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DOCUMENTS INCORPORATED BY REFERENCE
SELECTIS HEALTH, INC.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains statements that plan for or anticipate the future. In this Annual Report, forward-looking statements are generally identified by the words “anticipate,” “plan,” “believe,” “expect,” “estimate,” and the like. These forward-looking statements include, but are not limited to, statements regarding the following:
| * | strategic business relationships; |
| * | statements about our future business plans and strategies; |
| * | anticipated operating results and sources of future revenue; |
| * | our organization’s growth; |
| * | adequacy of our financial resources; |
| * | development of markets; |
| * | competitive pressures; |
| * | changing economic conditions; and, |
| * | expectations regarding competition from other companies. |
| * | the duration and scope of the COVID-19 pandemic |
| * | the impact of the COVID-19 pandemic on occupancy rates and on the operations of the Company’s facilities and its operators/tenants. |
| * | Actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting our properties and our operations and the operations of our operations/tenants. |
| * | The effects of health and safety measures adopted by us and our operations/tenants in response to the COVID-19 pandemic. |
| * | Increased operational costs because of health and safety measures related to COVID-19. |
| * | The impact of the COVID-19 pandemic on the business and financial conditions of our operations/tenants and their ability to pay rent. |
| * | Disruptions to our property acquisition and disposition activities due to economic uncertainty caused by COVID-19. |
| * | General economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth. |
Although we believe that any forward-looking statements, we make in this Annual Report are reasonable, because forward-looking statements involve future risks and uncertainties, there are factors that could cause actual results to differ materially from those expressed or implied. For example, a few of the uncertainties that could affect the accuracy of forward-looking statements, besides the specific factors identified above in the Risk Factors section of this Annual Report, include:
| * | changes in general economic and business conditions affecting the healthcare industry; |
| * | developments that make our facilities less competitive; |
| * | changes in our business strategies; |
| * | the level of demand for our facilities; and |
| * | regulatory changes affecting the healthcare industry and third-party payor practices. |
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PART I
| ITEM 1. | BUSINESS |
Background
Selectis Health, Inc. (“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries, Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions of the US. In 2019 the Company shifted from leasing long-term care facilities to third-party, independent operators towards a model where a wholly owned subsidiary would operate but is owned by another wholly owned subsidiary.
Prior to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. from September 30, 2013, to May 2021. Prior to this, 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”). WPF was merged into the Company in 2019.
In May 2021, the Company successfully rebranded to Selectis Health, Inc., from Global Healthcare REIT, Inc. to better align with the current and future business model, which is to own and operate its facilities.
We acquire, develop, lease, manage, and dispose of healthcare real estate, provide financing to healthcare providers, and provide healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following healthcare segments: (i) senior housing (including independent and assisted living) and (ii) post-acute/skilled nursing. We make investments within our healthcare segments using the following six strategies: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA and (vi) owning healthcare operations.
Healthcare Industry
Healthcare is the single largest industry in the U.S. based on Gross Domestic Product (“GDP”). According to the National Health Expenditures report by the Centers for Medicare and Medicaid Services (“CMS”): (i) national health expenditures are expected to grow 1.2 percentage points faster than GDP per year over the 2016 – 2025 period; (ii) the average compounded annual growth rate for national health expenditures, over the projection period of 2016 through 2027, is anticipated to be 5.6%; and (iii) health spending is projected to represent 19.9% of US GDP by 2025, up from 17.8% in 2015.
Senior citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 85-year and older segment of the population spends 92% more on healthcare than the 65 to 84-year-old segment and over 329% more than the population average.
In the future, the Company intends to continue to search for operations that will enhance our portfolio of healthcare centers.
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Real Estate Industry
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.
The Company owns 13 healthcare facilities. Initially, the Company simply owned the physical property and real estate and leased or subleased the facility to third-party operators. In 2019, the Company intentionally decided to begin moving towards operations through newly created independent operating subsidiaries. In the future, the Company intends to own and operate all future facilities. As of December 31, 2022, the Company, through wholly-owned subsidiaries, operates 11 healthcare facilities.
Business Strategy
As an organization, our primary goal is to increase shareholder value through profitable growth and professional healthcare. Our investment strategy to achieve this goal is based on four principles: (i) quality healthcare for our residents, (ii) opportunistic investing, (iii) portfolio diversification and (iv) conservative financing.
Quality Healthcare for our Residents
Our healthcare operations continue to bolster our revenue. Over the last two years, our operational footprint has grown from one facility to nine. The mix of our revenues, from leasing facilities to our owner operator model has shifted drastically from rents to healthcare as well. To ensure this continues our operational teams and staff at our facilities are dedicated to maintaining the highest of standards and quality care metrics in line with, but not limited to, the CDC, ADA, CMS, and all state and local guidelines.
Opportunistic Investing
We will make investment decisions that are expected to drive profitable growth and create shareholder value. We will perform in depth due diligence and quantitative and qualitative analyses to ensure that we position ourselves to create and take advantage of situations to meet our goals and investment criteria that will continue to add to the Company’s strategic and financial value.
Portfolio Diversification
We believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant, and investment product. Diversification reduces the likelihood that a single event would materially harm our business and allows us to take advantage of opportunities in different markets based on individual market dynamics. While pursuing this strategy of diversification, we will monitor, but will not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment product, geographic location, the number of properties which we may lease to a single operator or tenant, or mortgage loans we may make to a single borrower. With investments in multiple segments and investment products, we can focus on opportunities with the most attractive risk/reward profile for the portfolio. We may structure transactions as master leases, require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters of credit or security deposits, and take other measures to mitigate risk.
Financing
We will strive to manage our debt-to-equity levels and maintain multiple sources of liquidity, access to capital markets and secured debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets. Our debt obligations will be primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates on our operations.
We plan to finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may arrange for short-term borrowings from banks or other sources. We may also arrange for longer-term financing through offerings of equity and debt securities, placement of mortgage debt and capital from other institutional lenders and equity investors.
Competition
Investing in real estate serving the healthcare industry is highly competitive. We will face competition from REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers, and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation, and population trends.
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Income from our facilities is dependent on the ability of our operations and tenants to compete with other healthcare companies on a number of different levels, including: the quality of care provided, reputation, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. Private, federal, and state payment programs as well as the effect of laws and regulations may also have a significant influence on the profitability of our tenants and operators.
Healthcare Segments
Post-acute/skilled nursing. Skilled Nursing Facilities (“SNF”) offer restorative, rehabilitative and custodial nursing care for people not requiring the more extensive and sophisticated treatment available at hospitals. Ancillary revenues and revenues from sub-acute care services are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales of pharmaceutical products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis.
Post-acute/skilled nursing services provided by our operations and tenants in these facilities will be primarily paid for either by private sources or through the Medicare and Medicaid programs.
Independent Living Facilities (“ILFs”). ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with activities of daily living (“ADL”), such as bathing, eating, and dressing. However, residents have the option to contract for these services.
Senior Housing. Senior housing facilities include assisted living facilities (“ALFs”), independent living facilities (“ILFs”) and continuing care retirement communities (“CCRCs”), which cater to different segments of the elderly population based upon their needs. Services provided by our operations or tenants in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid and Medicare. Senior housing property types are further described below.
Assisted Living Facilities. ALFs are licensed care facilities that provide personal care services, support, and housing for those who need help with activities of daily living yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations.
Continuing Care Retirement Communities (“CCRCs”). CCRCs provide housing and health-related services under long-term contracts. This alternative is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents to “age in place.” Some CCRCs require a substantial entry or buy-in fee and most also charge monthly maintenance fees in exchange for a living unit, meals, and some health services. CCRCs typically require the individual to be in relatively good health and independent upon entry.
Investments
Direct Ownership. We plan to primarily generate revenue by purchasing properties and operating the facilities internally. Most of our revenue will be received from government agencies, hospice companies, managed care contracts and private pay receipts that will provide for a substantial recovery of operating expenses including but not limited to staffing, supplies, bed taxes, real estate taxes, repairs and maintenance, utilities, and insurance. For existing properties with leases in place, our rents will be received from leases under triple net leases.
Operating Properties. We may enter contracts with healthcare operators to manage communities that are placed in a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”). Additionally, as an owner operator, our local teams work to create alignment with our internal health care providers to scale operating efficiencies, and/or ancillary services to drive profitable growth.
Our ability to grow income from our properties depends, in part, on our ability to (i) increase revenue and other earned income by increasing occupancy levels and improving rates, (ii) manage bad debt and (iii) control operating expenses. For properties under lease, most of our leases will include contractual annual base rent escalation clauses that are either predetermined fixed increases and/or are a function of an inflation index.
Debt Investments. Our mezzanine loans will generally be secured by a pledge of ownership interests of an entity or entities, which directly or indirectly own properties, and are subordinate to more senior debt, including mortgages and more senior mezzanine loans. Our interest in mortgages and construction financing will typically be issued by federal, state, and/or local banks and will generally be secured by healthcare real estate.
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Developments and Redevelopments. We will generally commit to development projects that are at least 50% pre-leased or when we believe that market conditions will support speculative construction. We will work closely with our local real estate service providers, including brokerage, property management, project management and construction management companies to assist us in evaluating development proposals and completing developments. Our development and redevelopment investments will likely be in the life science and medical office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition cost or existing basis) to achieve property stabilization or to change the primary use of the properties.
Recent Financings
2021 Senior Secured Note Extension
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 was increased to $2,500,000. 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 Unsecured Notes. No fees or commissions were paid on the sale of the Units. The proceeds were used for general working capital.
In October 2021, the Company renegotiated the Senior Secured Notes, originally issued in 2018. The new terms were for 10% annual interest through June 30, 2023. The warrants issued and associated with these notes were extended through the same date. All other terms remain the same.
Exchange of Senior Notes for Common Stock
In the fourth quarter of 2021 and first quarter of 2022, the Company completed the exchange of an aggregate of $795,000 in principal amount of Senior Secured Notes for 159,000 shares of Common Stock valued at $5.00 per share.
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 2020, 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 operations took appropriate actions to protect residents and caregivers. These trends accelerated in fiscal year 2021, and are expected to continue through at least December 2023, impacting revenues and net operating income.
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. Our operations have also reported to us that they currently have adequate supply levels, including appropriate quantities of Personal Protective Equipment (PPE) for staff.
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.
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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 operations, 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.
PPP and CARES Act
On April 1, 2021, the Company received confirmation that the request for forgiveness for the second round of Paycheck Protection Program (“PPP”) finding was forgiven. In April and May of 2020, we applied for and were approved for an aggregate of $1,610,169 in Paycheck Protection Program (“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. On November 19, 2020, the Company received notice of forgiveness of the entire balance on two of its three loans obtained through the PPP (the “PPP Loans”) of the CARES Act. The forgiveness included principal of $324,442 and $710,752, as well as interest payable of $1,794 and $3,869. The Company applied for forgiveness on the remaining $574,975 principal and interest payable of $4,017, which was approved by the SBA on June 16, 2021.
Government Regulations, Licensing and Enforcement
Overview
Our operations, and tenants will typically be subject to extensive and complex federal, state and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide-ranging and can subject our tenants and our operations to civil, criminal, and administrative sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties will be subject to oversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement enforcement activity and regulatory non-compliance by our tenants and operations can all have a significant effect on the financial condition of the property, which in turn may adversely impact us.
We will seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our operations and tenants by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operations base to limit our exposure to any single entity, and seeking tenants and operations that are not largely dependent on Medicaid reimbursement for their revenues. In addition, we ensure in each instance that our operations have obtained all necessary licenses and permits before beginning operations and require that those operators covenant that they will comply with all applicable laws and regulations in connection with the facility operations.
The following is a discussion of certain laws and regulations generally applicable to our operations and tenants.
Fraud and Abuse Enforcement
There are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal, and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state, and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our operations and tenants are subject to these laws, and some of them may in the future become the subject of governmental enforcement actions if they fail to comply with applicable laws.
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Healthcare Licensure and Certificate of Need
Certain healthcare facilities in our portfolio will be subject to extensive federal, state, and local licensure, certification and inspection laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials, and operate equipment. Many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion, and closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact some of our tenants’ and our ability to expand or operative effectively.
Americans with Disabilities Act (the “ADA”)
Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations” as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one, and we continue to assess our properties and make modifications as appropriate in this respect.
Environmental Matters
A wide variety of federal, state, and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state, and local environmental laws, ordinances and regulations, an owner of real property or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s or secured lender’s liability therefore could exceed or impair the value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenues.
Taxation
Federal Income Tax Considerations
The following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt entities, financial institutions or broker-dealers, persons holding shares of common stock as part of a hedging, integrated conversion, or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United States).
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This summary does not discuss all the aspects of U.S. federal income taxation that may be relevant to you considering your particular investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of purchasing, owning, and disposing of our securities as set forth in this summary. Before you purchase our securities, you should consult your own tax advisor regarding the U.S. federal, state, local, foreign, and other tax consequences of acquiring, owning, and selling our securities.
On March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders who meet certain requirements and are individuals, estates, or certain trusts to pay an additional 3.8% tax on, among other things, dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of shares of our stock.
