XML 24 R13.htm IDEA: XBRL DOCUMENT

9. Debt

12 Months Ended

Dec. 31, 2015

9. DEBT

The following is a summary of the Company’s debt outstanding as of December 31, 2015 and 2014:

	2015	2014

Convertible Notes Payable	$ 3,200,000	$ 3,200,000
Fixed-Rate Mortgage Loans	14,461,421	13,660,830
Variable-Rate Mortgage Loans	8,050,043	8,216,660
Bonds Payable	5,700,000	5,700,000
Other Debt – Related Parties	5,105,000	6,110,000

	36,516,464	36,887,490

Less Unamortized Discount	74,004	76,616

	$ 36,442,460	$ 36,810,874

Convertible Notes Payable

6.5% Notes Due September, 2017

On September 26, 2014, the Company completed a private offering of its 6.5% Senior Secured Convertible Promissory Notes in the amount of $3,200,000. The Notes can be called for redemption at the option of the Company at any time (i) after September 15, 2015 but prior to September 15, 2016 at an early redemption price equal to 103% of the face amount of the Notes, plus accrued and unpaid interest, or (ii) any time after September 15, 2016 but prior to September 15, 2017 at an early redemption price equal to 102% of the face amount of the Notes, plus accrued and unpaid interest. Each Note is convertible at the option of the holder into shares of common stock of the Company at a conversion price of $1.37 per share, which exceeded fair value of the common stock at the time of issuance. The Notes will automatically convert into common stock at the conversion price in the event (i) there exists a public market for the Company’s common stock, (ii) the closing price of the common stock in the principal trading market has been $2.00 per share or higher for the preceding ten (10) trading days, and (iii) either (A) there is an effective registration statement registering for resale under the Securities Act of 1933, as amended, the conversion shares or (B) the conversion shares are eligible to be resold by non-affiliates of the Company without restriction under Rule 144 of the Securities Act. At the time of issuance and based on the Company’s common stock trading activity, the Company determined that no beneficial conversion feature was associated with the Notes. As of December 31, 2015, none of the Notes have been converted into common stock.

The Notes are secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio.

The Company paid a Placement Agent fee in the amount of $96,000 resulting in net proceeds to the Company of $3,104,000. In addition, the Company granted to the Placement Agent Warrants equal to 5% of the number of shares of common stock underlying the Notes sold in the Offering, exercisable for five years at an exercise price of $1.37 per share of Common Stock. The estimated fair value of the warrants in the amount of $56,065 and the Placement Agent fee of $96,000 will be amortized to interest expense over the life of the Notes. The estimated fair value of the warrants was determined using the following assumptions:

Expected Volatility	75%
Contractual Term	5 Years
Risk Free Interest Rate	1.77%
Expected Dividend Rate	1.00%

Mortgage Loans

Mortgage loans 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:

		Principal Outstanding at		Stated
	Face	December 31,		Interest	Maturity
Property	Amount	2015	2014	Rate	Date

Middle Georgia Nursing Home⁽¹⁾	$ 4,200,000	$ 3,849,678	$ 3,872,112	5.50% Fixed	October 4, 2018
Goodwill Nursing Home⁽¹⁾	4,976,316	4,577,047	4,735,516	5.50% Fixed	July 10, 2016⁽²⁾
Warrenton Nursing Home	2,720,000	2,562,765	2,639,469	5.00% Fixed	December 20, 2018
Edwards Redeemer Health & Rehab	1,501,500	-	1,361,728	4.25% Fixed	Repaid on December 20, 2015
Edward Redeemer Health & Rehab	2,303,815	2,249,772	-	5.50% Fixed	January 16, 2020
Southern Hills Retirement Center	1,750,000	1,222,159	1,052,005	4.75% Fixed	November 10, 2017
Providence of Sparta Nursing Home	1,725,000	1,686,506	1,717,330	Prime Plus 0.50%/ 6.00% Floor	September 17, 2016
Providence of Greene Point Healthcare Center	1,725,000	1,692,000	1,722,423	Prime Plus 0.50%/ 6.00% Floor	November 5, 2016
Golden Years Manor Nursing Home	5,000,000	4,671,537	4,776,907	Prime Plus 1.50%/ 5.75% Floor	August 3, 2037

		$ 22,511,464	$ 21,877,490

(1) Mortgage loans are non-recourse to the Company.

(2) Effective January 14, 2016, the maturity date was extended from December 28, 2015 to July 10, 2016.

The mortgage loan collateralized by the Golden Years Manor 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 December 31, 2015, the Company was not in compliance with certain of these covenants which is considered to be an Event of Default as defined in the note agreement. Remedies available to the lender in the event of a continuing Event of Default, at its option, include, but are 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 not been notified by the lender regarding the exercise of any remedies available. Guarantors under the mortgage loan are Christopher Brogdon and GLN Investors, LLC, which the Company owns a 100% membership interest.

Other mortgage loans contain non-financial covenants, including reporting obligations, with which the Company has complied in some instances in an untimely manner. These technical defaults are not deemed material, and the Company considers its relationships with its senior lenders to be very good.

