs of this loan totaled $437 for the six months ended June 30, 2020. Amortizing payments began in January 2019. In June 2018, the Company converted the original note to a fixed note which qualified as debt extinguishment, unamortized debt discount on the original note was expensed as a loss on extinguishment of $27,794. In April 2018, the Company capitalized $22,800 in fees and interest and added it to principal. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of June 30, 2020, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender. In October 2018, the Lender extended the Company a line of credit with a limit of $200,365 to provide working capital to scale operations at the facility. The line of credit was expanded in February 2019 to $400,000 with a maturity date of September 30, 2019. Prior to September 30, 2019, the Company had drawn $400,000 on the line which was subsequently merged into the amortizing note due May 25, 2021.
 (8)The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during 2017. Amortization expense related to loan costs totaled $2,492 for the six months ended June 30, 2020. The interest rate was reduced from 3.88% to 3.50% as part of a refinance completed in April 2020.
 (9)Amortization expense related to loan costs of this loan totaled $4,652 for the six months ended June 30, 2020. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of June 30, 2020, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender.
 (10)The mortgage loan collateralized by the GL Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is subject to financial covenants and customary affirmative and negative covenants. As of June 30, 2020, the Company was not in compliance with certain of these financial and non-financial covenants which is a technical Event of Default as defined in the note agreement. The Company is also delinquent in installment payments due under the mortgage. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are not necessarily limited to the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction from the guarantors. The Company has been notified by the lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility and is making payment of interest on the loan. The Company is not obligated to repay the interest.
 (11)In connection with the acquisition of Higher Call, the Company entered into a senior loan agreement with Security Bank in the principal amount of $1,051,721. This loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of $7,907. The loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets. The Company is subject to financial covenants and customary affirmative and negative covenants. As of June 30, 2020, the Company was in compliance with these covenants.

 

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Other mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has not complied in some instances or in an untimely manner. These mortgage loans are technically in default; however, our relationship with these lenders is considered good.

 

Other Debt

 

Other debt due at June 30, 2020 and December 31, 2019 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.

 

  Face  Principal Outstanding at  Stated Interest Maturity 
Property Amount  June 30, 2020  December 31, 2019  Rate Date 
Goodwill Nursing Home (1) $2,180,000  $1,053,600  $1,536,000  13% (1) Fixed  December 31, 2019 
Higher Call Nursing Center (2)  150,000   141,961   -  8% Fixed  April 1, 2024 
                   
      $1,195,561  $1,536,000       

 

 (1)The subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13% beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the principal balance of the notes. The Corporate entity, Global Healthcare REIT Inc. owns $800,000 of its own subsidiary’s notes, Goodwill Hunting, LLC, but this amount is excluded from the above table and eliminated in consolidation on the balance sheet. On June 30, 2020, the Company purchased from four former investors in GWH Investors, LLC their notes in favor of Goodwill Hunting, LLC in the aggregate amount of $482,400 for $402,000 cash and recognized a gain of $80,400, and subsequently in October purchased from two more investors an aggregate amount of $108,000 for $90,000 of cash and will recognize a gain of $18,000. The Company has not repaid or renewed the note as of June 30, 2020 and it is technically in default.
 (2)In connection with the acquisition of Higher Call, the Company executed a promissory note in favor of the Seller, Higher Call Nursing Center, Inc., in the principal amount of $150,000 which accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest. This note is secured by a corporate guaranty of Global.

 

Our corporate debt at June 30, 2020 and December 31, 2019 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.

 

  Face  Principal Outstanding at  Stated Interest  
Series Amount  June 30, 2020  December 31, 2019  Rate Maturity Date
              
10% Senior Secured Promissory Note $25,000  $25,000  $25,000  10.0% Fixed December 31, 2018
10% Senior Unsecured Promissory Notes  300,000   300,000   300,000  10.0% Fixed October 31, 2020
11% Senior Secured Promissory Notes  1,520,000   1,520,000   1,460,000  11.0% Fixed October 31, 2021
11% Senior Secured Promissory Notes – Related Party  975,000   975,000   875,000  11.0% Fixed October 31, 2021
                 
      $2,820,000  $2,660,000     

 

Effective January 28, 2020, the Company exchanged $100,000 in outstanding senior secured 10% Notes that had matured December 31, 2018 for an 11% Senior Secured Note with a maturity date of October 31, 2021 and issued 100,000 cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021.

 

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Paycheck Protection Program Loans and Other Debt

 

On April 20, 2020, the Company through its subsidiaries received a loan of $574,975 pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 20, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act.

 

On May 4, 2020, the Company through its subsidiaries received loans of $324,442 and $710,752 pursuant to the Paycheck Protection Program (the “PPP Loans”) of the CARES Act. Both PPP Loans mature on May 4, 2022 (the “Maturity Date”), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds from the PPP Loans to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act.

 

For the six months ended June 30, 2020 and 2019, the Company received proceeds from the issuance of debt of $2,821,890 and $1,676,354, respectively. Proceeds from the issuance of debt in the six months ended June 30, 2020 includes $100,000 from related parties. Cash payments on debt totaled $675,736 and $273,550 for the six months ended June 30, 2020 and 2019, respectively. Amortization expense for deferred loan costs and debt discounts totaled $90,907 and $71,231 for the six months ended June 30, 2020 and 2019, respectively.

 

Future maturities and principal reduction payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:

 

Years   
2020 $12,135,289(1)
2021  8,182,778 
2022  1,960,552 
2023  7,595,127 
2024  352,829 
2025 and after  10,461,851 
     
  $40,688,426 

 

 (1)Any note or bond that is not in compliance with all financial and non-financial covenants is considered to have an immediate maturity, including those that require compliance with covenants on any and all other notes. The notes secured by the facilities at GL Nursing Home, Meadowview and Abbeville have such covenants which were in technical non-compliance at June 30, 2020, but the Company believes that its relationships with these lenders is good.

 

9. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.

 

Series A Convertible Redeemable Preferred Stock

 

The Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred stock has a senior liquidation preference value of $2.00 per share, has no voting or redemption rights and does not accrue dividends.

 

As of June 30, 2020 and December 31, 2019, the Company has 200,500 shares of Series A Preferred stock outstanding.

 

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Series D Convertible Preferred Stock

 

The Company has established a class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share. Holders of the Series D preferred stock are entitled to receive dividends at the annual rate of eight percent (8%) based on the stated value per share computed on the basis of a 360-day year and twelve 30-day months. Dividends are cumulative, shall be declared quarterly, and are calculated from the date of issue and payable on the fifteenth day of April, July, October, and January. The dividends may be paid, at the option of the holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the dividend record date. Shares of the Series D preferred stock are redeemable at the Company’s option. At the option of the holder, shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s common stock at a conversion rate of $1.00 per share.

 

As of June 30, 2020, and December 31, 2019, the Company had 375,000 shares of Series D preferred stock outstanding.

 

During the six months ended June 30, 2020 and 2019, the Company paid $15,000 and $15,000, respectively, for Series D preferred stock dividends. Dividends of $15,000 and $15,000 were declared during the six months ended June 30, 2020 and 2019, respectively, with dividends of $7,500 accrued and payable as of June 30, 2020 and 2019. All quarterly dividends previously declared have been paid.

 

Restricted Stock Awards

 

The following table summarizes the restricted stock unit activity during the six months ended June 30, 2020 and 2019.

 

  June 30, 2020  June 30, 2019 
       
Outstanding Non-Vested Restricted Stock Units, Beginning  75,000   - 
Granted  -   545,454 
Vested  (75,000)  (409,091)
         
Outstanding Non-Vested Restricted Stock Units, Ending  -   136,363 

 

In connection with these director and executive restricted stock grants, the Company recognized stock-based compensation of $135,000 for the six months ended June 30, 2019. No stock-based compensation was recognized for restricted stock grants for the six months ended June 30, 2020, but a reversal of stock-based compensation of $8,750 due to forfeitures of restricted stock awards granted in the prior year was recognized.