Health Care Regulatory Climate
Government Regulation and Reimbursement
The healthcare industry is heavily regulated. Our operations are subject to extensive and complex federal, state and local healthcare laws and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operations, in addition to regulatory non-compliance by our operations, can have a significant effect on the operations and financial condition of our operations, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.
The U.S. Department of Health and Human Services (“HHS”) declared a public health emergency on January 31, 2020 following the World Health Organization’s decision to declare COVID-19 a public health emergency of international concern. This declaration, which has been extended through April 14, 2022, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. These regulatory actions have contributed, and may continue to contribute, to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion.
These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, continue to have a significant impact on our operations and financial condition. The extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance will depend on future developments, including the sufficiency and timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, the impact of genetic mutations of the virus into new variants, the impact of vaccine distributions and booster doses on our operations and their populations, the impact of vaccine mandates on staffing shortages at our operations, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business; however, the adverse impact on our business, results of operations, financial condition and cash flows could be material.
A significant portion of our revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could therefore have a material adverse effect on our results of operations and financial condition. Additionally, new and evolving payor and provider programs that are tied to quality and efficiency could adversely impact our liquidity, financial condition or results of operations, and there can be no assurance that payments under any of these government healthcare programs are currently, or will be in the future, sufficient to fully reimburse us for our operating and capital expenses. In addition to quality and value based reimbursement reforms, the U.S. Centers for Medicare and Medicaid Services (“CMS”) has implemented a number of initiatives focused on the reporting of certain facility specific quality of care indicators that could affect our operations, including publicly released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under the CMS “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures. These rating changes have impacted referrals to SNFs, and it is possible that changes to this system or other ranking systems could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.
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The following is a discussion of certain U.S. laws and regulations generally applicable to our operations.
Reimbursement Changes Related to COVID-19:
U.S. Federal Stimulus Funds and Financial Assistance for Healthcare Providers. In response to the pandemic, Congress has enacted a series of economic stimulus and relief measures. On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory’s Medicaid Federal Medical Assistance Percentage (“FMAP”) effective January 1, 2020. The temporary FMAP increase was set to extend through the last day of the calendar quarter in which the public health emergency terminates. In exchange for receiving the enhanced federal funding, the FFCRA included a requirement that Medicaid programs keep beneficiaries enrolled through the end of the month in which the public health emergency terminates. However, as part of the Consolidated Appropriations Act of 2023 signed into law on December 29, 2022, Congress decoupled the Medicaid continuous enrollment from the public health emergency and terminates this provision effective March 31, 2023. Additionally, starting April 1, 2023, states that comply with federal rules regarding conducting renewals may begin the phase-down of the enhanced federal funding according to the following schedule: 6.2 percentage points through March 2023; 5 percentage points through June 2023; 2.5 percentage points through September 2023 and 1.5 percentage points through December 2023. States cannot restrict eligibility standards, methodologies, and procedures and states cannot increase premiums as required in FFCRA. Primarily due to the continuous enrollment provision, Medicaid enrollment has grown substantially compared to before the pandemic and the uninsured rate has dropped. The extent to which this increase in Medicaid enrollment is sustained following the discontinuation of the continuous enrollment provision is uncertain.
In further response to the pandemic, the CARES Act authorized approximately $178 billion to be distributed through the Provider Relief Fund to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that were attributable to coronavirus. Funds have been allocated since 2020 in targeted and general distributions, the latter over four phases. In September 2021, HHS announced the release of $25.5 billion in phase four provider funding, including $17 billion of the $178 billion previously authorized through the CARES Act and $8.5 billion for rural providers, including those with Medicaid and Medicare patients, through the American Rescue Plan Act, with payments that began in December 2021. The Provider Relief Fund is administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. We do not expect our operators will receive additional funding from HHS.
The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments are loans that providers were scheduled to repay beginning one year from the issuance date of each provider’s or supplier’s accelerated or advance payment, with repayment made through automatic recoupment of 25% of Medicare payments otherwise owed to the provider or supplier for eleven months, followed by an increase to 50% for another six months, after which any outstanding balance would be repaid subject to an interest rate of 4%. We believe these repayments commenced for many of our operators in April 2021 and have adversely impacted operating cash flows of these operators. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020 through December 31, 2020 to December 31, 2021 with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022.
The Budget Control Act of 2011 established a Medicare Sequestration of 2%, which is an automatic reduction of certain federal spending as a budget enforcement tool. Originally, the sequester was supposed to be in effect from FY 2013 to FY 2021. However, most recently, the Infrastructure Investment and Jobs Act extended the sequester through FY 2031. Additional legislation, including the CARES Act and the Protecting Medicare and American Farmers Act, suspended the application of the sequester to Medicare from May 1, 2020 through March 30, 2022. It also limited Medicare reductions to 1% from April 1, 2022 through June 30, 2022. The full 2% Medicare sequestration went into effect as of July 1, 2022. The sequestration is currently extended through fiscal year 2031, and gradually increases to 4% from 2030 through 2031.
Quality of Care Initiatives and Additional Requirements Related to COVID-19. In addition to COVID-19 reimbursement changes, several regulatory initiatives announced from 2020 to 2022 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. In August 2021, CMS announced it was developing an emergency regulation requiring staff vaccinations within the nation’s more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS further announced that the scope of the regulation would be expanded to include workers in hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. In addition, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds, the implementation of new quality measures and the inclusion of a staff turnover percentage (over a 12-month period). Although the American Rescue Plan Act did not allocate specific funds directly to SNF or ALF providers, certain funds were allocated to states who then distributed a portion of these funds to SNF and ALF providers. In addition, the American Rescue Plan Act allocated funds to quality improvement organizations to provide infection control and vaccination uptake support to SNFs and to the CDC for staffing, training and deployment of state-based nursing home and long-term care “strike teams” to assist facilities with known or suspected COVID-19 outbreaks. Additionally, the Biden Administration announced a focus on implementing minimum staffing requirements and increased inspections as part of the nursing home reforms announced in the 2022 State of the Union Address, and in July 2022, CMS announced it was evaluating a proposed federal staffing mandate for SNFs. It is uncertain whether such a mandate will be implemented and, if it is, whether it will be accompanied by additional funding to offset any increased staffing requirements for our operators; an unfunded mandate to increase staff in SNFs may have a material and adverse impact on the financial condition of our operators.
On June 16, 2020, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020, 2021 and 2022. In March 2021, the Oversight Subcommittee of the House Ways and Means Committee held a hearing on examining the impact of private equity in the U.S. healthcare system, including the impact on quality of care provided within the skilled nursing industry. The Biden Administration additionally announced in March 2022 a focus on reviewing private equity investment specifically in the skilled nursing sector. These initiatives, as well as additional calls for government review of the role of private equity in the U.S. healthcare industry, could result in additional requirements on our operators.
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Reimbursement Generally:
Medicaid. Most of our SNF operators derive a substantial portion of their revenue from state Medicaid programs. Whether and to what extent the level of Medicaid reimbursement covers the actual cost to care for a Medicaid eligible resident varies by state. While periodic rate setting occurs and, in most cases, has an inflationary component, the state rate setting process not always keep pace with inflation or, even if it does, there is a risk that is may still not be sufficient to cover all or a substantial portion of the cost to care for Medicaid eligible residents. Additionally, rate setting is also subject to changes based on state budgetary constraints and political factors, both of which could result in decreased or insufficient reimbursement to the industry even in an environment where costs are rising. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past, and may in the future, adversely affect our operators’ results of operations and financial condition, which in turn could adversely impact us.
The CARES Act and American Rescue Plan Act contained several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. While the CARES Act provided for a 6.2% FMAP add-on to the Medicaid program during the PHE, only certain states passed any of that specifically on to SNF operators either via an enhanced rate or lump sum payments. Additionally, the American Rescue Plan Act provided for a 10% FMAP add-on for state home and community-based service expenditures from April 1, 2021 through March 30, 2022 in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. Both of these programs came with conditions that states had to meet to eligible for the FMAP add-on. There may be future initiatives proposed to allocate funding available for reimbursement away from SNFs in favor of home health agencies and community-based care.
The risks of insufficient Medicaid reimbursement rates along with possible initiatives to push residents historically cared for in SNFs to alternative settings may impact us more acutely in states where we have a larger presence. We continue to monitor rate adjustment activity in other states in which we have a meaningful presence, and it is too early to assess whether rates will generally keep pace with increased operator costs.
Medicare. On July 29, 2022, CMS issued a final rule regarding the government fiscal year 2023 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $904 million, or 2.7%, for fiscal year 2023 compared to fiscal year 2022. This estimated reimbursement increase is attributable to a 3.9% market basket increase factor plus a 1.5 percentage point market basket forecast error adjustment and less a 0.3 percentage point productivity adjustment, as well as a $780 million decrease in the SNF prospective payment system rates as a result of the recalibrated parity adjustment described below, which is being phased in over two years. The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program. CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions that are estimated to be $186 million in fiscal year 2023. While Medicare reimbursement rate setting, which takes effect annually each October, has historically included forecasted inflationary adjustments, the degree to which those forecasts accurately reflect current inflation rates remains uncertain. Additionally, it remains uncertain whether these adjustments will ultimately be offset by non-inflationary factors, including any adjustments related to the impact of various payment models, such as those described below.
Payments to providers continue to be increasingly tied to quality and efficiency. The Patient Driven Payment Model (“PDPM”), which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019. CMS has stated that it intended PDPM to be revenue-neutral to operators, with future Medicare reimbursement reductions possible if that was not the case. In April 2022, CMS issued a proposal for comment, which included an adjustment to obtain that revenue neutrality as early as the 2023 rate setting period. After considering the feedback received in the rulemaking cycle, CMS finalized recalibration of the PDPM parity adjustment factor of 4.6% with a two-year phase-in period that would reduce SNF spending by 2.3%, or approximately $780 million, in each of fiscal years 2023 and 2024. Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results. Given the ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits. Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value-based purchasing programs applicable to SNFs under the 2014 Protecting Access to Medicare Act. These reimbursement changes have had and may, together with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to the list of approved telehealth Providers for the Medicare Part B programs provided by a SNF as a part of the COVID-19 1135 waiver provisions. The COVID-19 1135 waiver provisions also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through May 11, 2023, the scheduled end of the public health emergency.
Other Regulation:
Office of the Inspector General Activities. The Office of Inspector General (“OIG”) of HHS has provided long-standing guidance for SNFs regarding compliance with federal fraud and abuse laws. More recently, the OIG has conducted increased oversight activities and issued additional guidance regarding its findings related to identified problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes and SNFs. The OIG has additionally reviewed the staffing levels reported by SNFs as part of its August 2018 and February 2019 Work Plan updates and included a review of involuntary transfers and discharges from nursing homes in the June 2019 Work Plan updates. In August 2020, the OIG released its findings regarding its review of staffing levels in SNFs from 2018. The OIG recommended that CMS enhance efforts to ensure nursing homes meet daily staffing requirements and explore ways to provide consumers with additional information on nursing homes’ daily staffing levels and variability. The OIG indicated that while the review was initiated before the COVID-19 pandemic emerged, the pandemic reinforces the importance of sufficient staffing for nursing homes, as inadequate staffing can make it more difficult for nursing homes to respond to infectious disease outbreaks like COVID-19. It is unknown what impact, if any, enhanced scrutiny of staffing levels by OIG and CMS will have on our operators.
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Department of Justice and Other Enforcement Actions. SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility. The Department of Justice (“DOJ”) has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. For example, California prosecutors announced in March 2021 an investigation into a skilled nursing provider that is affiliated with one of our operators, alleging the chain manipulated the submission of staffing level data in order to improve its Five Star rating. In 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies. Such enforcement activities are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these enforcement activities or investigations incurred by our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on their reputation, business, results of operations and cash flows.
Medicare and Medicaid Program Audits. Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our operators’ billing practices from time to time. CMS contracts with Recovery Audit Contractors on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program. Regional Recovery Audit Contractor program auditors along with the OIG and DOJ are expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges. CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments. In addition, the state Medicaid agencies and other contractors have increased their review activities. To the extent any of our operators are found out of compliance with any of these laws, regulations or programs, their financial position and results of operations can be adversely impacted, which in turn could adversely impact us.
Fraud and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.
These laws include: (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs; (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid Anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, such as services provided in a SNF; (iii) federal and state physician self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated health services (some of which are provided in SNFs) with which the physician or an immediate family member has a financial relationship; (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information.
Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or whistleblower actions, which have become more frequent in recent years.
Privacy:
We and our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder (collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights (“OCR”). Additionally, in a final rule issued in January 2013, HHS modified the standard for determining whether a breach has occurred by creating a presumption that any non-permitted acquisition, access, use or disclosure of protected health information is a breach unless the covered entity or business associate can demonstrate through a risk assessment that there is a low probability that the information has been compromised.
Various states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators found in violation of HIPAA or any other privacy law or regulation may face significant monetary penalties. In addition, compliance with an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational harm to an operator’s business.
Licensing and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’ facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.