Bonds Payable – Tulsa County Industrial Authority

On March 1, 2014, Southern Tulsa, LLC (Southern Tulsa), a subsidiary of WPF that owns the Southern Hills Retirement Center, entered into a loan agreement with the Tulsa County Industrial Authority (Authority) in the State of Oklahoma pursuant to which the Authority lent to Southern Tulsa the proceeds from the sale of the Authority’s Series 2014 Bonds. The Series 2014 Bonds consist of $5,075,000 in Series 2014A First Mortgage Revenue Bonds and $625,000 in Series 2014B Taxable First Mortgage Revenue Bonds. The Series 2014 Bonds were issued pursuant to a March 1, 2014 Indenture of Trust between the Authority and the Bank of Oklahoma. $4,325,000 of the Series 2014A Bonds mature on March 1, 2044 and accrue interest at a fixed rate of 7.75% per annum. The remaining $750,000 of the Series 2014A Bonds mature on various dates through final maturity on March 1, 2029 and accrue interest at a fixed rate of 7.0% per annum. The Series 2014B Bonds mature on March 1, 2023 and accrue interest at a fixed rate of 8.5% per annum. The debt is secured by a first mortgage lien on the independent living units and assisted living facility (facilities), an assignment of the facilities’ leases, a first lien on all personal property located in the facilities, and a guarantee by the Company. Deferred loan costs incurred of $478,950 and an original issue discount of $78,140 related to the loan are amortized to interest expense over the life of the loan. Amortization expense related to deferred loan costs totaled $28,190 in 2015 and $0 in 2014. Amortization expense related to the original issue discount totaled $2,612 in 2015 and $1,524 in 2014. The loan agreement includes certain financial covenants required to be maintained by the Company, which were not in compliance as of December 31, 2015. As of December 31, 2015, restricted cash of $541,835 is related to the bonds.

Other Debt – Related Parties

Other debt due at December 31, 2015 and 2014 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.

		Principal Outstanding at		Stated
	Face	December 31,		Interest	Maturity
Property	Amount	2015	2014	Rate	Date

Goodwill Nursing Home	2,180,000	$ 1,280,000	$ 1,380,000	13.0 %⁽¹⁾ Fixed	June 30, 2017⁽²⁾
Edwards Redeemer Health & Rehab	880,000	-	880,000	12.0% Fixed	Repaid on January 20, 2015
Providence of Sparta Nursing Home	1,050,000	1,050,000	1,050,000	10.0% Fixed	August 1, 2016⁽³⁾
Providence of Greene Point Healthcare Center	1,150,000	1,125,000	1,150,000	10.0% Fixed	June 30, 2017⁽⁴⁾
Golden Years Manor Nursing Home	1,650,000	1,650,000	1,650,000	11.0% Fixed	April 1, 2016⁽⁵⁾

		$ 5,105,000	$ 6,110,000

(1)The interest rate on this note increased from 12% to 13% per annum effective January 1, 2015.

(2)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, all of the holders of the Goodwill subordinated note executed an Agreement Among Lenders pursuant to which they (i) waived all equity ratchets and (ii) extended the maturity date of their notes to June 30, 2017. In exchange, Goodwill Hunting LLC agreed to pay the investors a one-time premium equal to 5% of the principal amount of each individual note (approximately $64,000) as such time as the note is repaid.

(3)The subordinated note on Sparta matured on August 1, 2015. Investors in the Sparta note are entitled to an additional 5% equity in Providence HR, LLC every six months if the note is not paid when due. The Company is negotiating with these investors to purchase their residual equity interests in exchange for shares of common stock. There can be no assurance that these negotiations will be successful.

(4)The subordinated note on Greene Point matured on October 1, 2015. Investors in the Greene Point note were entitled to an additional 5% equity in Wash/Greene, LLC, the entity that owns the facility, every six months if the note is not paid when due. Effective December 31, 2015, all of the holders of the Wash/Greene subordinated note executed an Agreement Among Lenders pursuant to which they (i) waived all equity ratchets and (ii) extended the maturity date of their notes to June 30, 2017. In exchange, Wash/Greene LLC agreed to pay the investors a one-time premium equal to 5% of the principal amount of each individual note (approximately $56,000) as such time as the note is repaid.

(5)Effective January 1, 2016, we entered into a new operating lease with a new operator for GL Nursing, LLC. Under the new lease, the base rent was reduced to a level that permits payment of the senior loan, but is insufficient to pay interest on the subordinated debt. The Company has been accruing the unpaid interest but is in default under the Note. A further event of default is the note’s past maturity. Base rent under the new operating lease adjusts based upon the occupancy census; however there can be no prediction when those adjustments will occur.

For the years ended December 31, 2015 and 2014, the Company received proceeds from the issuance of debt of $2,566,854 and $11,379,175, respectively. Cash payments on debt totaled $2,937,880 and $5,764,703 for the years ended December 31, 2015 and 2014, respectively.

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

Years

2016		$ 11,137,183
2017		7,217,231
2018		6,304,487
2019		289,340
2020		2,085,426
2021 and Thereafter		9,482,797

		$ 36,516,464