 

Common Stock Warrants

 

As of June 30, 2020 and December 31, 2019, the Company had 2,858,130 and 2,598,130, respectively, of outstanding warrants to purchase common stock at a weighted average exercise price of $0.53 and $0.54, respectively, and weighted average remaining term of 1.33 years and 2.10 years, respectively. During the six months ended June 30, 2020, an aggregate of 260,000 warrants with a weighted average exercise price of $0.50 were issued in connection with a private offering of the Company’s 11% Senior Secured Notes. During the six-month period ended June 30, 2019, an aggregate of 427,668 warrants with a weighted average exercise price of $0.75 expired. The aggregate intrinsic value of the common stock warrants outstanding at June 30, 2020 was $0.

 

Common Stock Options

 

As of June 30, 2020, and December 31, 2019, the Company had 600,000 and 600,000, respectively, of outstanding options to purchase common stock at a weighted average exercise price of $0.36 and a weighted average remaining term of 2.75 and 3.00 years, respectively. During the six-month period ended June 30, 2020 and 2019, no options expired. The aggregate intrinsic value of the common stock options outstanding at June 30, 2020 was $0.

 

Earnings per Share

 

Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. FASB ASC Topic 260, “Earnings per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.

 

Diluted earnings per share are based on the assumption that all dilutive options and warrants were converted or exercised by applying the treasury stock method and that all convertible preferred stock were converted into common shares by applying the if-converted method. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period or at the time of issuance, if later, and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, the preferred dividends applicable to convertible preferred stock are added back to the numerator. The convertible preferred stock is assumed to have been converted at the beginning of the period or at time of issuance, if later, and the resulting common shares are included in the denominator.

 

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We calculate basic earnings per share by dividing net income attributable to common stockholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the reporting period. Diluted earnings per share is calculated similarly but reflects the potential impact of outstanding options, warrants and other commitments to issue common stock, including shares issuable upon the conversion of convertible preferred stock outstanding, except where the impact would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

  Six Months Ended  Three Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Numerator for basic earnings per share:                
Net Income (Loss) Attributable to Global Healthcare REIT, Inc. $1,184,655  $(3,959) $1,123,555  $(168,255)
Series D Preferred Dividends  (15,000)  (15,000)  (7,500)  (7,500)
Net Income (Loss) Attributable to Common Stockholders - Basic $1,169,655  $(18,959) $1,116,055  $(175,755)
                 
Numerator for diluted earnings per share:                
Net Income (Loss) Attributable to Common Stockholders $1,169,655  $(18,959) $1,116,055  $(175,755)
Series D Preferred Dividends  15,000   -   7,500   - 
Net Income (Loss) Attributable to Common Stockholders - Diluted $1,184,655  $(18,959) $1,123,555  $(175,755)
                 
Denominator for basic earnings per share:                
Weighted Average Common Shares Outstanding  27,427,928   27,122,607   27,414,816   27,347,134 
                 
Denominator for diluted earnings per share:                
Weighted Average Common Shares Outstanding – Basic  27,427,928   27,122,607   27,414,816   27,347,134 
Effect of dilutive securities:                
Conversion of Series D Convertible Preferred Stock  382,500   -   382,500   - 
Weighted Average Common Shares Outstanding - Diluted  27,810,428   27,122,607   27,797,316   27,347,134 
                 
Net Income (Loss) per Share Attributable to Common Stockholders:                
Basic $0.04  $(0.00) $0.04  $(0.01)
Diluted $0.04  $(0.00) $0.04  $(0.01)

 

Options to purchase 600,000 shares of common stock were outstanding during each of the three and six months ended June 30, 2020 but were not included in the computation of diluted earnings per share because they are anti-dilutive due to the options’ exercise price being greater than the average market price of the common shares. Warrants to purchase 2,858,130 shares of common stock were outstanding during each of the three and six months ended June 30, 2020 but were not included in the computation of diluted earnings per share because they are anti-dilutive due to the warrants’ exercise price being greater than the average market price of the common shares.

 

10. RELATED PARTIES

 

Clifford Neuman provides office space for the Company’s Controller at no charge. As of June 30, 2020, and December 31, 2019, the Company owed Mr. Neuman for legal services rendered $0 and $32,156, respectively.

 

Creative Cyberweb developed and maintains the Company’s website and is affiliated with former CFO Zvi Rhine’s family. The ongoing upkeep is $450 per month.

 

In January 2018, the Directors modified the Directors’ Compensation Plan to provide the annual grants be subject to ratable vesting over 12 months. In March 2019, the Board approved an annual grant to three of its Directors without other compensation plans, restricted stock awards of 90,909 shares each, subject to vesting. In July 2019, the Board approved a pro-rated annual grant to two of its Directors without other compensation plans restricted stock awards of 90,909 shares in aggregate, subject to vesting. In connection with these director restricted stock grants, the Company recognized stock-based compensation of $45,000 for the six months ended June 30, 2019. No stock-based compensation was recognized in connection with director restricted stock grants for the six months ended June 30, 2020, but a reversal of stock-based compensation of $8,750 due to forfeitures of the restricted stock awards granted in prior year was recognized.

 

In the first quarter of 2020, the Board revised the Director Compensation Plan to provide that non-employee directors are entitled to a directors’ fee equal to $7,500 per quarter, payable in cash.

 

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11. FACILITY LEASES

 

The following table summarizes our leasing arrangements related to the Company’s healthcare facilities at June 30, 2020:

 

Facility Monthly Lease Income (1)    Lease Expiration  Renewal Option if any
Eastman (2)   $-   -   None
Warrenton $55,724   June 30, 2026  Term may be extended for one
additional ten-year term.
Goodwill (3)   $48,125   February 1, 2027  Term may be extended for one
additional five-year term.
Edwards Redeemer (4)   $          None
Providence $42,519   June 30, 2026  Term may be extended for one
additional ten-year term.
Meadowview (5)   $-       None
GL Nursing (6)   $-   -   None
Glen Eagle (7)   $-   -   None
Southern Hills SNF (8)   $-   -  Term may be extended for two
additional five-year term.
Southern Hills ALF (9)   $-   -   None
Southern Hills ILF (10)   $-   -   None
Higher Call $-   -   None

 

(1) Monthly lease income reflects rent income on a straight-line basis over, where applicable, the term of each lease.

 

(2) On October 18, 2019, the Company terminated the lease at its Eastman property. A Receivership was appointed to assume the operations of the facility. The receivership was discharged on July 1, 2020 and the Company is currently operating the building independently.

 

(3) In January 2016, the Goodwill facility was closed by Georgia regulators and all residents were removed. In a transaction related to the sale of the Greene Point facility, an affiliate of the buyer of Greene Point executed a ten-year operating lease covering Goodwill. After investing approximately $2.0 million in capital improvements in the property, the lease operator obtained all regulatory approvals and began admitting patients in December 2016. The lease became effective on February 1, 2017, and the facility began generating rental revenue thereafter.

 

(4) Cadence, our former lease operator, informed the Company that it intended to close the Edwards Redeemer facility due to unprofitable operations. In violation of the operating lease, Cadence began moving patients from the facility and, as of October 18, 2019, all patients had been removed. In response to our Petition, on October 17, 2019, the District Court of Oklahoma County, State of Oklahoma issued a Temporary Order Appointing Receiver (the “Order”) pursuant to a Motion to Appoint Receiver filed by Edwards Redeemer Property Holdings, LLC (“Edwards Property”), a wholly-owned subsidiary of the Company, with respect as a skilled nursing facility. The Order was issued due to the violations by Cadence of the business-preservation obligations contained in the lease between Edwards Property and the Operator. The Company will allow Edwards Redeemer to remain closed for the purpose of undertaking extensive renovations to the facility. We are planning to reopen the facility in the first quarter of 2021 to be operated by our newly formed wholly-owned subsidiary Tiaps Rehab Center, LLC.

 

(5) The lease was generating $33,000 in monthly gross rent; however, the operator experienced adverse results in late 2017 and throughout 2018. In April 2018, the Company recognized a bad debt expense of $56,000 related to rent receivables previously booked in 2018 at the Meadowview facility. Effective December 1, 2018, the Company completed the operations transfer to an affiliate of Infinity Health Interests, LLC (“Infinity”). The lease was structured with a lower base rent component than the prior operator but included occupancy-based escalators that were intended to better align facility operations with future rental payments. The Company did not receive any cash rent for the facility and has not recorded any rental revenues or receivables for this facility since the inception of the lease. On August 7, 2020, the facility was served with a Notice of Immediate Imposition of Remedies from the Centers for Medicare and Medicaid Services (“CMS”), as well as a Notice of Imposition of Remedies by the Ohio Department of Health (“ODH”) ordering the facility to relocate all residents no later than August 9, 2020. The actions of the CMS and ODH were the result of ongoing operating deficiencies which the operator failed to cure. All residents of the Meadowview facility were relocated by the August 9, 2020 deadline, and as a result the facility has been closed. The Company has applied with the ODH for a new nursing home license which is pending. In September 2020, the ODH served notice that it intended to commence proceedings to revoke the nursing license on the facility. The Company has not determined what future courses of action may be required or appropriate.