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Other Laws and Regulations. Additional federal, state and local laws and regulations affect how we conduct our operations, including laws and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; the Americans with Disabilities Act (the “ADA”), which imposes certain requirements to make facilities accessible to persons with disabilities, the costs for which we may be directly or indirectly responsible; the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform Law”), which amended requirements for staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others; staffing; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and health standards, including those set by the federal Occupational Safety and Health Administration (in the U.S.). It is anticipated that our operators will continue to face additional federal and state regulatory requirements related to the operation of their facilities in response to the COVID-19 pandemic. These requirements may continue to evolve and develop over lengthy periods of time.
General and Professional Liability. Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long-term care providers, there have been numerous lawsuits in recent years challenging the validity of arbitration agreements in long-term care settings. On July 16, 2019, CMS issued a final rule lifting the prohibition on pre-dispute arbitration agreements offered to residents at the time of admission provided that certain requirements are met. The rule prohibits providers from requiring residents to sign binding arbitration agreements as a condition for receiving care and requires that the agreements specifically grant residents the explicit right to rescind the agreement within thirty calendar days of signing. A number of professional liability and employment related claims have been filed or are threatened to be filed against long-term care providers related to COVID-19. While such claims may be subject to liability protection provisions within various state executive orders or legislation and/or federal legislation, an adverse resolution of any of legal proceeding or investigations against our operators may involve injunctive relief and/or substantial monetary penalties, either or both of which could have a material adverse effect on our operators’ reputation, business, results of operations and cash flows.
Environmental, Social and Governance (“ESG”)
We prioritize environmental, social and governance initiatives that matter most to our business and shareholders. Our Nominating and Corporate Governance Committee of our Board of Directors has been charged with primary oversight of our sustainability efforts.
As a triple-net landlord at two of our facilities, our third-party operators maintain operational control and responsibility for our real estate on a day-to-day basis. While our ability to mandate environmental changes to their operations is limited, our tenants are contractually bound to preserve and maintain our properties in good working order and condition. In connection with this, they are required to meet or exceed annual expenditure thresholds on capital improvements and enhancements of our properties, which in some cases may facilitate improvements in the environmental performance of our properties and reduces energy usage, water usage, and direct and indirect greenhouse gas emissions. The goal is to incentivize operators to invest in sustainable capital projects that provide a favorable return on investment while reducing the environmental footprint of these operations. Our due diligence on real estate acquisitions generally includes environmental assessments as part of our analysis to understand the environmental condition of the property, and to determine whether the property meets certain environmental standards. Similarly, during the due diligence process, we seek to evaluate the risk of physical, natural disaster or extreme weather patterns on the properties we are looking to acquire and to assess their compliance with building codes, which often results in remediations that incorporate sustainable improvements into our properties.
We are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of the communities in which our employees live and work. See also “Human Capital Management” immediately below.
Human Capital Management
Our success is based on the focused passion and dedication of our people. We believe our employees’ commitment to our Company provides better service to our tenants and stakeholders, supports an inclusive and collegial working environment and generates long-term value for our shareholders and the communities which we serve. As of February 1, 2023, we had 655 employees including the executive officers listed below, none of whom is subject to a collective bargaining agreement. Due to the size and nature of our business, our future performance depends to a significant degree upon the continued contributions of our executive management team and other key employees. As such, the ability to attract, develop and retain qualified personnel will continue to be important to the Company’s long-term success.
We have a long-standing commitment to being an equal opportunity employer. The Company has expanded its recruitment practices to reach more diverse candidates for employment and Board positions and has developed an internship program with a focus on increasing diversity in the pipeline of eligible employees. The Company requires employees and Board members to certify its Code of Business Conduct & Ethics periodically, and from time to time, conducts compliance training for all employees and Directors, including diversity and inclusion training. As of February 1, 2023, at the executive level, one of the Company’s four executive officers was a woman, and on the senior management team, 82% are women and 36% bring ethnic diversity to the team. We regularly conduct pay equity reviews as we seek for women and men, on average, at various roles and levels of the Company, to be paid equitably for their roles and contributions to our success.
We are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of the communities in which our employees live and work. Our full-time employees are provided a competitive benefits program, the opportunity to participate in our employee stock purchase program, bonus and incentive pay opportunities, competitive paid time-off benefits and paid parental leave, wellness programs, continuing education and development opportunities, and periodic engagement surveys. In addition, we believe that giving back to our community is an extension of our mission to improve the lives of our stockholders, our employees, and their families.
EMPLOYEES
As of December 31, 2022, the Company and its subsidiaries had 671 employees. The Company also engages the services of consultants from time to time, some of which may be provided by affiliates of the Company at no cost.
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| ITEM 1A. | RISK FACTORS |
The COVID-19 pandemic has subjected our business, operations, and financial condition to several risks, including, but not limited to, those discussed below:
| ● | Risks Related to Revenue: The revenues from our operations and from our tenants are dependent on occupancy. All facilities must maintain a minimum viable resident count to ensure costs do not exceed revenues. 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. |
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| ● | Risks Related to Operations: Across all of our properties, our operations and our tenants 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 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. 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 may be adversely impacted if a significant number of our employees’ 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. 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. |
| ● | 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 experienced 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.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
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| ITEM 2. | PROPERTIES |
As of December 31, 2022, we owned thirteen (13) long-term care facilities including a campus of three buildings in Tulsa, OK. The following table provides summary information regarding these facilities at December 31, 2022:
| Total Square Feet | # of Beds | |||||||||||||||||||||||||||
State |
Properties |
Operations | Leased Operations | Operating Square Feet | Leased Square Feet | Operating Beds | Leased Beds | |||||||||||||||||||||
| Arkansas | 1 | - | 1 | - | 40,737 | - | 141 | |||||||||||||||||||||
| Georgia | 5 | 4 | 1 | 78,197 | 46,199 | 454 | 100 | |||||||||||||||||||||
| Ohio | 1 | 1 | - | 27,500 | - | 99 | - | |||||||||||||||||||||
| Oklahoma | 6 | 6 | - | 162,976 | - | 351 | - | |||||||||||||||||||||
| Total | 13 | 11 | 2 | 268,673 | 86,936 | 904 | 241 | |||||||||||||||||||||
| ITEM 3. | 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.
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’s 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 for which complaint was made. 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. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
Lawson v. C.R.M of Warrenton, LLC d/b/a Warrenton Health and Rehab; ATL/WARR, LLC; Selectis Warrenton, LLC, et.al., Superior Court of Warren County, State of Georgia, Civil Action No. 23CV0076.
This is a personal injury lawsuit filed on June 14, 2023 against various defendants arising out of the death of a patient of the Warrenton Health and Rehab Facility located in Warren, Georgia (the “Facility”). The Facility is owned by the Company’s wholly-owned subsidiary ATL/Warr, LLC. At all relevant times, the Facility was leased and operated by a third party C.R.M. Warrenton, LLC under an operating lease. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. Subsequent to the patient care complained of the Company entered into an Operations Transfer Agreement with the lease operator and assumed operating control of the Facility through a new subsidiary, Selectis Warrenton, LLC. The Company believes its exposure in this matter is de minimus and has referred the litigation to its insurance company for management.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Outstanding shares of the Company’s common stock are traded over the counter and quoted on the OTC. Pink under the symbol “GBCS”. The reported high and low bid and ask prices for the common stock are shown below for the period from January 1, 2021 through December 31, 2022. All prices give retroactive effect to a one-for-ten reverse split which was effective in September 2021.
| High | Low | |||||||
| Jan – Mar 2021 | $ | 6.90 | $ | 4.60 | ||||
| Apr – June 2021 | $ | 7.40 | $ | 4.10 | ||||
| July – Sept 2021 | $ | 8.70 | $ | 0.65 | ||||
| Oct – Dec 2021 | $ | 7.50 | $ | 5.61 | ||||
| Jan – Mar 2022 | $ | 7.72 | $ | 6.40 | ||||
| Apr – June 2022 | $ | 7.32 | $ | 4.50 | ||||
| July – Sept 2022 | $ | 6.30 | $ | 4.55 | ||||
| Oct – Dec 2022 | $ | 6.00 | $ | 1.00 | ||||
Since July 20, 2022, due to the Company being delinquent in its SEC reporting, the Company’s common stock is eligible for Unsolicited Quotes Only. The stock is traded on the Expert Market only, which is not eligible for public viewing. The Company expects that its common stock will resume being quoted on the OTC once it has brought its SEC reporting current.
The OTC.Pink prices are bid and ask prices which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commissions to the broker-dealer. The prices do not reflect prices in actual transactions. As of May 31, 2022, there were approximately 93 record owners of the Company’s common stock not including stock held in street name.
The OTC.Pink is a quotation service that displays real-time quotes, last sale prices and volume information in over the counter (OTC) securities. An OTC equity security generally is any equity that is not listed or traded on any national securities exchange. The OTC.Pink is not an issuer listing service, market, or exchange. Although the OTC.Pink does not have any listing requirements, per se, to be eligible for quotation on the OTC.Pink, issuers must remain current in their filings with the SEC or applicable regulatory authority.
The Company’s Board of Directors may declare and pay dividends on outstanding shares of common stock out of funds legally available therefore in its sole discretion. For the years ended December 31, 2022, and 2021, the Company paid no dividends on common stock but did pay the 8% dividends on our outstanding shares of Series D Preferred Stock. Future dividends on our common stock will be authorized at the discretion of our Board of Directors and will depend on our actual cash flow, financial condition, capital requirements, and other factors as our Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
None, except as previously reported on Forms 8-K.
EQUITY COMPENSATION PLAN INFORMATION
In May 2021, the Company adopted its 2021 Equity Incentive Plan and authorized an aggregate of 300,000 shares of Common Stock to be issued pursuant to rights granted under the Plan. As of the date of this Report, no options, SAR’s or other rights to acquire shares of Common Stock under the Plan had been granted or are outstanding.
| ITEM 6. | [Reserved] |
Not applicable.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Impact of COVID-19 Pandemic
The extent to which the COVID-19 pandemic impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future, including but not limited to, the following:
| ● | Our operating revenues and our triple-net operators’ revenues are dependent on occupancy. Declines in occupancy are expected due to heightened move-in criteria and screening, as well as increased mortality rates among seniors. In addition, increased expenses are expected to continue until the pandemic subsides. Such factors may impact our triple-net operator’s ability to pay rent and contractual obligations. Furthermore, various local and state stay at home orders and the temporary closure of certain medical practices as a result may impact our medical office building tenants’ ability to pay rent. These factors may cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables. |
| 18 |
| ● | Assessing properties for potential impairment involves subjectivity in determining if impairment indicators are present and in estimating the future undiscounted cash flows or estimated fair value of the asset. Key assumptions are made in this assessment and drive conclusions include the estimation of future rental revenues, operating expenses, capitalization rates and the ability and intent to hold the respective asset. All of these assumptions are significantly affected by our expectations of future market or economic conditions and can be highly impacted by the uncertainty of the COVID-19 pandemic. |
| ● | The determination of the allowance for credit losses is based on our evaluation of collectability of our loans receivable and includes review of factors such as delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and the value of the underlying collateral. Reduced economic activity severely impacts our borrowers’ businesses, financial conditions and liquidity and may hinder their ability to make contractual payments to us, leading to an increase in loans deemed to have deteriorated credit which could result in an increase in the provision for loan losses. |
RESULTS OF OPERATIONS
Rental revenue for the year ended December 31, 2022, totaled $591,808, compared to $626,808 for the year ended December 31, 2021, a decrease of $35,000. The Company also had Healthcare revenue of $36,735,683 for the year ended December 31, 2022, an increase of $9,814,136, compared to $26,921,547 for the year ended December 31, 2021. The Company also had Healthcare Grant revenue of $3,272,026 for the year ended December 31, 2022, an increase of $1,757,298, compared to $1,514,728 for the year ended December 31, 2021. Due to our concerted effort to focus on healthcare operations, our healthcare revenues are increasing. As we assume operations and purchase more facilities, we anticipate this trend to continue. As a result of this, our rental income will likely continue to decrease.
General and administrative expenses were $7,869,645 for the year ended December 31, 2022, compared to $5,911,934 for the year ended December 31, 2021, an increase of $1,957,711. This increase can be attributed to the Company operating more facilities, with the addition of the administration expenses within those operations. To support the healthcare operations management has increased our corporate support to continue to aid facilities in delivering world class care.
Property taxes, insurance, and other operating expenses totaled $29,859,250 and $21,473,397 for the years ended December 31, 2022, and 2021, respectively, an increase of $8,385,853. This increase can be attributed to the Company operating additional facilities compared to the previous year.
Expenses related to the provision for bad debt were $1,364,354 for the year ended December 31, 2022, and $897,538 for the year ended December 31, 2021, an increase of $466,816. This increase is due to the Company’s growth in healthcare revenue.
Depreciation and amortization expense totaled $1,792,840 for the year ended December 31, 2022, compared to $1,733,349 for the year ended December 31, 2021, an increase of $59,491. This increase is related to an increase in our plant, property, and equipment, compared to the same period in the prior year.
The Company had $2,231,233 of net interest expense for the year ended December 31, 2022, and $2,497,893 of net interest expense for the year ended December 31, 2021. This decrease is related to the refinancing mortgages during the year ended December 31, 2021.
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For the years ended December 31, 2022 and 2021, we recorded loss on extinguishment of debt of $46,466 and $65,623, respectively. During 2021, the Company recorded an aggregate gain on extinguishment of debt of $675,598 in connection with the forgiveness of the entire balance of principal and accrued interest on the remaining PPP loan.
The Company had $258,943 of lease termination expense for the year ended December 31, 2021, as a result of the termination of two leases. This rent had been recognized on a straight-line basis.
LIQUIDITY AND CAPITAL RESOURCES
Through its history, the Company has experienced shortages in working capital and has relied, from time to time, upon sales of debt and equity securities to meet cash demands generated by our acquisition activities.
At December 31, 2022, the Company had cash and cash equivalents of $1,420,200 and restricted cash of $996,400. Our restricted cash is to be expended on insurance, taxes, repairs, and capital expenditures associated with Providence of Sparta Nursing Home or Warrenton Health and Rehab. 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 healthcare operations, rental revenues received, and existing cash on hand. We have successfully refinanced all mortgage that matured in the 2021 and 2022 fiscal years.
Cash used in operating activities was $305,148 for the year ended December 31, 2022, compared to $270,930 for the year ended December 31, 2021. Healthcare revenue was adversely affected by COVID-19 which increased costs and decreased our census.
Cash used in investing activities was $222,361 for the year ended December 31, 2022, compared to $519,575 for the year ended December 31, 2021. Purchases of property and equipment decreased during the year ended December 31, 2022 compared to the prior year.
Cash used in financing activities was $1,848,992 for the year ended December 31, 2022, compared to cash provided by financing activities of $1,605,303 for the year ended December 31, 2021. During the year ended December 31, 2022, we made payments on long-term debt. During the year ended December 31, 2021, we received proceeds from the private placement of debt and a stock offering that exceeded payments made on long-term debt.
In accordance with ASU 2014-15 management believes the Company has sufficient liquidity and capital resources to maintain ongoing operations. This is, in part due to refinancing debt to more favorable terms, the continued optimization of our operations in our current facilities and anticipated increases in state Medicaid reimbursement rates. Based on management’s projections, the Company is expected to generate positive cash flows from its continued operations.
The focus on opportunities within our current portfolio and future properties to acquire and operate, the settlement, refinance, and continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing to additional working capital should alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively impact our future operations.
The CARES Act provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee through December 31, 2020. Additional relief provisions were passed by the United States government, which extend and slightly expand the qualified wage caps on these credits through December 31, 2021. Based on these additional provisions, the tax credit is now equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee has been increased to $10,000 of qualified wages per quarter. The Company qualified for the tax credit under the CARES Act for qualified wages for the years ended December 31, 2020 and 2021. In February 2023, the Company submitted filings for CARES Employee Retention Credits totaling $6,350,532 and expects to receive the credits within twelve months of filing submission.
| 20 |
As of December 31, 2022, and 2021, our debt balances consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Senior Secured Promissory Notes | $ | 1,025,000 | $ | 1,305,000 | ||||
| Senior Secured Promissory Notes - Related Parties | 750,000 | 750,000 | ||||||
| Fixed-Rate Mortgage Loans | 30,568,677 | 31,407,503 | ||||||
| Variable-Rate Mortgage Loans | 4,879,462 | 5,063,841 | ||||||
| Other Debt, Subordinated Secured | 741,000 | 741,000 | ||||||
| Other Debt, Subordinated Secured - Related Parties | 150,000 | 150,000 | ||||||
| Other Debt, Subordinated Secured - Seller Financing | 56,051 | 93,251 | ||||||
| Financed Insurance Premiums | 235,125 | - | ||||||
| 38,405,315 | 39,510,595 | |||||||
| Unamortized Discount and Debt Issuance Costs | (810,997 | ) | (1,243,071 | ) | ||||
| $ | 37,594,318 | $ | 38,267,524 | |||||
| As presented in the Consolidated Balance Sheets: | ||||||||
| Current Maturities of Long-Term Debt, Net | $ | 2,296,830 | $ | 6,312,562 | ||||
| Short Term Debt – Related Parties, Net | 900,000 | 150,000 | ||||||
| Debt, Net | 34,397,488 | 31,054,962 | ||||||
| Debt - Related Parties, Net | - | 750,000 | ||||||
The weighted average interest rate and term of our fixed rate debt are 3.87 % and 12.83 years, respectively, as of December 31, 2022. The weighted average interest rate and term of our fixed rate debt were 3.53% and 15.25 years, respectively, as of December 31, 2021.
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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, a formerly but no longer related party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following:
| Number of | Total Face | Total Principal Outstanding as of | ||||||||||||||
| State | Properties | Amount | December 31, 2022 | December 31, 2021 | ||||||||||||
| Arkansas(1) | 1 | $ | 5,000,000 | $ | 3,910,767 | $ | 4,058,338 | |||||||||
| Georgia | 5 | $ | 17,765,992 | $ | 16,019,874 | $ | 16,581,283 | |||||||||
| Ohio | 1 | $ | 3,000,000 | $ | 2,649,400 | $ | 2,728,599 | |||||||||
| Oklahoma(2)(3) | 6 | $ | 13,181,325 | $ | 12,868,098 | $ | 11,823,385 | |||||||||
| 13 | $ | 38,947,317 | $ | 35,448,139 | $ | 35,191,605 | ||||||||||
| (1) | The mortgage loan collateralized by this property 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. Guarantors under the mortgage loan include Christopher Brogdon. Mr. Brogdon has assumed operations of the facility and is making payments of principal and interest on the loan on our behalf in lieu of paying rent on the facility to us, until a formal lease can be put in place. During the year ended December 31, 2021, the Company recognized other income of $521,400 for repayments on the loan. |
| (2) | The Company has refinanced two of its mortgages that would have matured in June and October of 2021 amounting to $2,961,167 and $3,289,595, to extend their maturity dates to May 2024 for both. |
| (3) | The Company refinanced all three mortgages in July 2021, that would have matured in June and July of 2021 amounting to $2,065,969 and $750,000, $500,000, to extend their maturity dates to June 2027 for all three. Additionally, the Company has refinanced the primary mortgage at the Southern Hills Campus, for 35 years at 2.38%. |
Subordinated, Corporate, and Other Debt
Other debt due at December 31, 2022 and 2021 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.
| Total Principal Outstanding as of | Stated | Maturity | ||||||||||||||||
| Property | Face Amount | December 31, 2022 | December 31, 2021 | Interest Rate | Date | |||||||||||||
| Goodwill Nursing Home | $ | 2,030,000 | $ | 741,000 | $ | 741,000 | 13% Fixed | 1-Apr-24 | ||||||||||
| Goodwill Nursing Home – Related Party | $ | 150,000 | 150,000 | 150,000 | 13% Fixed | 30-Nov-25 | ||||||||||||
| Higher Call Nursing Center | 150,000 | 56,051 | 93,251 | 8% Fixed | 1-Apr-24 | |||||||||||||
| $ | 2,330,000 | $ | 947,051 | $ | 984,251 | |||||||||||||
Our corporate debt at December 31, 2022 and 2021 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
| Total Principal Outstanding as of | Stated | Maturity | ||||||||||||||||
| Series | Face Amount | December 31, 2022 | December 31, 2021 | Interest Rate | Date | |||||||||||||
| 10% Senior Secured Promissory Notes | $ | 1,255,000 | $ | 1,025,000 | $ | 1,230,000 | 10% Fixed | 30-Jun-23 | ||||||||||
| 10% Senior Secured Promissory Notes – Related Party | $ | 750,000 | 750,000 | 750,000 | 10% Fixed | 30-Jun-23 | ||||||||||||
| $ | 2,005,000 | $ | 1,775,000 | $ | 1,980,000 | |||||||||||||
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Contractual Obligations
As of December 31, 2022, we had the following contractual debt obligations:
| Less Than | More Than | |||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 3 - 5 Years | 5 Years | ||||||||||||||||
| Notes Payable - Principal | $ | 38,405,914 | $ | 3,252,810 | $ | 15,828,454 | $ | 3,868,234 | $ | 15,456,417 | ||||||||||
| Notes Payable - Interest | $ | 10,974,188 | 1,601,975 | 2,038,811 | 1,322,934 | 6,010,469 | ||||||||||||||
| Total Contractual Obligations | $ | 49,381,103 | $ | 4,854,785 | $ | 17,867,264 | $ | 5,191,168 | $ | 21,466,885 | ||||||||||
Revenues from operations are sufficient to meet the working capital needs of the Company for the foreseeable future. Cash on hand and revenues generated from operations are in excess of operating expenses and debt service requirements. Debt maturities are expected to be refinanced at reasonable terms upon maturity. The Company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. Except for renovations at Retirement Center, there are no material capital improvement or recurring capital expenditure commitments at the properties.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we consider material.
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SUMMARY OF CRITICAL ACCOUNTING POLICIES
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.
Property Acquisitions
We allocate the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence period. Acquisition-related costs such as due diligence, legal and accounting fees are included in the purchase price. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Business Acquisitions
Upon acquisition of business entities and real estate determined to be a business combination, the Company identifies and recognizes the net tangible and identified intangible assets based on fair values, and net assets as goodwill or gain on bargain purchase. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing, leasing, and or operating at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition, and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties using standard industry valuation techniques.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related fair value.
Revenue Recognition
The Company recognizes revenue in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. Under the accounting guidance our revenues are presented net of estimated allowances, and we no longer present the contractual allowance as a separate line item on our balance sheet.
The Company reviews its calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing for the uncollectible portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly with a greater emphasis given to current trends. This calculation is routinely analyzed by the Company based on actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.
Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, and Medicaid) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare, and Medicaid). Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member.
| 24 |
Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care are based upon the payment terms specified in the related contractual agreements.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process).
The collection of outstanding receivables for Medicare, and Medicaid, is our primary source of cash and is critical to our operating performance. The primary collection risks relate to Medicaid pending patient accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and write-off data. We believe our quarterly updates to the estimated contractual allowance amounts at each of our facilities provide reasonable estimates of our revenues and valuations of our accounts receivable.
In accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that are a direct reduction to net operating revenues. For the year ended December 31, 2022 the uncollectable amounts recognized as a reduction to net operating revenues totaled $510,939. During the years ended December 31, 2022 and 2021 the Company recognized $3,272,026, and $1,514,728, respectively in Healthcare Grant revenue.
| 25 |
Subsequent Events
The CARES Act provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee through December 31, 2020. Additional relief provisions were passed by the United States government, which extend and slightly expand the qualified wage caps on these credits through December 31, 2021. Based on these additional provisions, the tax credit is now equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee has been increased to $10,000 of qualified wages per quarter. The Company qualified for the tax credit under the CARES Act for qualified wages for the years ended December 31, 2020 and 2021. In February 2023, the Company submitted filings for CARES Employee Retention Credits totaling $6,350,532 and expects to receive the credits within twelve months of filing submission.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the index included at Item 15. Exhibits, Financial Statement Schedules.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
As previously reported on Form 8-K, effective October 4, 2022, the Company’s Board of Directors, acting as an Audit Committee which has not been separately appointed, approved the appointment of Marcum, LLP to serve as the Company’s independent registered public accounting firm. Prior to its engagement as the Company’s independent registered public accounting firm the Company had not consulted Marcum, LLP with respect to the application of accounting principles to specific transactions or the type of audit opinion that might be rendered on the Company’s financial statements.
The Company’s former independent registered public accountants, Haynie & Company, audited the Company’s financial statements through year ended December 31, 2021.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this Report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, relating to the Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
Conclusion Regarding the Effectiveness of Disclosure 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.
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Our management, including our CEO and CFO, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Management is committed to accurate and ethical business practices. Based on our evaluation, management concluded that our disclosure controls and procedures were not effective as of December 31, 2022 due to material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Management noted the following deficiencies that we believe to be material weaknesses:
| ● | Inadequate design of information technology (IT) general and application controls resulting from inappropriate access given to certain individuals within finance, including the CFO and Controller; | |
| ● | Lack of segregation of duties in certain accounting and financial reporting processes including the initiation, processing, recording and approval of disbursements; and | |
| ● | Lack of a formal review process that includes multiple levels of review as well as timely review of accounts and reconciliations leading to material post-closing adjustments. |
Management also noted the following deficiencies that we believe to be significant deficiencies:
| ● | Lack of documentation of processes and controls at the level appropriate for a public company; | |
| ● | Inadequate design of IT controls to mitigate potential cybersecurity risks; and | |
| ● | The Chief Financial Officer reviews and inquire about the related party transactions regularly, not less than quarterly, and the transactions are approved by senior management. However, there is no formalized, documented process (checklist or signoff) for identifying or approving by executive management and/or the board of directors on related party transactions prior to the transactions being executed. |
Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our system of internal control. Therefore, while there are some compensating controls in place, it is difficult to ensure effective segregation of accounting and financial reporting duties.