 

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(6) Effective January 1, 2016, the GL Nursing facility was leased to another operator for a period of ten years at a monthly base rent of $30,000 which was subject to increases based on census levels. Under the terms of the lease, the Company agreed to fund certain capital expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice that it was terminating the lease effective August 31, 2016. The Company entered into a Lease Termination Agreement under which it paid the tenant $145,000 and is obligated to make future payments. Effective August 30, 2016, the Company entered into a new lease agreement with another nursing home operator. The lease term was to commence at the end of a straddle period. During the straddle period, the Company made working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the facility. Prior to the end of the straddle period, the lease operator informed the Company that it would vacate the facility. An entity affiliated with Mr. Brogdon, who is a guarantor of the mortgage, assumed operations of the facility in March 2018 under an OTA. We do not expect the facility to generate any future revenue for the Company.

 

(7) The Company entered into a management agreement with Cadence Healthcare Solutions to operate Glen Eagle after expending approximately $1.0 million in capital improvements. The facility passed its licensure survey and began admitting patients in June 2018. Effective October 12, 2018, the facility gained its certification and started collecting revenues from Medicare and Medicaid in April 2019. On October 17, 2019, the Company terminated its management with Cadence Healthcare Solutions and is currently operating the building independently.

 

(8) Lease agreement dated May 21, 2014 with lease payments commencing February 1, 2015. On May 10, 2016, the Company obtained a Court Order appointing a Receiver to control and operate the Southern Hills SNF. The former lease operator represented that it was unable to meet the financial commitments of the facility, including the payment of rent, payroll, and other operating requirements. In October 2017, the Receiver engaged a new manager for the facility at the request of the Company. In May 2019, the lease expired, and in July 2019 the facility was leased to Southern Hills Rehab Center LLC, a wholly owned subsidiary of the Company, to conduct operations. The approval of the transfer of the Certificates of Need and appropriate licenses to operate the facility was granted on December 1, 2019. The Company is currently operating the building independently.

 

(9) The Company plans to operate the Southern Hills ALF independently once COVID-19 is brought under control.

 

(10) The Company has been operating the Southern Hills Independent Living Facility (ILF) directly since September 2019. The facility does not provide healthcare services. It consists of private one- and two-bedroom units leased separately to individual tenants. The rollout of the ILF has been slowed due to COVID-19.

 

Lessees are responsible for payment of insurance, taxes and other charges while under the lease. Should the lessees not pay all such charges as required under the leases, or if there is no tenant, the Company may become liable for such operating expenses. We have been required to cover those expenses at Glen Eagle as well as the Southern Hills SNF, ALF and ILF, Meadowview, Higher Call, and Edwards properties.

 

Future cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows (excludes Abbeville, Edwards Redeemer, Southern Tulsa SNF and Southern Tulsa ALF and ILF, and Higher Call due to properties being independently operated, and GL Nursing):

 

Years   
2020 $873,048 
2021  1,764,942 
2022  1,796,400 
2023  1,828,480 
2024  1,860,867 
2025 and Thereafter  3,223,628 
     
  $11,347,365 

 

12. FAIR VALUE MEASUREMENTS

 

Financial assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:

 

Level 1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2— Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

 

Level 3— Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

 

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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, accounts receivable, notes receivable, restricted cash, accounts payable, debt and lease security deposit. We consider the carrying values of our short-term financial instruments to approximate fair value because they generally expose the Company to limited credit risk, because of the short period of time between origination of the financial assets and liabilities and their expected settlement, or because of their proximity to acquisition date fair values. The carrying value of debt approximates fair value based on borrowing rates currently available for debt of similar terms and maturities.

 

Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price base on the fair value of the tangible assets and intangible assets, if any, acquired and any liabilities assumed based on Level 3 inputs. These Level 3 inputs can include comparable sales values, discount rates, and capitalization rate assumptions from a third party appraisal or other market sources.

 

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the six months ended June 30, 2020 and 2019:

 

  2020  2019 
       
Beginning Balance January 1 $-  $2,785 
         
Change in Fair Value of Warrant Liability  -   (2,758)
         
Ending Balance, June 30 $-  $27 

 

13. SEGMENT REPORTING

 

The Company had two primary reporting segments during the six months ended June 30, 2020, which include real estate services and healthcare services. The Company reports segment information based on the “management approach” defined in ASC 280, Segment Reporting. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.

 

Total assets for the healthcare services and real estate services segments were $8,191,160 and $34,859,771, respectively, as of June 30, 2020 and $4,654,845 and $35,223,318, respectively, as of December 31, 2019.

 

  Statements of Operations Items for the Six Months Ended 
  June 30, 2020  June 30, 2019 
  Real Estate
Services
  Healthcare Services  Consolidated  Real Estate
Services
  Healthcare Services  Consolidated 
Rental Revenue $1,144,605  $-  $1,144,605  $1,825,575  $-  $1,825,575 
Healthcare Revenue  -   7,837,461   7,837,461   -   1,063,928   1,063,928 
Total Revenue  1,144,605   7,837,461   8,982,066   1,825,575   1,063,928   2,889,503 
Expenses                        
General and Administrative  296,149   419,621   715,770   390,097   180,739   570,836 
Property Taxes, Insurance and Other Operating  299,379   4,686,596   4,985,975   86,065   806,954   893,019 
Provision for Bad Debts  -   263,890   263,890   -   -   - 
Acquisition Costs  28,654   -   28,654   -   -   - 
Depreciation  670,767   97,336   768,103   582,723   63,128   645,851 
Total Expenses  1,294,949   5,467,443   6,762,392   1,058,885   1,050,821   2,109,706 
Income (Loss) from Operations  (150,344)  2,370,018   2,219,674   766,690   13,107   779,797 
Other (Income) Expense                        
Gain on Warrant Liability  -   -   -   (2,758)  -   (2,758)
Gain on Extinguishment of Debt  (80,400)  -   (80,400)  

-

   

-

   

-

 
Gain on Sale of Investments  -   -   -   (1,069)  -   (1,069)
Gain on Proceeds from Insurance Claim  -   -   -   (270,264)  -   (270,264)
Interest Income  -   -   -   (7,003)  -   (7,003)
Interest Expense  1,010,360   106,211   1,116,571   989,042   81,818   1,070,860 
Total Other (Income) Expense  929,960   106,211   1,036,171   707,948   81,818   789,766 
Net Income (Loss)  (1,080,304)  2,263,807   1,183,503   58,742   (68,711)  (9,969)
Net Loss Attributable to Noncontrolling Interests  1,152   -   1,152   6,010   -   6,010 
Net Income (Loss) Attributable to Global Healthcare REIT, Inc. $(1,079,152) $2,263,807  $1,184,655  $64,752  $(68,711) $(3,959)

 

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  Statements of Operations Items for the Three Months Ended 
  June 30, 2020  June 30, 2019 
  Real Estate
Services
  Healthcare Services  Consolidated  Real Estate
Services
  Healthcare Services  Consolidated 
Rental Revenue $623,593  $-  $623,593  $930,287  $-  $930,287 
Healthcare Revenue  -   4,506,872   4,506,872   -   684,137   684,137 
Total Revenue  623,593   4,506,872   5,130,465   930,287   684,137   1,614,424 
Expenses                        
General and Administrative  147,579   225,128   372,707   278,327   99,030   377,357 
Property Taxes, Insurance and Other Operating  153,539   2,500,692   2,654,231   25,241   518,590   543,831 
Provision for Bad Debts  -   57,282   57,282   -   -   - 
Acquisition Costs  13,763   -   13,763   -   -   - 
                         
Depreciation  335,408   45,477   380,885   291,362   31,564   322,926 
Total Expenses  650,289   2,828,579   3,478,868   594,930   649,184   1,244,114 
Income (Loss) from Operations  (26,696)  1,678,293   1,651,597   335,357   34,953   370,310 
Other (Income) Expense                        
Gain on Warrant Liability  -   -   -   (2,655)  -   (2,655)
Gain on Extinguishment of Debt  (80,400)  -   (80,400)  -   

-

   

-

 
Interest Income  -   -   -   (1,536)  -   (1,536)
Interest Expense  532,597   78,704   611,301   505,093   39,532   544,625 
Total Other (Income) Expense  452,197   78,704   530,901   500,902   39,532   540,434 
Net Income (Loss)  (478,893)  1,599,589   1,120,696   (165,545)  (4,579)  (170,124)
Net Loss Attributable to Noncontrolling Interests  2,859   -   2,859   1,869   -   1,869 
Net Income (Loss) Attributable to Global Healthcare REIT, Inc. $(476,034) $1,599,589  $1,123,555  $(163,676) $(4,579) $(168,255)

 

14. LEGAL PROCEEDINGS

 

The Company and/or its affiliated subsidiaries are or were involved in the following litigation:

 

Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.