Management’s view is that unethical, illegal, or inaccurate conduct in the operations and accounting for the Company violates the trust and integrity of the Company and is damaging to the interests of all stakeholders, and in the long-term misconduct injures the interests of even the individual whom it might initially benefit. This is reinforced periodically with informal conversations and is ingrained in the culture of the Company. When questions arise, they are escalated to the CFO, General Counsel, CEO, President, or Board for review, investigation, direction, and consensus, and external opinion is sought if consensus is not achieved. The Controller and CFO both have direct contact with all levels of review. The Company plans to implement multi-level review in 2023, and management intends to work internally and with various third-parties to ensure we have the proper controls in place going forward.
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This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the SEC rules that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
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 fiscal quarter ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
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 all positions with the Company, including as a Director, President, and CFO of the Company. Effective October 1, 2020, the Company entered into a consulting agreement with Mr. Rhine. In mid- December 2020, the Company advised Mr. Rhine that it would not be renewing his consulting agreement beyond the termination date. The Company has discovered several matters involving a financial benefit undertaken by Mr. Rhine that had previously been unknown by the other members of the Board and were unauthorized by the Company. The Company is doing a thorough investigation into Mr. Rhine’s actions both as a former employee and subsequently as a consultant to determine the full and exact nature and extent of any unauthorized conduct.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION |
Not applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors and Executive Officers
The name, position with the Company, age of each Director and executive officer of the Company is as follows:
| Name | Age | Position | Director/Officer Since | |||||
| Lance Baller | 48 | Chairman,CEO | 2015 | |||||
| Adam Desmond | 52 | Director | 2017 | |||||
| Andy Sink | 54 | Director | 2022 | |||||
| David Furstenberg | 61 | Director | 2022 |
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Lance Baller serves as a director and sole or principal shareholder of several privately owned businesses, including Baller Enterprises, Inc. (personal holding company), Titan Au, Inc, Empire Leasing LLC, Valdez Au, Inc, Extrac, Inc, Yukon Au, LLC (which all are in gold, sand, rock, and gravel mining), Ultimate Investment Corp. Inc (personal investment company) and Baller Family Foundation, Inc. (personal family foundation). He is also the co-founder, former CEO and President of Iofina plc, a technology leader in the production of iodine and iodine derivatives, where he continues to serve as Non- executive Chairman. He is the former managing partner of Shortline Equity Partners, Inc. (2004 to 2010), a mid-market merger and acquisitions consulting and investment company. Mr. Baller is also the former Managing Partner of Elevation Capital Management, LLC (2005 to 2010) and is the former alternative investment hedge fund manager of the Elevation Fund. He is also a former Vice-President of Corporate Development and Communications (2003 to 2004) of Integrated Biopharma, Inc. and prior to that a vice-president of the investment banking firms UBS and Morgan Stanley. Mr. Baller has been a CEO, interim CEO, Chairman, CFO and secretary of various private and public listed companies throughout his career. Mr. Baller has had extensive experience in all aspects of corporate finance. Mr. Baller currently is on the board of trustees of Index Fund and Digital Funds where he serves as the chairman of the audit committee and as the audit committee financial expert under Sarbanes-Oxley. Mr. Baller also sits on the Board of Real Colorado Soccer, Real Weld Metro District, and the Front Infrastructure Authority (FRIA).
Adam Desmond is the founder and CEO of Needle Rock Capital, an investment banking firm located in Carbondale, Colorado. Prior to founding Needle Rock Capital, Mr. Desmond founded ASG Securities in 1998 that focused exclusively on small/mid-cap banks and thrift markets. In 2004 ASG Securities became FIG Partners LLC which expanded the business from a sales and trading platform to a full-service investment banking firm. Mr. Desmond assembled a team of principals at Fig Partners that raised over $2.5 billion in equity since 2007 and completed more than 95 whole bank transactions throughout the United States, with offices in Chicago, Los Angeles, San Francisco, Dallas, New Jersey, and Charlotte, employing over 60 people. Mr. Desmond began his career at the Chicago Mercantile Exchange in the financial quadrant and went on to Raymond James and Associates where he helped develop a high yield fixed income department. Mr. Desmond enjoys supporting and servicing many charitable organizations, including helping fund the building of a school in the Philippines through St. Mary’s Catholic Church in Aspen, Colorado. Mr. Desmond is a graduate of the University of Wisconsin – Madison with a Bachelor of Arts in International Economics and Political Science.
David J. Furstenberg is a tax attorney and certified public accountant with expertise in tax research and planning, IRS and state audits, settlement negotiations, state and federal tax returns, accounting, software and auditor relations. Mr. Furstenberg served as the Director of Taxes at PulteGroup, Inc. (NYSE:PHM) in Bloomfield Hills, Michigan from 1997 to 2016 where he led the tax research and planning functions, including federal, state and international. From 1991 through 1996 he served in the capacities of Assistant Vice President-Taxes, Director of Taxes and Director of Federal Taxes for Handleman Company (NYSE: HDL) in Troy, Michigan. Mr. Furstenberg also served as an Associate Attorney for Levin, Levin, Garvett & Dill, PC in Southfield, Michigan and a Tax Consultant and Tax Associate at Price Waterhouse in Detroit, Michigan. In 1983 David obtained a B.A. in Accounting from Michigan State University and in 1986, a Juris Doctorate from Wayne State University Law School in Detroit, Michigan.
Andy Sink is the Co-Founder and Manager of Own Alabama, LLC (an Alabama based commercial real estate investment fund) and also the Managing Director of the Investment Advisory division and Principal for Colliers International | Alabama. His team provides investment property advisory, investment property brokerage, investment fund structuring and real estate investment management to high net worth families and individuals. His team also provides advisory services to privately held operating companies seeking to enhance enterprise value via various real estate strategies including sale leaseback and private fund structuring. Andy Sink has more than 30 years’ experience in the real estate industry with a broad range of expertise in real estate brokerage and investments. He has been involved in numerous investment transactions and development projects with an aggregate value in excess of $700 million. He has also created and managed six different private equity funds and three different private family investment funds with an aggregate value in excess of $100 Million. Andy earned a Bachelor of Science degree in Commerce and Business Administration with a major in real estate from The University of Alabama. Andy is a former member of the board of directors of Selectis Health, a current board of trustees’ member and Secretary of the Eyesight Foundation of Alabama. He is also a board member of Restoration Academy, an inner-city Christian school based in Fairfield Alabama and a member of the Monday Morning Quarterback Club.
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Family Relationships
None.
Board Meeting and Compensation
During the fiscal year ended December 31, 2022, meetings of the Board of Directors were held telephonically, and business of the board was also conducted by written unanimous consent. There were two meetings of the Board during 2022. A quorum was present at all Board meetings. Directors are entitled to reimbursement of their expenses associated with attendance at such meeting or otherwise incurred in connection with the discharge of their duties as a Director.
During fiscal 2021, the entire Board of Directors assumed all responsibilities of the Audit, Compensation and Nominating Committees. During fiscal 2022, Standing Audit, Compensation and Nominating Committees were established.
The following table summarizes compensation earned by or paid to the Company’s directors for the year ended December 31, 2022:
DIRECTOR COMPENSATION TABLE
| Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||||||||
| Lance Baller | $ | 30,000 | - | - | - | - | - | $ | 30,000 | |||||||||||||||||||
| Christopher Barker (1) | $ | 30,000 | - | - | - | - | - | $ | 30,000 | |||||||||||||||||||
| Clifford Neuman | $ | 22,500 | - | - | - | - | - | $ | 22,500 | |||||||||||||||||||
| Adam Desmond | $ | 30,000 | - | - | - | - | - | $ | 30,000 | |||||||||||||||||||
| Andy Sink | $ | 7,500 | - | - | - | - | - | $ | 7,500 | |||||||||||||||||||
| David Furstenberg | $ | 22,500 | - | - | - | - | - | $ | 22,500 | |||||||||||||||||||
| (1) | On May 27, 2023, Mr. Barker tendered his resignation as President, Chief Operating Officer and a member of the Board of Directors effective May 31, 2023. |
Director Independence
Our common stock is listed on the OTC.Pink inter-dealer quotation systems, which does not have director independence requirements. Nevertheless, for purposes of determining director independence, we have applied the definition of independence under the NYSE American listing standards. The NYSE American listing standards for smaller reporting companies require that at least 50% of the members of a listed company Board qualify as “independent,” as defined under NYSE American rules and as affirmatively determined by the company’s Board. After review of all the relevant transactions and relationships between each director (and his family members) and the Company, and senior management, the Board affirmatively determined that at all times during the year ended December 31, 2022, and through the date of filing this Annual Report, the following directors (while serving as such) were independent within the meaning of applicable NYSE American rules: Messrs. Desmond and Furstenberg.
Audit Committee
The Board as a whole served as the audit committee. On July 25, 2022 the Company established a standing audit committee The audit committee was initially comprised of Messrs. Furstenberg (Chairman), Neuman and Desmond. Mr. Furstenberg qualifies as an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K. An audit committee member is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family, or other material personal ties to management. Effective August 18, 2022, Mr. Neuman resigned as a member of the Audit Committee.
The committee is responsible for accounting and internal control matters. The audit committee:
| - | reviews with management and the independent auditors’ policies and procedures with respect to internal controls; |
| - | reviews significant accounting matters; |
| - | approves any significant changes in accounting principles of financial reporting practices; |
| - | reviews independent auditor services; and |
| - | recommends to the board of directors the independent registered public accounting firm to audit our consolidated financial statements. |
In addition to its regular activities, the committee is available to meet with the independent registered public accounting firm or controller whenever a special situation arises.
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The Audit Committee of the Board of Directors will adopt a written charter, which, when adopted, will be filed with the Commission.
Compensation Advisory Committee
The Board, as a whole, served as the compensation committee. We have established a standing compensation committee in the third quarter of 2022. The compensation committee was initially comprised of Messrs. Desmond, Neuman and Furstenberg. Effective August 18, 2022, Mr. Neuman resigned as a member of the Compensation Committee.
The compensation advisory committee did not meet during fiscal 2022. The compensation advisory committee will:
| - | recommend to the board of directors the compensation and cash bonus opportunities based on the achievement of objectives set by the compensation advisory committee with respect to our chairman of the board and president, our chief executive officer, and the other executive officers; |
| - | administer our compensation plans for the same executives; |
| - | determine equity compensation for all employees; |
| - | review and approve the cash compensation and bonus objectives for the executive officers; and |
| - | review various matters relating to employee compensation and benefits. |
Nomination Process
The Board of Directors has appointed a standing nomination committee in the third quarter of 2022, initially consisting of Messrs. Desmond, Neuman and Furstenberg. Effective August 18, 2022, Mr. Neuman resigned from the Nomination and Governance Committee.
The board of directors has not adopted a policy regarding the consideration of any director candidates recommended by security holders, since to date the board has not received from any security holder a director nominee recommendation. The board of directors will consider candidates recommended by security holders in the future. Security holders wishing to recommend a director nominee for consideration should contact Mr. Lance Baller, Chairman and CEO, at the Company’s principal executive offices located in Greenwood Village, Colorado and provide to Mr. Baller, in writing, the recommended director nominee’s professional resume covering all activities during the past five years, the information required by Item 401 of Regulation S-K, and a statement of the reasons why the security holder is making the recommendation. Such recommendation must be received by the Company before December 31, 2023.
The board of directors believes that any director nominee must possess significant experience in business and/or financial matters as well as a particular interest in the Company’s activities.
Shareholder Communications
Any shareholder of the Company wishing to communicate to the board of directors may do so by sending written communication to the board of directors to the attention of Mr. Lance Baller, Chairman and CEO, at the principal executive offices of the Company. The board of directors will consider any such written communication at its next regularly scheduled meeting.
Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company’s independent, outside disinterested directors.
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Code of Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees during the fiscal year ended June 30, 2004. We will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics. Such request should be made in writing and addressed to Investor Relations, Selectis Health, Inc., at the Company’s principal executive offices located in Greenwood Village, Colorado. Further, our Code of Business Conduct and Ethics was filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 and can be reviewed on the website maintained by the SEC at www.SEC.gov.
There are no material proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent (5%) of any class of voting securities of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company’s independent, outside disinterested directors.
Indemnification and Limitation on Liability of Directors
The Company’s Articles of Incorporation provide that the Company shall indemnify, to the fullest extent permitted by Utah law, any director, officer, employee, or agent of the corporation made or threatened to be made a party to a proceeding, by reason of the former or present official of the person, against judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any director, officer, employee, or agent of the Company where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
The Company’s Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Utah Business Corporation Act. Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles. The officers of the Company will dedicate sufficient time to fulfill their fiduciary obligations to the Company’s affairs. The Company has no retirement, pension, or profit-sharing plans for its officers and Directors.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company’s Directors, its Executive (and certain other) Officers, and any persons holding more than ten percent (10%) of the Company’s common stock are required to report their ownership of the Company’s common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to report in this Report any failure to file by these dates. All of these filing requirements were satisfied by our Officers, Directors, and ten-percent holders except for Mr. Baller failed to file one (1) reports covering one (1) transactions in a timely manner and Mr. Barker failed to file one (1) report covering one (1) transaction in a timely manner. In making these statements, the Company has relied on the written representation of its Directors and Officers or copies of the reports that they have filed with the Commission.
| ITEM 11. | EXECUTIVE COMPENSATION |
Components of Compensation.
None of our executive officers serve as a member of the Compensation Committee or Nominating Committee.
The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to the Company’s three (3) most highly compensated executive officers, for all services rendered in all capacities to the Company and its subsidiaries for each of the Company’s last three (3) completed fiscal years; provided, however, that no disclosure has been made for any executive officer, other than the CEO and CFO, whose total annual salary and bonus does not exceed $100,000.
| 32 |
Company Stock Incentive Plans
As of December 31, 2021, no options were outstanding under the Plan and all options to purchase shares of Common Stock have expired. The Plan has terminated in accordance with its terms, and as a result no shares are available for future option grants.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Options Awards | Non equity Incentive Plan Compensation | Nonqualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||||||||||||||
| Lance Baller, CEO | 2022 | $ | 150,000 | $ | 50,000 | - | - | - | - | - | $ | 200,000 | ||||||||||||||||||||||||
| 2021 | $ | 125,000 | $ | - | - | - | - | - | - | $ | 125,000 | |||||||||||||||||||||||||
| Christopher Barker, Former President & COO | 2022 | $ | 150,000 | $ | 50,000 | - | - | - | - | - | $ | 200,000 | ||||||||||||||||||||||||
| 2021 | $ | 125,000 | $ | - | - | - | - | - | - | $ | 125,000 | |||||||||||||||||||||||||
| Brandon Thall, Former CFO | 2022 | $ | 32,769 | $ | - | - | - | - | - | - | $ | 32,769 | ||||||||||||||||||||||||
| 2021 | $ | 180,000 | $ | 11,250 | - | - | - | - | - | $ | 191,250 | |||||||||||||||||||||||||
| Mary Lucus, Former CFO | 2022 | $ | 128,388 | $ | 10,500 | - | - | - | - | - | $ | 138,888 | ||||||||||||||||||||||||
| 2021 | $ | 70,580 | $ | 2,500 | - | - | - | - | - | $ | 73,080 | |||||||||||||||||||||||||
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information with respect to beneficial ownership of our common stock by:
| * | each person who beneficially owns more than 5% of the common stock; |
| * | each of our executive officers; |
| * | each of our directors and director nominees; and |
| * | all executive officers and directors as a group. |
The table shows the number of shares owned as of May 31, 2023, and the percentage of outstanding common stock owned as of May 31, 2023. Beneficial ownership is based on information provided to us, and the beneficial owner has no obligation to inform us of or otherwise report any changes in beneficial ownership. Except as indicated, and subject to community property laws when applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
| Title of Class | Name & Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent (1)(3) | |||||||
| Common Stock | ||||||||||
| Lance Baller | ||||||||||
| 8480 E. Orchard Rd., Ste. 4900 | ||||||||||
| Greenwood Village, CO 80111 | 297,682 | (2) | 9.71 | % | ||||||
| Adam Desmond | ||||||||||
| PO Box 2036 | ||||||||||
| Carbondale, CO 81623 | 30,282 | 0.99 | % | |||||||
| David Furstenberg | ||||||||||
| 8480 E Orchard Rd, Ste 4900 | ||||||||||
| Greenwood Village, CO 80111 | 5,910 | 0.19 | % | |||||||
| Andy Sink | ||||||||||
| 3058 Lewis Circle | ||||||||||
| Birmingham, AL 35223 | 52,667 | 1.72 | % | |||||||
| Zvi Rhine | ||||||||||
| 895 Mountain Drive | ||||||||||
| Deerfield, IL 60015 | 183,953 | (3) | 6.00 | % | ||||||
| All Officers and Directors as a Group | ||||||||||
| (5 persons) | 386,541 | 12.60 | % | |||||||
| (1) | Shares not outstanding but beneficially owned by virtue of the individuals right to acquire them as of the date of this annual report or within sixty days of such date, are treated as outstanding when determining the percent of the class owned by such individual. |
| (2) | Includes 161,965 shares owned individually; 56,616 shares which includes warrants exercisable to purchase 10,000 shares of common stock owned by High Speed Aggregate, Inc. of which Mr. Baller is an owner and control person but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act; 72,934 shares owned by Ultimate Investments Corp., Inc. of which Mr. Baller is an owner and control person but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act and 6,667 shares owned by Baller Family Foundation Inc. of which Mr. Baller is a control person but disclaims beneficial ownership for purposes of Section 16 under the Exchange Act. |
| (3) | Based on 3,067,059 shares issued and outstanding on May 31, 2023 |
| 34 |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
For the fiscal year 2022, Selectis Health, Inc. had a net loss, and was able to meet all its obligations without the assistance or needs of affiliated parties lending arrangements.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The following is an aggregate of fees billed for each of the last two fiscal years for professional services rendered by Marcum LLP our principal registered public accountants and Haynie & Company, our former principal registered public accountants:
| 2022 | 2021 | |||||||
| Audit Fees - audit of annual financial statements and review of financial statements included in our quarterly reports, services normally provided by the accountant in connection with statutory and regulatory filings. | $ | 200,637 | $ | 181,000 | ||||
| Audit-Related Fees - related to the performance of audit or review of financial statements not reported under “audit fees” above. | $ | - | $ | - | ||||
| Tax Fees - tax compliance, tax advice and tax planning. | $ | 5,000 | $ | 12,500 | ||||
| All Other Fees - services provided by our principal accountants other than those identified above. | $ | - | $ | - | ||||
| Total fees paid or accrued to our principal accountants | $ | 205,637 | $ | 193,500 | ||||
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Annual Report:
| (a) | Financial Statement Schedules |
See the Index to Consolidated Financial Statements at page F-1 of this report.
| (b) | Exhibits | ||
| Exhibit No. | Title | ||
| (1) | 1.0 | Articles of Amendment to the Articles of Incorporation dated June 22, 1994 | |
| (1) | 3.1 | Amended and Restated Articles of Incorporation | |
| (35) | 3.1 | Amended and Restated Articles of Incorporation | |
| (1) | 3.2 | Bylaws | |
| (1) | 3.3 | Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock | |
| (5) | 3.4 | Certificate of Designations, Preferences, and Rights of Series B Convertible Preferred Stock | |
| (5) | 3.5 | Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock | |
| (5) | 3.6 | Agreement Respecting Rights of Holders of Series C Convertible Preferred Stock | |
| (17) | 3.7 | Certificate of Designations, Preferences, and Rights of Series E Convertible Preferred Stock | |
| (18) | 3.8 | Form of Registration Rights Agreement | |
| (1) | 4.1 | Specimen Certificate of Common Stock | |
| (1) | 4.2 | Specimen Class A Common Stock Purchase Warrant | |
| (1) | 4.3 | Specimen Class B Common Stock Purchase Warrant | |
| (1) | 4.4 | Specimen Class C Common Stock Purchase Warrant | |
| (1) | 4.5 | Warrant Agreement | |
| (19) | 4.6 | Form of Series 2010 5% Convertible Debenture | |
| (20) | 4.7 | Form of Common Stock and Warrant Purchase Agreement | |
| (1) | 5.0 | Opinion of Neuman & Drennen, LLC regarding the legality of the securities being registered | |
| (1) | 10.1 | Selling Agent Agreement | |
| (1) | 10.2 | The Casino-Global Venture I Joint Venture Agreement | |
| (1) | 10.3 | Assignment of Casino-Global Joint Venture Agreement dated January 31, 1994 |
| 36 |
| (1) | 10.4 | Nonresidential Lease Agreement between Russian-Turkish Joint Venture Partnership with Hotel Lazurnaya and Global Casino | |
| Group, Inc. dated September 22, 1993 | |||
| (1) | 10.5 | Contract by and between Aztec-Talas-Four Star, Inc. and Global Casinos Group, Inc. dated April 12, 1993, and Addendum to | |
| Agreement by and between Aztec-Talas-Four Star, Inc., Global Casinos Group, Inc., and Restaurant “Naryn” dated June 29, | |||
| 1993. | |||
| (1) | 10.6 | Agreement and Plan of Reorganization among Silver State Casinos, Inc., Colorado Gaming Properties, Inc., and Morgro | |
| Chemical Company, dated September 8, 1993, incorporated by reference from the Company’s Current Report on Form 8-K, | |||
| dated September 20, 1993 | |||
| (1) | 10.7 | Agreement and Plan of Reorganization among Casinos USA., Lincoln Corporation, Woodbine Corporation and Morgro | |
| Chemical Company, dated October 15, 1993, incorporated by reference from the Company’s Current Report on Form 8-K, dated | |||
| November 19, 1993 | |||
| (1) | 10.8 | Stock Pooling and Voting Agreement, incorporated by reference from the Company’s Current Report on Form 8-K, dated | |
| November 19, 1993 | |||
| (1) | 10.9 | Employment Agreement, dated September 28, 1993, between Morgro Chemical Company and Nathan Katz, incorporated by | |
| reference from the Company’s Current Report on Form 8-K, dated November 19, 1993 | |||
| (1) | 10.10 | Employment Agreement, dated October 15, 1993, between Morgro Chemical Company and William P. Martindale, incorporated | |
| by reference from the Company’s Current Report on Form 8-K, dated November 19, 1993 | |||
| (1) | 10.11 | Asset Acquisition Agreement by and among Global Casinos, Inc., Morgro, Inc. and MDO, L.L.C., dated as of February 18, | |
| 1994, incorporated by reference from the Company’s Current Report on Form 8-K, dated February 18, 1994 | |||
| (1) | 10.12 | Stock Purchase Agreement, dated March 25, 1994, incorporated by reference from the Company’s Current Report on Form 8-K, | |
| dated April 29, 1994 | |||
| (1) | 10.13 | Articles of Incorporation of BPJ Holding N.V., incorporated by reference from the Company’s Current Report on Form 8-K, | |
| dated April 29, 1994 | |||
| (1) | 10.14 | Aruba Caribbean Resort and Casino Lease Agreement, dated January 18, 1993, incorporated by reference from the Company’s | |
| Current Report on Form 8-K, dated April 29, 1994 | |||
| (1) | 10.15 | Aruba Gaming Permit issued to Dutch Hotel and Casino Development Corporation, incorporated by reference from the | |
| Company’s Current Report on Form 8-K, dated April 29, 1994 | |||
| (1) | 10.16 | Letter Agreement between Astraea Investment Management, L.P. and Global Casinos, Inc. dated May 11, 1994 | |
| (1) | 10.17 | Guaranty from Global Casinos, Inc. to Astraea Investment Management, L.P. dated May 19, 1994 | |
| (1) | 10.18 | Secured Convertible Promissory Note in favor of Global Casinos, Inc. from Astraea Investment Management, L.P. dated May | |
| 19, 1994 | |||
| (1) | 10.19 | Registration Rights Agreement between Global Casinos, Inc. and Astraea Investment Management, L.P. dated May 11, 1994 | |
| (1) | 10.20 | Employment Agreement, dated July 1, 1994, between Global Casinos, Inc., and Peter Bloomquist | |
| (2) | 10.21 | Letter of Agreement, dated September 16, 1994 between Astraea Management Services, L.P., Casinos USA., Inc. and Global | |
| Casinos, Inc. | |||
| (3) | 10.23 | Letter of Agreement dated June 27, 1995, between Global Casinos, Inc., Global Casinos International, Inc., Global Casinos | |
| Group, Inc., Broho Holding, N.V., and Kenneth D. Brown individually. | |||
| (1) | 10.24 | Second Amended Plan of Reorganization of Casinos USA, Inc., and Order Confirming Plan | |
| (1) | 10.25 | Warrant Agreement | |
| (4) | 10.26 | Stock Purchase and Sale Agreement between Alaska Bingo Supply, Inc., Global Alaska Industries, Inc., and Mark Griffin |
| 37 |
| 38 |
| 39 |
| 40 |
| 41 |
| 42 |
| (84) | 10.156 | Rescission Agreement | |
| (85) | 10.157 | Pursuant to Item 304(a)(1) of Regulation S-K, the Registrant herewith files the letter of MaloneBailey, LLP, former accountants to the Company | |
* |
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| * | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| * | 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| ** | 101.INS | XBRL Instance | |
| ** | 101.SCH | XBRL Taxonomy Extension Schema | |
| ** | 101.CAL | XBRL Taxonomy Extension Calculation | |
| ** | 101.DEF | XBRL Taxonomy Extension Definition | |
| ** | 101.LAB | XBRL Taxonomy Extension Labels | |
| ** | 101.PRE | XBRL Taxonomy Extension Presentation |
| (1) | Incorporated by reference to the Registrant’s Registration Statement on Form SB-2, Registration No. 33-76204, on file with the Commission on August 11, 1994. |
| (2) | Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for year ended June 30, 1994. |
| (3) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 15, 1995. |
| (4) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 1, 1997, as filed with the Commission on August 14, 1997. |
| (5) | Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 1999. |
| (6) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 1999, as filed with the Commission on January 14, 2000. |
| (7) | Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 2002. |
| (8) | Incorporated by reference to the Registrant’s Annual Report on Form 10KSB for the year ended June 30, 2004. |
| (9) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 14, 2007 as filed with the Commission on June 19, 2007 |
| 43 |
| (10) | Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated September 28, 2007 as filed with the Commission on October 2, 2007. |
| (11) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2007 as filed with the Commission on December 3, 2007. |
| (12) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 5, 2007 as filed with the Commission on December 6, 2007. |
| (13) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 30, 2008 as filed with the Commission on February 4, 2008. |
| (14) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 6, 2008 as filed with the Commission on March 6, 2008. |
| (15) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 18, 2008 as filed with the Commission on March 24, 2008. |
| (16) | Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated March 18, 2008 as filed with the Commission on May 29, 2008. |
| (17) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 12, 2010 as filed with the Commission on July 14, 2010. |
| (18) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 19, 2010 as filed with the Commission on July 20, 2010. |
| (19) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 16, 2010 as filed with the Commission on July 20, 2010. |
| (20) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 16, 2010 as filed with the Commission on July 20, 2010. |
| (21) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2009 as filed with the Commission on December 3, 2009. |
| (22) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 30, 2009 as filed with the Commission on December 3, 2009. |
| (23) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 2009 as filed with the Commission on December 31, 2009. |
| (24) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 30, 2009 as filed with the Commission on January 5, 2010. |
| (25) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 25, 2010 as filed with the Commission on March 25, 2010. |
| (26) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 28, 2010 as filed with the Commission on December 29, 2010 as amended by Form 8-K/A filed with the Commission on February 10, 2011. |
| (27) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 20, 2011 as filed with the Commission on December 20, 2011 |
| (28) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 1, 2012 as filed with the Commission on June 6, 2012. |
| (29) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 25, 2012 as filed with the Commission on June 28, 2012. |
| (30) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 11, 2012 as filed with the Commission on October 16, 2012. |
| 44 |
| (31) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 9, 2012 as filed with the Commission on November 13, 2012. |