 

In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.

 

As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.

 

19

 

 

While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.

 

Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.

 

This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.

 

Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.

 

This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. Other claims against the former operator are pending.

 

Dodge NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.

 

This action was brought by us against the former lease operator for numerous violations of the operating lease, including violation of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019, the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility. This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions, LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer Agreement with the Company, which Motion was granted. On July 2nd, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. Nearly simultaneously Global Eastman, LLC secured an operating license from the state with an effective date of July 1, 2020. Pursuant to the terms of the OTA, Global Eastman has assumed all receivables and selected critical liabilities associated with the prior operator.

 

Village of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.

 

This is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients) at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not Guilty. We are the landlord and do not believe we have any liability in this matter. The action was subsequently dismissed without prejudice.

 

Cadence Healthcare Solutions, LLC.

 

We received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”) claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this claim and intend to defend vigorously. We believe the likelihood of a material adverse outcome is extremely remote.

 

Oliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983

 

This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company wholly owned subsidiary Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident complained of. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care.  The landlord is Dodge NH, LLC.  Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020.  Global Eastman LLC was formed on November 21, 2019. We strongly deny any liability and intend to vigorously defend. We believe that the likelihood of a material adverse outcome is extremely remote.

 15. SUBSEQUENT EVENTS

 

On July 2, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. The OTA was made effective July 1, 2020, as that was the effective date of the nearly simultaneous issuance of operating license from the state. Pursuant to the terms of the OTA, Global Eastman assumed all receivables and only selected critical ongoing liabilities associated with the prior operator. All other liabilities remain with the prior operator in the former entity.

 

Effective July 23, 2020, Global Fairland Property, LLC (“Fairland Property”), a newly formed wholly-owned subsidiary of the Company, signed a definitive Asset Purchase Agreement (the “Agreement’) pursuant to which Fairland Property intends to purchase a skilled nursing facility located in Fairland, Oklahoma consisting of 29 licensed beds and commonly known as “Family Care Center of Fairland” (the “Facility”). The purchase price of the Facility will be $796,500. The purchase and sale of the Facility is subject to numerous conditions, including satisfactory due diligence, financing, and other conditions customary in transactions of this nature. There can be no assurance that the transaction will be consummated.

 

20

 

 

Effective July 31, 2020 the Company received a line of credit of $500,000 and a construction loan of $750,000 to be used for renovation and capital investment in its Edwards facility from Southern Bank. Both loans carry an interest rate of 4.75% on principal balance and mature July 30, 2021.

 

On August 7, 2020, the Meadowview skilled-nursing facility owned by the Company was served with a Notice of Immediate Imposition of Remedies from the Centers for Medicare and Medicaid Services (“CMS”), as well as a Notice of Imposition of Remedies by the Ohio Department of Health (“ODH”) ordering the facility to relocate all residents no later than August 9, 2020. The actions of the CMS and ODH were the result of ongoing operating deficiencies which the operator failed to cure. All residents of the Meadowview facility were relocated by the August 9, 2020 deadline and, as a result, the facility has been closed. The Company has applied with the ODH for a new nursing home license which is pending. In September 2020, the ODH served notice that it intended to commence proceedings to revoke the license on the facility. The Company has not determined what other future courses of action may be required or appropriate.

 

On August 18, 2020, the Company’s Board of Directors approved the repurchase for redemption of 443,431 shares of common stock for $75,385 or $0.17 per share in a privately negotiated transaction. The redemption has been completed and the shares of common stock were cancelled.

 

On September 29, 2020, the Company’s President and Chief Financial Officer and a member of the Board of Directors resigned from all positions with the Company. The resignations were prompted by regulatory issues not involving the Company or its subsidiaries.

 

On October 30, 2020, the Company purchased from two former investors in GWH Investors, LLC their notes in favor of Goodwill Hunting, LLC in the aggregate amount of $108,000 for $90,000 of cash and will recognize a gain of $18,000.

 

Effective October 31, 2020, the Company exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that had matured on October 31, 2020 for 11% Senior Secured Promissory Notes and issued 150,000 cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021. The Company also repaid the remaining $150,000 of 10% Senior Unsecured Notes.

 

On November 13, 2020, the Company’s Board of Directors approved the repurchase for redemption of 104,715 shares of common stock for $26,718 or $0.25 per share in a privately negotiated transaction. The redemption has been completed and the shares of common stock were cancelled.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our interim financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise. All forward-looking statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC.

 

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

 

● macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets;

 

● changes in national and local economic conditions in the real estate and healthcare markets specifically;

 

● legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;

 

● the availability of debt and equity capital;

 

● changes in interest rates;

 

● competition in the real estate industry; and,

 

● the supply and demand for operating properties in our market areas.

 

COVID-19 Pandemic

 

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported globally.

 

Starting in March, the COVID-19 pandemic, and measures to prevent its spread began to affect us in a number of ways. In our operating portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers. These trends accelerated in April and May, and are expected to continue through at least June 2021, impacting revenues and net operating income.

 

Our triple-net tenants experienced similar trends, which has put them under increased operational and financial pressure. Without financial support or other government assistance, certain of our triple-net tenants will likely experience worsening financial conditions through the second quarter of 2021, which would pressure their rent coverage ratios and may affect their ability to pay us contractual rent in full on a timely basis.

 

As of the date of this Report, four of our facilities have reported “presumptive positive” cases of COVID-19 involving both employees and residents. The Centers for Disease Control & Prevention (“CDC”) will provide final confirmation of the cases. The Company is engaging in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health and safety of residents while respecting their rights. Employees at all of our facilities are taking several precautions as they care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while caring for residents. Additionally, as of the date of this Report, none of our third party operators have reported any occurrences of COVID-19 in any of the buildings they are managing. Our operators have also reported to us that they currently have adequate supply levels, including appropriate quantities of Personal Protective Equipment (PPE) for staff. Additionally, as of the date of filing the Company has received no additional information.

 

22

 

 

The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers and managers. While these government assistance programs are not expected to fully offset the negative financial impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded, we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers and managers regarding ways in which these programs could benefit them or us.

 

In April and May, we applied for and were approved for an aggregate of $1,610,169 in PPP loans issued by the SBA. As a result of newly adopted amendments to the PPP program, 60% of the PPP loan amount must be expended on payroll in the 24 week-period following the loan date. We believe that most if not all the PPP loans will be eligible to be forgiven under the PPP guidelines. Any portion that is not forgiven must be repaid over two years.

 

The COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition.

 

We expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate. The extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country re-open and restrictions begin to lift, the availability of government financial support to our business, tenants and operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and cash flows but it could be material.

 

Overview

 

Global Healthcare REIT, Inc. (“Global” or “we�� or the “Company”) was organized for the purpose of investing in real estate related to the long-term care industry.

 

We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio will be comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments within our healthcare segments using the following five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA.

 

The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the following:

 

Compelling demographics driving the demand for healthcare services;
Specialized nature of healthcare real estate investing; and
Ongoing consolidation of a fragmented healthcare real estate sector.