| (32) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 20, 2012 as filed with the Commission on December 20, 2012. |
| (33) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 8, 2013 as filed with the Commission on April 12, 2013. |
| (34) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2013 as filed with the Commission on May 6, 2013. |
| (35) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 30, 2013 as filed with the Commission on October 4, 2013. |
| (36) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 27, 2014 as05 filed with the Commission on January 30, 2014. |
| (37) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 10, 2014 as filed with the Commission on March 14, 2014. |
| (38) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 23, 2014 as filed with the Commission on May 19, 2014. |
| (38) | Incorporated by reference to the Registrant’s Current Report on Form 8-K/A dated May 23, 2014 as filed with the Commission on May 19, 2014. |
| (39) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 26, 2014 as filed with the Commission on October 2, 2014. |
| (40) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 16, 2014 as filed with the Commission on December 17, 2014. |
| (41) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 22, 2015 as filed with the Commission on January 27, 2015 |
| (42) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 28, 2015 as filed with the Commission on February 4, 2015. |
| (43) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 14, 2015 as filed with the Commission on August 20, 2015. |
| (44) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 9, 2015 as filed with the Commission on November 12, 2015. |
| (45) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 30, 2016 as filed with the Commission on July 5, 2016. |
| (46) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 29, 2016 as filed with the Commission on August 30, 2016. |
| 45 |
| (47) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 25, 2016 as filed with the Commission on November 29, 2016. |
| (48) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 25, 2017 as filed with the Commission on January 26, 2017. |
| (49) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 3, 2017 as filed with the Commission on May 8, 2017. |
| (50) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 16, 2017 as filed with the Commission on May 16, 2017. |
| (51) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017. |
| (52) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017. |
| (53) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 27, 2017 as filed with the Commission on November 6, 2017. |
| (54) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 8, 2017 as filed with the Commission on November 17, 2017. |
| (55) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 8, 2017 as filed with the Commission on November 17, 2017. |
| (56) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 5, 2018 as filed with the Commission on April 17, 2018. |
| (57) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 24, 2018 as filed with the Commission on April 24, 2018. |
| (58) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018. |
| (59) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018. |
| (60) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018. |
| (61) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 4, 2018 as filed with the Commission on May 10, 2018. |
| (62) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 27, 2018 as filed with the Commission on August 27, 2018. |
| (63) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 15, 2018 as filed with the Commission on October 22, 2018. |
| (64) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 12, 2019 as filed with the Commission on April 16, 2019. |
| 46 |
| (65) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 15, 2019 as filed with the Commission on April 17, 2019. |
| (66) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 13, 2019 as filed with the Commission on July 11, 2019. |
| (67) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 6, 2019 as filed with the Commission on August 14, 2019. |
| (68) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 19, 2019 as filed with the Commission on November 19, 2019. |
| (69) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (70) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (71) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (72) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (73) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (74) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 2, 2020 as filed with the Commission on March 5, 2020. |
| (75) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 23, 2020 as filed with the Commission on July 27, 2020. |
| (76) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 31, 2020 as filed with the Commission on January 6, 2021. |
| (77) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 31, 2020 as filed with the Commission on January 6, 2021. |
| (78) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 21, 2021 as filed with the Commission on September 22, 2021. |
| (79) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 27, 2021 as filed with the Commission on October 4, 2021. |
| (80) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 27, 2021 as filed with the Commission on October 4, 2021. |
| (81) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 29, 2021 as filed with the Commission on December 30, 2021. |
| (82) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 29, 2021 as filed with the Commission on December 30, 2021. |
| (83) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 29, 2021 as filed with the Commission on December 30, 2021. |
| (84) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 29, 2021 as filed with the Commission on January 3, 2022. |
| (85) | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 26, 2022 as filed with the Commission on January 28, 2022. |
| * | Filed herewith |
| ** | furnished, not filed. |
| 47 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
of Selectis Health, Inc. and Subsidiaries
| Page No. | |
Report
of Independent Registered Public Accounting Firm – |
F-1 |
Report
of Independent Registered Public Accounting Firm – |
F-2 |
Consolidated Balance Sheets of Selectis Health, Inc. as of December 31, 2022 and 2021 |
F-3 |
| F-4 | |
| F-5 | |
| F-6 | |
| F-7 |
| 48 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Selectis Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Selectis Health Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Marcum llp
We have served as the Company’s auditor since 2022
Steve Rapattoni, CPA
Partner
June 29, 2023
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Selectis Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Selectis Health, Inc. (the Company) as of December 31, 2021, and the related consolidated statements of operations, changes in equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Haynie & Company
Haynie & Company
August 25, 2022
PCAOB ID: 457
We began serving as the Company’s auditor in 2022. In 2022, we became the predecessor auditor.
| F-2 |
SELECTIS HEALTH, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| December 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, Net | ||||||||
| Prepaid Expenses and Other | ||||||||
| Investments in Debt Securities | ||||||||
| Total Current Assets | ||||||||
| Long Term Assets: | ||||||||
| Restricted Cash | ||||||||
| Property and Equipment, Net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts Payable and Accrued Liabilities | ||||||||
| Accounts Payable – Related Parties | ||||||||
| Dividends Payable | ||||||||
| Short term debt – Related Parties, | ||||||||
| Current Maturities of Long-Term Debt, Net of Discount of $ | ||||||||
| Other Current Liability | ||||||||
| Total Current Liabilities | ||||||||
| Debt - Related Parties, | ||||||||
| Debt, Net of discount of $ | ||||||||
| Lease Security Deposit | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Equity: | ||||||||
| Preferred Stock: | ||||||||
| Series A - | ||||||||
| Series D - | ||||||||
| Common Stock - $ Par Value; Shares Authorized, and Shares Issued and Outstanding at December 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional Paid-In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See accompanying notes to these consolidated financial statements.
| F-3 |
SELECTIS HEALTH, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
| Twelve Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Rental Revenue | $ | $ | ||||||
| Healthcare Revenue | ||||||||
| Healthcare Grant Revenue | ||||||||
| Management Fee Revenue | ||||||||
| Total Revenue | ||||||||
| Expenses | ||||||||
| Property Taxes, Insurance and Other Operating | ||||||||
| General and Administrative | ||||||||
| Provision for Bad Debts | ||||||||
| Depreciation and Amortization | ||||||||
| Total Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other (Income) Expense | ||||||||
| Loss on Extinguishment of Debt | ||||||||
| Interest Expense, net | ||||||||
| Gain on Forgiveness of PPP Loan | ( | ) | ||||||
| Other Income | ( | ) | ( | ) | ||||
| Lease Termination Expense | ||||||||
| Total Other Expense | ||||||||
| Net Loss | ( | ) | ( | ) | ||||
| Net Loss Attributable to Noncontrolling Interests | ( | ) | ||||||
| Net Loss Attributable to Selectis Health, Inc. | ( | ) | ( | ) | ||||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||
| Net Loss Attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | ||
| Per Share Data: | ||||||||
| Net Loss per Share Attributable to Common Stockholders: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Common Shares Outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to these consolidated financial statements.
| F-4 |
SELECTIS HEALTH, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Series A Preferred Stock | Series D Preferred Stock | Common Stock | Additional | Selectis
Health, Inc. | Non- | Total | ||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In
Capital | Accumulated
Deficit | Stockholders’ Equity | Controlling
Interests | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | | $ | | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Issuance of Common Shares - cash proceeds | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Shares - stock compensation | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common Shares Issued for Debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Cashless Exercise of Warrants | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Cashless Exercise of Options | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Purchase of Non-Controlling Interest | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Loss on Forgiveness of Debt, Net | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Modification of Warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Series D Preferred Dividends | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common Shares Issued for Debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Loss on Forgiveness of Debt, Net | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes to these consolidated financial statements.
| F-5 |
SELECTIS HEALTH, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Twelve Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on Forgiveness from PPP Loan | ( | ) | ||||||
| Other Income from Partial Settlement of Debt | ( | ) | ( | ) | ||||
| Depreciation and Amortization | ||||||||
| Amortization of Deferred Loan Costs and Debt Discount | ||||||||
| Provision for Bad Debt | ||||||||
| Stock-Based Compensation | ||||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts and Rents Receivable | ( | ) | ( | ) | ||||
| Prepaid Expenses and Other Assets | ||||||||
| Accounts Payable and Accrued Liabilities | ( | ) | ||||||
| Lease Security Deposits | ( | ) | ||||||
| Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of Property and Equipment | ( | ) | ( | ) | ||||
| Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Issuance of Debt, Non-Related Party | ||||||||
| Payments on Debt, Non-Related Party | ( | ) | ( | ) | ||||
| Dividends Paid on Preferred Stock | ( | ) | ( | ) | ||||
| Proceeds from Stock Offering | ||||||||
| Purchase of Non-Controlling Interest | ( | ) | ||||||
| Debt Discount - Warrants RP | ( | ) | ||||||
| Debt Discount | ||||||||
| Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash | ( | ) | ||||||
| Cash and Cash Equivalents and Restricted Cash at Beginning of the Period | ||||||||
| Cash and Cash Equivalents and Restricted Cash at End of the Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
| Cash and Cash Equivalents | ||||||||
| Restricted Cash | ||||||||
| Total Cash and Cash Equivalents and Restricted Cash | ||||||||
| Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
| Dividends Declared on Series D Preferred Stock | $ | $ | ||||||
| Issuance of common stock for cashless exercise of warrants | ||||||||
| Issuance of common stock for cashless exercise of options | ||||||||
| Issuance of common stock for debt | ||||||||
| Financing of Insurance Premiums | ||||||||
See accompanying notes to these consolidated financial statements.
| F-6 |
SELECTIS HEALTH, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
Selectis Health, Inc. (“Selectis” or “we” or the “Company”) owns and operates, through wholly-owned subsidiaries Assisted Living Facilities, Independent Living Facilities, and Skilled Nursing Facilities across the South and Southeastern portions of the US. In 2019 the Company shifted from leasing long-term care facilities to third-party independent operators towards an owner-operator model.
Prior to the Company changing its name to Selectis Health, Inc., the Company was known as Global Healthcare REIT, Inc. from September 30, 2013, to May 2021. Prior to this, 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”). WPF was merged into the Company in 2019.
In September 2021, the Company rebranded to Selectis Health, Inc., from Global Healthcare REIT, Inc. to better align with the current and future business model, which is to own and operate its facilities.
We acquire, develop, lease, and manage healthcare real estate; provide financing to healthcare providers; and provide healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following three healthcare segments: (i) senior housing (including independent and assisted living), (ii) post-acute/skilled nursing facilities, and (iii) bonds securing senior housing communities. We will make investments within our healthcare segments using the following six investment methods: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management, (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations utilizing the structure permitted by RIDEA and (vi) owning healthcare operations.
Basis of Presentation
The accompanying consolidated financial statements (the Financial Statements) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member of various consolidated limited liability companies established to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interests within the equity section of its consolidated balance sheets and the amount of consolidated net income that is attributable to Selectis Health, Inc. and the noncontrolling interest in its consolidated statements of operations.
The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.
Reclassifications
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.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates included herein relate to the recoverability of assets, the purchase price allocation for properties acquired, and the fair value of certain assets and liabilities. Actual results may differ from estimates.