 

Health Care Regulatory Climate

 

The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 30, 2019, CMS issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, CMS projects aggregate payments to skilled nursing facilities will increase by $851 million, or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the new Patient-Driven Payment Model case mix classification system that became effective on October 1, 2019, changes to the group therapy definition in the skilled nursing facility setting, and various skilled nursing facility Value-Based Purchasing and quality reporting program policies. On April 10, 2020, CMS issued a proposed rule to update skilled nursing facility rates and policies for fiscal year 2021, which starts October 1, 2020. CMS estimates that payments to skilled nursing facilities would increase by $784 million, or 2.3%, for fiscal year 2021 compared to fiscal year 2020. CMS also proposes to revise the geographic wage index and apply a cap on wage index decreases used in setting skilled nursing facility rates. The proposal would also make changes to the patient classifications under the Patient Driven Payment Model and certain minor policy changes to the Value-Based Purchasing program. Those rules were finalized in October 2020.

 

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Since the announcement of the COVID-19 pandemic and beginning as of March 13, 2020, CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including skilled nursing facilities, respond to the COVID-19 pandemic. These include, waiving the skilled nursing facility’s 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow skilled nursing facilities and certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments they received from October–December 2019; this expansion was suspended April 26, 2020 in light of other CARES Act funding relief. In addition, CMS has also enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities.

 

On March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), sweeping legislation intended to bolster the nation’s response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspends the 2% across-the-board “sequestration” reduction during the period May 1, 2020 through December 31, 2020, and extends the current Medicare sequester requirement through fiscal year 2030. In addition, the law provides $100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. On April 10, 2020, CMS announced the distribution of $30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers must agree to certain terms and conditions in receiving these grants. In addition, the Department of Health and Human Services (“HHS”) has authorized $20 billion of additional funding for providers that have already received funds from the initial distribution of $30 billion. Unlike the first round of funds, which came automatically, providers have to apply for these additional funds and submit the required supporting documentation, using the online portal provided by HHS. Providers must attest to and agree to specific terms and conditions for the use of such funds. HHS will make the additional distributions with the goal of allocating the whole $50 billion proportionally across all providers based on those providers’ proportional share of 2018 net Medicare fee-for-service revenue. CMS is expected to distribute additional funding to Medicaid and potentially other providers, but the details are not yet known.

 

On July 18, 2019, CMS published a final rule that eliminates the prohibition on pre-dispute binding arbitration agreements between long-term care facilities and their residents. The rule also strengthens the transparency of arbitration agreements and makes other changes to arbitration requirements for long-term care facilities. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

 

Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services. Congress continues to consider further legislative action in response to the COVID-19 pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company.

 

Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.

 

Acquisitions

 

Effective March 2, 2020, the Company, through its wholly-owned subsidiary, Global Quapaw, LLC (“Quapaw”), completed the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center (“Higher Call”) located in Quapaw, Oklahoma for the purchase price of $1,300,000. Quapaw has entered into an Operating Lease Agreement with Global Higher Call Nursing, LLC, a wholly owned subsidiary of the Company, as lessee, to be the Operator of the facility. The acquisition represents the consummation of an Asset Purchase Agreement dated October 21, 2019 between Higher Call Nursing Center, Inc., as Seller, and Quapaw, as Buyer.

 

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In connection with the acquisition of Higher Call, the Company entered two credit facilities, summarized as follows:

 

The Company entered into a senior loan agreement with Security Bank in the principal amount of $1.1 million (the “Senior Loan”). The Senior Loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of $7,907. The Senior Loan matures in 2040. The Senior Loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents (“Mortgage”) covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets.

 

The Company also executed a promissory note in favor of the Seller, Higher Call Nursing Center, Inc., in the principal amount of $150,000 (the “Seller Note”). The Seller Note accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest, and matures in April 2024. The Seller Note is secured by a Corporate Guaranty of Global.

 

Properties

 

As of June 30, 2020, we owned twelve long-term care facilities including a campus of three buildings in Tulsa, OK. The following table provides summary information regarding these facilities at June 30, 2020:

 

Property Name Location Effective
Percentage
Equity
Ownership
  Date
Acquired
 Gross
Square Feet
  Purchase
Price
  Outstanding
Debt at
June 30, 2020
 
                 
Eastman Nursing Home (a/k/a Middle Georgia) (1) Eastman, GA  100% 3/15/2013  28,808  $5,000,000  $3,969,841 
                     
Warrenton Health and Rehabilitation Warrenton, GA  100% 12/31/2013  26,894  $3,500,000  $3,704,959 
                     
Southern Hills Retirement Center Tulsa, OK  100% 2/7/2014  104,192  $2,000,000  $7,227,074 
                     
Goodwill Nursing Home (a/k/a Archway)(1) Macon, GA  85% 5/19/2014  46,314  $7,185,000  $5,295,771 
                     
Edwards Redeemer Health & Rehab (a/k/a Tiaps) Oklahoma City, OK  100% 9/16/2014  31,939  $3,142,233  $2,065,773 
                     
Providence of Sparta Nursing Home Sparta, GA  100% 9/16/2014  19,441  $2,836,930  $2,893,371 
                     
Meadowview Healthcare Center Seville, OH  100% 9/30/2014  27,500  $3,000,000  $2,834,400 
                     
Grand Prairie Nursing Home Lonoke, AR  100% 9/16/2014  40,737  $6,742,767  $4,618,006 
                     
Glen Eagle Healthcare & Rehab Abbeville, GA  100% 5/25/2016  29,393  $2,100,000  $3,036,436 
                     
Higher Call Nursing Center (1) Quapaw, OK  100% 3/2/2020  20,694  $1,300,000  $1,187,601 

 

 (1)Outstanding Debt includes senior and subordinated debt, but excludes intercompany subordinated debt owed to wholly owned affiliates of the Company that are eliminated in consolidation of financial statements.

 

Property Name 2020 Base Revenue
Per Lease
  Operating Lease Expiration 
       
Eastman Nursing Home (a/k/a Middle Georgia) $720,000   October 31, 2022 
Warrenton Health and Rehabilitation $642,846   June 30, 2026 
Southern Hills Retirement Center $12,000   - 
Goodwill Nursing Home (a/k/a Archway) $560,138   February 1, 2027 
Edwards Redeemer Health & Rehab (a/k/a Tiaps) $574,958   October 31, 2022 
Providence of Sparta Nursing Home $494,496   June 30, 2026 
Meadowview Healthcare Center $-   November 30, 2023 
Grand Prairie Nursing Home $-   - 
Glen Eagle Healthcare & Rehab $-   - 
Higher Call Nursing Center $-     

 

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Going Concern

 

The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2020, the Company had net income of $1,183,503 and reported net cash provided by operations of $1,409,936. However, the Company has incurred net losses in each of the previous five fiscal years and, as of June 30, 2020, had an accumulated deficit of $10,792,565. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues and cash flows to operate profitably and meet contractual obligations or raise additional capital through debt financing or through sales of common stock.

 

Failure to achieve the necessary levels of profitability and cash flows or obtain additional funding would be detrimental to the Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Results of Operations

 

The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Results of Operations - Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

 

Rental revenues for the six-month periods ended June 30, 2020 and 2019 totaled $1,144,605 and $1,825,575, respectively, a decrease of $680,970. The Company also had healthcare revenue of $7,837,461 for the six months ended June 30, 2020, compared to $1,063,928 for the six months ended June 30, 2019. Factors that contributed to the decrease in rental revenue included the appointment of a receivership at Eastman as well as the closure of Edwards Redeemer. Also, the Southern Tulsa facility is operated directly by the Company as of December 1, 2019, increasing Healthcare revenues but decreasing rental revenues. The acquisition of the Higher Call Nursing Center also increased healthcare revenues. Looking forward, we anticipate growing the rental revenue at the Southern Hills ILF facility in 2020 and beyond, but the shift toward healthcare revenue will continue as we operate more facilities directly.

 

General and administrative expenses were $715,770 and $570,836 for the six-month periods ended June 30, 2020 and 2019, respectively, an increase of $144,934 primarily due to additional expenses with the Southern Tulsa facility being operated directly by the Company as of December 1, 2019 and Higher Call Nursing Center as of March 1, 2020. The Company stringently reviews its costs regularly but believes its cost structure has been optimized for its current portfolio. For the six months ended June 30, 2020 and June 30, 2019, respectively, general and administrative expenses included $0 and $174,979 of share-based compensation related to restricted stock and common stock awards, and for the six months ended June 30, 2020 the company reversed expenses of $8,750 related to the forfeiture of restricted stock awards in the prior year.

 

Property taxes, insurance, and other operating expenses totaled $4,985,975 and $893,019 for the six-month periods ended June 30, 2020 and 2019, respectively. Lessees are responsible for the payment of insurance, taxes, and other charges while under the lease. Should the lessee not pay all such charges, as required under the leases, we may be liable for such operating expenses. We are also responsible for all working capital related to our Glen Eagle as well as the Southern Hills SNF, ALF and ILF, Meadowview, Higher Call, and Edwards properties.

 

Expenses related to the provision for bad debt was $0 for the six months ended June 30, 2019 and $263,890 for the six months ended June 30, 2020, an increase of $263,890. The Company’s greatly increased Healthcare Services operations require more complicated billing and less certain collection, and the Company anticipates and preemptively records bad debt expense as a proportion of revenues.

 

Depreciation expense increased $122,252 from $645,851 for the six months ended June 30, 2019 to $768,103 for six months ended June 30, 2020.

 

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The Company had no interest income for the six months ended June 30, 2020 and $7,003 interest income for the six months ended June 30, 2019.

 

Interest expense increased $45,711 from $1,070,860 for the six months ended June 30, 2019 to $1,116,571 for the six months ended June 30, 2020. We capitalized $135 of interest during the six months ended June 30, 2020.

 

Liquidity and Capital Resources

 

Throughout its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities.

 

Our liquidity is expected to increase from potential equity and debt offerings and decrease as net offering proceeds are expended in connection with our various property improvement projects. Our continuing short-term liquidity requirements consisting primarily of operating expenses and debt service requirements, excluding balloon payments at maturity, are expected to be achieved from rental revenues received and existing cash on hand. We plan to renew secured obligations that mature during 2020, as our projected cash flow from operations will be insufficient to retire the debt. Our restricted cash approximated $425,000 as of June 30, 2020 and is to be expended on insurance, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home.

 

Cash provided by operating activities was $1,409,936 for the six months ended June 30, 2020 compared to cash provided by operating activities of $400,839 for the six months ended June 30, 2019. Cash flows from operations were beneficially impacted by increased net income offset primarily by an increase in accounts receivable and a decrease in accounts payable and accrued liabilities during the first six months of 2020.

 

Cash used in investing activities was $1,231,357 for the six-month period ended June 30, 2020 compared to cash used in investing activities of $1,458,097 for the six-month period ended June 30, 2019. The decrease reflects less spending on property renovations and refurbishments offset by net cash paid in the acquisition of Higher Call assets.

 

Cash provided by financing activities was $2,098,059 for the six months ended June 30, 2020 compared to cash provided by financing activities of $1,378,919 for the six months ended June 30, 2019. During the first six months of 2020, we received proceeds from the issuance of debt of $2,821,890 and made payments on debt of $675,736. During the first six months of 2019, we issued $1,676,354 in debt in cash and made cash payments on debt of $273,550.

 

As of June 30, 2020, and December 31, 2019, our debt balances consisted of the following:

 

  June 30, 2020  December 31, 2019 
       
Senior Secured Promissory Notes $1,545,000  $1,485,000 
Senior Unsecured Promissory Notes  300,000   300,000 
Senior Secured Promissory Notes - Related Parties  975,000   875,000 
Fixed-Rate Mortgage Loans  29,399,050   22,427,949 
Variable-Rate Mortgage Loans  5,663,646   4,618,006 
Line of Credit, Senior Secured  -   7,230,582 
Other Debt, Subordinated Secured  1,045,561   1,386,000 
Other Debt, Subordinated Secured - Related Parties  150,000   150,000 
Paycheck Protection Program Loans  1,610,169   - 
         
   40,688,426   38,472,537 
         
Unamortized Discount and Debt Issuance Costs  (455,303)  (493,353)
         
  $40,233,123  $37,979,184 
         
As presented in the Consolidated Balance Sheets:        
         
Debt, Net $39,113,315  $36,954,184 
         
Debt - Related Parties, Net  1,119,808   1,025,000 
         
  $40,233,123  $37,979,184 

 

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The weighted average interest rate and term of our fixed rate debt are 5.38% and 7.16 years, respectively, as of June 30, 2020. The weighted average interest rate and term of our variable rate debt are 5.89% and 17.58 years, respectively, as of June 30, 2020.

 

Mortgage Loans and Lines of Credit Secured by Real Estate

 

Mortgage loans and other debts such as lines of credit are collateralized by all assets of each nursing home property and an assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon or corporate guarantees. Mortgage loans for the periods presented consisted of the following:

 

  Face  Principal Outstanding at  Stated Maturity
Property Amount  June 30, 2020  December 31, 2019  Interest Rate Date
              
Southern Hills Retirement Center (1)(2) $7,227,074  $7,227,074  $7,230,582  4.75% Fixed June 18, 2023
Eastman Nursing Home (1)(3)  3,570,000   3,394,866   3,451,593  5.50% Fixed October 26, 2021
Goodwill Nursing Home (1)(4)  4,268,878   4,242,171   4,286,237  4.75% Fixed April 12, 2025
Warrenton Nursing Home (5)  3,768,600   3,704,959   3,739,942  3.73% Fixed July 1, 2049
Edward Redeemer Health & Rehab(6)  2,065,804   2,065,773   2,074,958  4.75% Fixed June 29, 2021
Glen Eagle Health and Rehab(7)  3,119,214   3,036,436   3,083,006  5.50% Fixed May 25, 2021
Providence of Sparta Nursing Home (8)  3,039,300   2,893,371   2,923,013  3.50% Fixed November 1, 2047
Meadowview Healthcare Center (9)  3,000,000   2,834,400   2,869,200  6.00% Fixed October 30, 2022
GL Nursing Home(10)  5,000,000   4,618,006   4,618,006  Prime Plus 1.50%/ 5.75% Floor August 3, 2037
Higher Call Nursing Center (11)  1,051,721   1,045,640   -  Prime Plus 2.00% March 3, 2040
                 
      $35,062,696  $34,276,537     

 

 (1)Mortgage loans are non-recourse to the Company except for (i) the senior loan held by ServisFirst Bank on Meadowview (Ohio), (ii) the loans held by Colony Bank on Eastman and Glen Eagle, and (iii) the Southern Hills line of credit and Goodwill loan owed to Southern Bank (formerly First Commercial Bank).
 (2)

On October 31, 2017, the Company, through its wholly-owned subsidiaries Southern Tulsa, LLC and Southern Tulsa TLC, LLC, as Co-Borrowers, consummated a new Line of Credit with Southern Bank (formerly First Commercial Bank) pursuant to a Promissory Note in the principal amount of $7,229,052 (the “Line of Credit”). Under the Line of Credit, the Company refinanced the prior mortgage on its skilled nursing facility in Tulsa for $1,546,801, funded open market and tender offer purchases of its Industrial Revenue Bonds covering the ALF and ILF as well as provided working capital for improvements to the ALF and ILF. As of June 30, 2020, a total of $7,227,074 was drawn under the Line of Credit, and as of December 31, 2019, a total of $7,230,582 was drawn under the Line of Credit. Modifications to the loan in June 2020 effectively convert it from a line of credit to a term loan and is treated as debt extinguishment.

 

The interest rate on the Line of Credit increased from 5.25% to 5.75% effective April 28, 2019 and subsequently was reduced to 4.75% as part of a new three-year loan renewal. Monthly payments of interest began on November 30, 2017 and continue until the Promissory Note is paid in full on the Maturity Date. The Maturity Date was been extended multiple times in three month increments initially from April 30, 2018 to May 5, 2020, and subsequently to June 18, 2023 with a principal amount of $7,227,074. During the six months ended June 30, 2020, the Company capitalized $33,095 in loan costs paid. The Credit Note is secured by a First Mortgage and Assignment of Rents on Real Property for Southern Hills Rehabilitation Center, a Junior Lien and Assignment of Rents on Real Property for its Southern Hills Independent Living Facility location and a Junior Lien on Real Property for its Southern Hills Assisted Living Facility location. With the retirement of the Tulsa Industrial Authority Bonds effective November 1, 2018, Southern Bank (formerly First Commercial Bank) moved into a senior position on the ALF and ILF properties.

   
 (3)The loan at Eastman was renewed on November 26, 2018 with the maturity date extended to October 26, 2021. For the six months ended June 30, 2020, amortization expense related to loan costs totaled $643.
 (4)The maturity date for the loan at Goodwill Nursing was extended to April 12, 2025 in June 2020. The face value of the note was adjusted to the principal outstanding at the time of $4,268,878, and the interest rate was decreased to 4.75%, from 5.50%. The modification of the loan was substantial and resulted in an extinguishment of the original loan.
 (5)The original maturity date for the loan was extended on January 19, 2019 to January 20, 2020 and the Company capitalized $8,885 in loan costs paid. The loan was refinanced in June 2019. The Company has incurred $156,671 in unamortized loan costs to refinance this debt with another lender. The refinance was treated as debt extinguishment, with a new maturity date of July 1, 2049 and an interest rate of 3.73%. For the six months ended June 30, 2020, amortization expense related to loan costs totaled $2,611.

 

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 (6)The maturity date for the loan at Edwards Redeemer was extended to June 29, 2021 in June 2020. The face value of the note was adjusted to the principal outstanding at the time of the modification, $2,065,804, and the interest rate was decreased from 5.50% to 4.75%.
 (7)Amortization expense related to loan costs of this loan totaled $437 for the six months ended June 30, 2020. Amortizing payments began in January 2019. In June 2018 the Company converted the original note to a fixed note which qualified as debt extinguishment, unamortized debt discount on the original note was expensed as a loss on extinguishment of $27,794. In April 2018, the Company capitalized $22,800 in fees and interest and added it to principal. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of June 30, 2020, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender. In October 2018 the Lender extended the Company a line of credit with a limit of $200,365 to provide working capital to scale operations at the facility. The line of credit was expanded in February 2019 to $400,000 with a maturity date of September 30, 2019. Prior to September 30, 2019, the Company had drawn $400,000 on the line which was subsequently merged into the amortizing note due May 25, 2021.
 (8)The senior debt and subordinated debt owed in relation to Providence of Sparta was refinanced into a single senior HUD note during 2017. Amortization expense related to loan costs totaled $2,492 for the six months ended June 30, 2020. The interest rate was reduced from 3.88% to 3.50% as part of a refinance completed in April 2020.
 (9)Amortization expense related to loan costs of this loan totaled $4,652 for the six months ended June 30, 2020. The Company is subject to financial covenants and customary affirmative and negative covenants, including compliance with the covenants of all other notes and bonds. As of June 30, 2020, the Company was not in compliance with some unrelated notes and bonds, which is considered to be a technical Event of Default as defined in the note agreement, but the Company believes that it is in good standing with the Lender.
 (10)The mortgage loan collateralized by the GL Nursing Home is 80% guaranteed by the USDA and requires an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. The Company is subject to financial covenants and customary affirmative and negative covenants. As of June 30, 2020, the Company was not in compliance with certain of these financial and non-financial covenants which is considered to be a technical Event of Default as defined in the note agreement. The Company is also delinquent in installment payments due under the mortgage. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are not necessarily limited to the following (1) lender may declare the principal and all accrued interest on the note due and payable; and (2) lender may exercise additional rights and remedies under the note agreement to include taking possession of the collateral or seeking satisfaction from the guarantors. The Company has been notified by the lender regarding the Events of Default. Guarantors under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility and is making payment of interest on the loan. The Company is not obligated to repay the interest.
 (11)In connection with the acquisition of Higher Call, the Company entered into a senior loan agreement with Security Bank in the principal amount of $1,051,721. This loan accrues interest at the rate of 6.5% per annum and is payable in monthly installments of $7,907. The loan is secured by a senior Mortgage, Security Agreement and Assignment of Rents covering the Higher Call facility and a UCC Security Interest covering the personal property and other non-real estate assets. The Company is subject to financial covenants and customary affirmative and negative covenants. As of June 30, 2020, the Company was in compliance with these covenants.

 

We have $3.4 million of debt maturing and expect principal reduction payments of approximately $528,000 in the next twelve months. There is also $10.5 million in debt in technical default maturing after June 30, 2021 but shown due immediately. While we anticipate being able to refinance all the loans at reasonable market terms upon maturity, inability to do so may impact our financial position and results of operations. We expect to refinance $1.2 million in loans maturing in 2020 as the associated properties meet loan to value requirements currently being employed in commercial lending markets, and have already refinanced or repaid $300,000 in loans matured or maturing in 2020. We have $325,000 in note obligations maturing in 2020. Following is a summary of our subordinated debt and corporate debt as of June 30, 2020 and December 31, 2019.

 

Other Debt

 

Our subordinated debt at June 30, 2020 and December 31, 2019 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.

 

  Face  Principal Outstanding at  Stated Interest Maturity
Property Amount  June 30, 2020  December 31, 2019  Rate Date
Goodwill Nursing Home (1) $2,180,000  $1,053,600  $1,536,000  13% (1) Fixed December 31, 2019
Higher Call Nursing Center (2)  150,000   141,961   -  8% Fixed April 1, 2024
                 
      $1,195,561  $1,536,000     

 

 (1)The subordinated note on Goodwill matured on July 1, 2015. Investors in the Goodwill note were entitled to an additional 5% equity in Goodwill Hunting, LLC every six months if the note is not paid when due. Effective December 31, 2015, the investors holding the subordinated debt executed an Agreement Among Lenders pursuant to which they (i) agreed to waive any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017. In exchange, Goodwill Hunting agreed to pay the investors an additional one-time premium equal to 5% of the principal amount of the individual note at such time as the note is repaid. Effective May 3, 2017, we entered into an Allonge and Modification Agreement with the Goodwill investors pursuant to which they agreed to (i) waive all accrued interest through December 31, 2017, (ii) reduce interest rate to 13% beginning January 1, 2018 and (iii) extend the maturity date of the notes to December 31, 2019. In exchange, the Company agreed that upon repayment of the notes, the investors would be entitled to a one-time premium payment in the amount of 15% of the principal balance of the notes. On June 30, 2020, the Company purchased from four former investors in GWH Investors, LLC their notes in favor of Goodwill Hunting, LLC in the aggregate amount of $482,400 for $402,000 cash and recognized a gain of $80,400, and subsequently in October purchased from two more investors an aggregate amount of $108,000 for $90,000 of cash and will recognize a gain of $18,000 The Company has not repaid or renewed the note as of June 30, 2020 and it is technically in default.

 

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 (2)In connection with the acquisition of Higher Call, the Company executed a promissory note in favor of the Seller, Higher Call Nursing Center, Inc., in the principal amount of $150,000 which accrues interest at the rate of 8% per annum and is payable in equal monthly installments, principal and interest. This note is secured by a corporate guaranty of Global.

 

Our corporate debt at June 30, 2020 and December 31, 2019 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.

 

  Face  Principal Outstanding at  Stated Interest  
Series Amount  

June 30, 2020

  

December 31, 2019

  Rate Maturity Date
              
10% Senior Secured Promissory Note $25,000  $25,000  $25,000  10.0% Fixed December 31, 2018
10% Senior Unsecured Promissory Notes  300,000   300,000   300,000  10.0% Fixed October 31, 2020
11% Senior Secured Promissory Notes  1,520,000   1,520,000   1,460,000  11.0% Fixed October 31, 2021
11% Senior Secured Promissory Notes – Related Party  975,000   975,000   875,000  11.0% Fixed October 31, 2021
                 
      $2,820,000  $2,660,000     

 

Paycheck Protection Program Loans

 

On April 20, 2020, the Company through its subsidiaries received a loan of $574,975 pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 20, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act.

 

On May 4, 2020, the Company through its subsidiaries received loans of $324,442 and $710,752 pursuant to the Paycheck Protection Program (the “PPP Loans”) of the CARES Act. Both PPP Loans mature on May 4, 2022 (the “Maturity Date”), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act.

 

Contractual Obligations

 

As of June 30, 2020, we had the following contractual obligations:

 

  Total Contractual Terms  

Less Than

1 Year

  1 – 3 Years  3 – 5 Years  

More Than

5 Years

 
Notes Payable - Principal $40,688,426  $14,380,281  $15,307,172  $4,202,025  $6,798,948 
Notes Payable - Interest  7,239,368   1,489,315   1,861,203   897,581   2,991,269 
                     
Total Contractual Obligations $47,927,794  $15,869,596  $17,168,375  $5,099,606  $9,790,217 

 

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Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand and revenues generated from operations are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations at Grand Prairie and Southern Hills Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.

 

Critical Accounting Policies

 

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.

 

Property Acquisitions

 

We allocate the purchase price of acquired properties to net tangible and identified intangible assets and any liabilities based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing and leasing at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the purchase price or fair value of an acquired property.

 

Impairment of Long-Lived Assets

 

When circumstances indicate the carrying value of property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions and projected cash flows of properties using standard industry valuation techniques.

 

Goodwill

 

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.

 

The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.

 

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Recently Adopted Accounting Pronouncements

 

None.

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2020. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.

 

Subsequent Events

 

On July 2, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. The OTA was made effective July 1, 2020, as that was the effective date of the nearly simultaneous issuance of operating license from the state. Pursuant to the terms of the OTA, Global Eastman assumed all receivables and only selected critical ongoing liabilities associated with the prior operator. All other liabilities remain with the prior operator in the former entity.

 

Effective July 23, 2020, Global Fairland Property, LLC (“Fairland Property”), a newly formed wholly-owned subsidiary of the Company, signed a definitive Asset Purchase Agreement (the “Agreement’) pursuant to which Fairland Property intends to purchase a skilled nursing facility located in Fairland, Oklahoma consisting of 29 licensed beds and commonly known as “Family Care Center of Fairland” (the “Facility”). The purchase price of the Facility will be $796,500. The purchase and sale of the Facility is subject to numerous conditions, including satisfactory due diligence, financing, and other conditions customary in transactions of this nature. There can be no assurance that the transaction will be consummated.

 

Effective July 31, 2020 the Company received a line of credit of $500,000 and a construction loan of $750,000 to be used for renovation and capital investment in its Edwards facility from Southern Bank. Both loans carry an interest rate of 4.75% on principal balance and mature July 30, 2021.

 

On August 7, 2020, the Meadowview skilled-nursing facility owned by the Company was served with a Notice of Immediate Imposition of Remedies from the Centers for Medicare and Medicaid Services (“CMS”), as well as a Notice of Imposition of Remedies by the Ohio Department of Health (“ODH”) ordering the facility to relocate all residents no later than August 9, 2020. The actions of the CMS and ODH were the result of ongoing operating deficiencies which the operator failed to cure. All residents of the Meadowview facility were relocated by the August 9, 2020 deadline and, as a result, the facility has been closed. The Company has submitted an application with the ODH for a new nursing home license which is pending. In September 2020, the ODH issued notice that intends to commence proceedings to revoke the license on the facility. The Company has not determined what other future courses of action may be required or appropriate.

 

On August 18, 2020, the Company’s Board of Directors approved the repurchase for redemption of 443,431 shares of common stock for $75,385 or $0.17 per share in a privately negotiated transaction. The redemption has been completed and the shares of common stock were cancelled.

 

On September 29, 2020, the Company’s President and Chief Financial Officer and a member of the Board of Directors resigned from all positions with the Company. The resignations were prompted by regulatory issues not involving the Company or its subsidiaries.

 

On October 30, 2020, the Company purchased from two former investors in GWH Investors, LLC their notes in favor of Goodwill Hunting, LLC in the aggregate amount of $108,000 for $90,000 of cash and will recognize a gain of $18,000.

 

Effective October 31, 2020, the Company exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that had matured on October 31, 2020 for 11% Senior Secured Promissory Notes and issued 150,000 cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021. The Company also repaid the remaining $150,000 of 10% Senior Unsecured Notes.

 

On November 13, 2020, the Company’s Board of Directors approved the repurchase for redemption of 104,715 shares of common stock for $26,718 or $0.25 per share in a privately negotiated transaction. The redemption has been completed and the shares of common stock were cancelled.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

 

Our management, including our CEO and CFO, the same individual as of filing, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were not effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under 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 management as appropriate, to allow timely decisions regarding disclosures.

 

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There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company and/or its affiliated subsidiaries are or were involved in the following litigation:

 

Bailey v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.

 

In April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry, it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing, as landlord, as required by the operating lease.

 

As we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend to assert.

 

While it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.

 

Thomas v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.

 

This action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April 2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure. The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood of a material adverse result is remote.

 

Edwards Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-19-5883.

 

This action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients and closing the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. Other claims against the former operator are pending.

 

Dodge NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.

 

This action was brought by us against the former lease operator for numerous violations of the operating lease, including violation of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019, the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility. This Order will mitigate any potential disruption to the facility’s ongoing operations considering the various disputes between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions, LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer Agreement with the Company, which Motion was granted. On July 2nd, 2020, the court approved the Operations Transfer Agreement (“OTA”) from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. On the same date, Global Eastman, LLC secured an operating license from the state. Pursuant to the terms of the OTA, Global Eastman will assume all receivables and selected critical liabilities associated with the prior operator.

 

33

 

 

Village of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.

 

This is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients) at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not Guilty. We are the landlord and do not believe we have any liability in this matter. The action was subsequently dismissed without prejudice.

 

Cadence Healthcare Solutions, LLC.

 

We received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”) claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this claim and intend to defend vigorously. We believe the likelihood of a material adverse outcome is extremely remote.

 

Oliphant v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983

 

This is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare & Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident complained of. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. We strongly deny any liability and intend to vigorously defend. We believe that the likelihood of a material adverse outcome is extremely remote.

 

Item 1A. Risk Factors

 

COVID

 

The COVID-19 pandemic has subjected our business, operations, and financial condition to a number of risks, including, but not limited to, those discussed below:

 

Risks Related to Revenue: Our revenues and our operators’ revenues are dependent, in part, on occupancy. In addition to the impact of increases in mortality rates on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our operating and triple-net properties could further decrease. Such a decrease could affect the net operating income of our operating properties and the ability of our triple-net operators to make contractual payments to us.
  
Risks Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy or insolvency due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant because of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about the operator’s financial condition and insolvency proceedings, particularly considering ongoing publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should such events occur, our revenue and operating cash flow may be adversely affected.
  
Risks Related to Operations: Across all of our properties, we and our operators have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or tenants’ contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties, employees and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement of people.

 

34

 

 

Risks Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have a significant development portfolio and have not experience significant delays or disruptions but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position.
  
Risks Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets.

 

The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many of the other risks described in this Report.

 

SEC ADMINISTRATIVE ORDER

 

On September 25, 2020, the SEC issued an Administrative Order against Sabra Capital Partners, LLC and Zvi Rhine requiring that those respondents cease and desist from further violations of certain federal securities laws. The full text of that Order is a matter of public record and can be found at the SEC’s website: www.sec.gov. Following the entry of that Order, on September 29, 2020, Mr. Rhine voluntarily resigned as a Director, President and CFO of the Company. The Company intends to engage a new CFO and is actively recruiting. Effective October 1, 2020, the Company entered into a consulting agreement with Mr. Rhine which is terminable by either party on 30 days’ notice after December 31, 2020. Mr. Rhine will be paid a fee of $15,000 per month. The agreement contains customary covenants concerning corporate opportunity and non-compete. Mr. Rhine will provide consulting services related to the Company’s operations, but under no circumstances will those services include or relate to, directly or indirectly, the Company’s financial management and reporting. Nevertheless, it is likely that Mr. Rhine’s resignation may have a disruptive effect on the Company’s near-term operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None, except as previously disclosed.

 

Item 3. Defaults Upon Senior Securities

 

None, except as disclosed in this Report.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31 Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002*
   
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

101.INS XBRL Instance Document**
101.SCH XBRL Schema Document**
101.CAL XBRL Calculation Linkbase Document**
101.LAB XBRL Label Linkbase Document**
101.PRE XBRL Presentation Linkbase Document**
101.DEF XBRL Definition Linkbase Document**

 

* filed herewith

** furnished, not filed

 

35

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 GLOBAL HEALTHCARE REIT, INC.
   
Date: November 18, 2020By:/s/ Lance Baller
  

Lance Baller, Chief Executive Officer

(Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer)

 

36