Management’s Liquidity Plans
On August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
For
the year ended December 31, 2022 the Company had negative operating cash flows of $
| F-7 |
The focus on opportunities within our current portfolio and future properties to acquire and operate, the settlement, refinance, and continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing to additional working capital should alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively impact our future operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consisted of the following as of December 31:
| 2022 | 2021 | |||||||
| Funds held in escrow under the terms of notes for future capital expenditures, repairs and maintenance | $ | $ | ||||||
Concentration of Credit Risk
The
Company maintains deposits in financial institutions that at times exceed the insured amount of $
Property and Equipment
In accordance with purchase accounting guidance established for entities under common control, the property and equipment acquired from entities under common control are stated at their carrying value on the date of acquisition. Property and equipment not acquired from entities under common control is recorded at its estimated fair value. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties using standard industry valuation techniques.
Upon acquisition of real estate properties determined to be asset acquisitions, the Company determines the total purchase price of each property and allocates the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, and information obtained during due diligence period. Acquisition-related costs such as due diligence, legal and accounting fees are included in the purchase price. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
| F-8 |
Upon acquisition of business entities and real estate determined to be a business combination, the Company identifies and recognizes the net tangible and identified intangible assets based on fair values, and net assets as goodwill or gain on bargain purchase. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing, leasing, and or operating at the specific property. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred. Initial valuations are subject to change during the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Any subsequent betterments and improvements are stated at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, and tenant improvements are depreciated over the remaining term of the lease. Useful lives of the assets are summarized as follows:
| Land Improvements | ||
| Buildings and Improvements | ||
| Furniture, Fixtures and Equipment |
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of property and equipment may not be recoverable, the Company reviews the property 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 and equipment. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of the property using standard industry valuation techniques.
Deferred Loan Costs and Debt Discounts
Deferred
loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest
method. Amortization expense for the years ended December 31, 2022 and 2021 totaled $
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 it’s 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.
| F-9 |
The
Company has recorded Goodwill in connection with business acquisitions during the year ended December 31, 2020 (see Note 9). During the
years ended December 31, 2022 and 2021, the Company recorded
Revenue Recognition
Rent receivables are carried net of an allowance for uncollectible amounts. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line recognition of rents. Such allowances are charged to net against rental incomes.
The
Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying consolidated
financial statements reflect rental income on a straight-line basis over the term of each lease. During the year ended December 31, 2021
the Company terminated leases resulting in a lease termination expense of $
When the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. As of December 31, 2022, and 2021, there were no deferred lease incentives recorded.
The Company recognizes revenue in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. Under the accounting guidance our revenues are presented net of estimated allowances, and we no longer present the contractual allowance as a separate line item on our balance sheet.
The Company reviews its calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing for the uncollectible portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly with a greater emphasis given to current trends. This calculation is routinely analyzed by the Company based on actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.
Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, and Medicaid) and the transaction prices for the services provided are dependent upon the terms provided by the third party payer or payers. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member.
Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care are based upon the payment terms specified in the related contractual agreements.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined. In relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process.
The collection of outstanding receivables for Medicare, and Medicaid is our primary source of cash and is critical to our operating performance. The primary collection risks relate to Medicaid pending patient accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and write-off data. We believe our quarterly updates to the estimated contractual allowance amounts at each of our facilities provide reasonable estimates of our revenues and valuations of our accounts receivable.
In
accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions that
are a direct reduction to net operating revenues. For the year ended December 31, 2022, the uncollectable amounts recognized as a
reduction to net operating revenues totaled $
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
Fair Value Measurements
The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1 – Quoted market prices in active markets for identical assets or liabilities at the measurement date.
| F-10 |
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.
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.
The Company has no financial assets or financial liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2022, and 2021.
The carrying values of cash and cash equivalents, accounts payable, accrued liabilities and other short-term debt, approximate their fair value because of the short-term nature of these financial instruments. The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.
Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price based 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 rates from a third-party appraisal or other market sources.
Income Taxes
As previously disclosed in the “Organization and Description of the Business” section of this Note, the Company’s focus has partially shifted from leasing nursing home assets to independent operators toward owning and operating its real estate assets itself.
The Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the period of enactment. A valuation allowance is established against deferred tax assets when management concludes that the “more likely than not” realization criteria has not been met. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
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.
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.
| F-11 |
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator for basic earnings per share: | ||||||||
| Net Loss Attributable to Selectis Health, Inc. | $ | ( | ) | $ | ( | ) | ||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||
| Net Loss Attributable to Common Stockholders - Basic | $ | ( | ) | $ | ( | ) | ||
| Numerator for diluted earnings per share: | ||||||||
| Net Loss Attributable to Common Stockholders | ( | ) | ( | ) | ||||
| Series D Preferred Dividends | ( | ) | ( | ) | ||||
| Net Loss Attributable to Common Stockholders - Diluted | ( | ) | ( | ) | ||||
| Denominator for basic earnings per share: | ||||||||
| Weighted Average Common Shares Outstanding | ||||||||
| Denominator for diluted earnings per share: | ||||||||
| Weighted Average Common Shares Outstanding - Basic | ||||||||
| Effect of dilutive securities: | ||||||||
| Issuance of stock options | ||||||||
| Exercise of warrants | ||||||||
| Weighted Average Common Shares Outstanding - Diluted | ||||||||
| Net Loss per Share Attributable to Common Stockholders: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
Options to purchase shares of common stock were outstanding during the years ended December 31, 2022 and 2021 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.
Recently Issued Accounting Pronouncements
In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
The FASB and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2022. 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.
| F-12 |
2. INVESTMENTS IN DEBT SECURITIES
At December 31, 2021, the Company held investments in marketable securities that were classified as held-to-maturity and carried at amortized costs. Held-to-maturity securities consisted of the following:
| 2022 | 2021 | |||||||
| States and Municipalities | $ | $ | ||||||
Contractual
maturity of held-to-maturity securities at December 31, 2021 was $
3. PROPERTY AND EQUIPMENT, NET
The gross carrying amount and accumulated depreciation of the Company’s property and equipment as of December 31, 2022 and 2021 are as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Land Improvements | ||||||||
| Buildings and Improvements | ||||||||
| Furniture, Fixtures and Equipment | ||||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||
| Less: Impairment | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Depreciation Expense (excluding Intangible Assets) | $ | $ | ||||||
| Cash Paid for Capital Expenditures | $ | $ | ||||||
| F-13 |
4. DEBT AND DEBT – RELATED PARTIES
The following is a summary of the Company’s debt and debt – related parties outstanding as of December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Senior Secured Promissory Notes | $ | $ | ||||||
| Senior Secured Promissory Notes - Related Parties | ||||||||
| Fixed-Rate Mortgage Loans | ||||||||
| Variable-Rate Mortgage Loans | ||||||||
| Other Debt, Subordinated Secured | ||||||||
| Other Debt, Subordinated Secured - Related Parties | ||||||||
| Other Debt, Subordinated Secured - Seller Financing | ||||||||
| Financed Insurance Premiums | ||||||||
| Debt and Debt – Related Parties, Gross | ||||||||
| Unamortized Discount and Debt Issuance Costs | ( | ) | ( | ) | ||||
| Debt and Debt – Related Parties, Net of Discount | $ | $ | ||||||
| As presented in the Consolidated Balance Sheets: | ||||||||
| Current Maturities of Long Term Debt, Net | $ | $ | ||||||
| Short Term Debt – Related Parties, Net | ||||||||
| Long-Term Debt, Net | ||||||||
| Long-Term Debt - Related Parties, Net | ||||||||
The
weighted average interest rate and term of our fixed rate debt are
Corporate Senior and Senior Secured Promissory Notes
As
of December 31, 2022, and December 31, 2021, the senior secured notes are subject to annual interest ranging from
In
2017, $
In
October 2017, the Company sold an aggregate of $
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
On
January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering of
| F-14 |
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 a former but no longer related party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following:
| Total Principal Outstanding as of | ||||||||||||||||
| State | Number of Properties | Total Face Amount | December 31, 2022 | December 31, 2021 | ||||||||||||
| Arkansas(1) | $ | $ | $ | |||||||||||||
| Georgia(2) | $ | $ | $ | |||||||||||||
| Ohio | $ | $ | $ | |||||||||||||
| Oklahoma(3) | $ | $ | $ | |||||||||||||
| $ | $ | $ | ||||||||||||||
| (1) | |
| (2) | |
| (3) |
Subordinated, Corporate, and Other Debt
Other debt due at December 31, 2022 and 2021 includes unsecured notes payable issued to entities controlled by the Company used to facilitate the acquisition of the nursing home properties.
| Total Principal Outstanding as of | ||||||||||||||||||
| Property | Face Amount | December 31, 2022 | December 31, 2021 | Stated Interest Rate | Maturity Date | |||||||||||||
| Goodwill Nursing Home | $ | $ | $ | |||||||||||||||
| Goodwill Nursing Home – Related Party | $ | |||||||||||||||||
| Higher Call Nursing Center (1) | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||
| (1) |
Our corporate debt at December 31, 2022 and December 31, 2021 includes unsecured notes and notes secured by all assets of the Company not serving as collateral for other notes.
| Total Principal Outstanding as of | ||||||||||||||||||
| Series | Face Amount | December 31, 2022 | December 31, 2021 | Stated Interest Rate | Maturity Date | |||||||||||||
| 10% Senior Secured Promissory Notes | $ | $ | $ | |||||||||||||||
| 10% Senior Secured Promissory Notes – Related Party | $ | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||
For
the year ended December 31, 2021, the Company received proceeds from the issuance of debt of $
Paycheck Protection Program Loans
On
June 16, 2021, the Company through its subsidiaries received confirmation that the loan of $
| F-15 |
Future maturities and principal payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:
| Year Ending December 31 | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and Thereafter | ||||
| Total | $ | |||
5. OTHER CURRENT LIABILITIES
During
the year ended December 31, 2021, the Company received an overpayment from Medicare of $
6. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized 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 shares of $ stated value, Series A Preferred Stock. The preferred stock
has a senior liquidation preference value of $
As of December 31, 2022, and 2021, the Company has shares of Series A Preferred Stock outstanding.
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 non-voting shares with a stated value of $ per share. Holders of the Series D preferred
stock are entitled to receive dividends at the annual rate of
As of December 31, 2022, and 2021, the Company had shares of Series D Preferred Stock outstanding.
For
years ended December 31, 2022, and 2021, the Company declared $
Common Stock
The Company’s Board of Directors has authorized shares of $ par value, Common Stock. As of December 31, 2022, and 2021, the Company has and shares of common stock outstanding, respectively.
Additionally, on September 22, 2021, the Company received approval from FINRA and other regulators to execute a ten-for-one reverse stock split. Accordingly, all share and per-share amounts relating to the common stock, stock options and warrants for all periods presented in the accompanying consolidated financial statements have been retroactively adjusted, where applicable, to reflect the reverse stock split.
During
the year ended December 31, 2021, the Company issued shares of common stock in exchange for services which were valued at $
During
the year ended December 31, 2021, the Company sold shares of Common Stock at a purchase price of $ per share for net proceeds
of $
| F-16 |
There were repurchases performed in the 2022 year.
Common Stock Warrants
As
of December 31, 2022, and December 31, 2021, the Company had
| Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Number of | Weighted Average | Number of | Weighted Average | |||||||||||||
| Warrants | Exercise Price | Warrants | Exercise Price | |||||||||||||
| Beginning Balance | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Ending Balance | $ | $ | ||||||||||||||
Common Stock Options
As of December 31, 2022, the Company had outstanding options to purchase common stock.
7. FACILITY LEASES
The following table summarizes our leasing arrangements related to the Company’s healthcare facilities at December 31, 2022:
| Monthly | Lease | |||||||
| Facility | Lease Income (1) | Expiration | Renewal Option if Any | |||||
| Goodwill Hunting LLC(1) | $ | |||||||
| (1) |
| F-17 |
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, Edwards, Fairland, Sparta, and Warrenton 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:
| As of December 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and Thereafter | ||||
| Total | $ | |||
8. INCOME TAXES
The following is the breakdown of the Company’s income tax expenses:
| Income Tax Expenses: | 2022 | 2021 | ||||||
| Current Federal | $ | $ | ||||||
| Current State | ||||||||
| Deferred Federal | ||||||||
| Deferred State | ||||||||
| Total Income Tax Expenses | ||||||||
The Company and its subsidiaries are subject to income taxes on income arising in, or derived from, the tax jurisdictions in which they operate. The Company files federal, Alabama, Arkansas, Colorado, Georgia, and Oklahoma income tax returns. The Company is current with all its federal and state tax filings. The Company is open to examination for tax years 2015 through 2022 due to the carry forward of net operating losses, although the Company is not currently under examination in any jurisdiction.
The following is a reconciliation of the federal statutory tax rate and the effective tax rate as a percentage for the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Statutory Federal Income Tax Rate | % | % | ||||||
| Prior Year True-Ups | ( | )% | ||||||
| Amortization of Warrant Discount | ( | )% | ||||||
| Other | % | |||||||
| Effect of Valuation Allowance on Deferred Tax Assets | % | ( | )% | |||||
| % | % | |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of deferred tax assets as of December 31, 2022 and 2021 are as follows:
| 2022 | 2021 | |||||||
| Deferred Tax Assets: | ||||||||
| Net Operating Loss Carryforwards | $ | $ | ||||||
| Impairment Loss on Long Term Assets | ||||||||
| Goodwill Impairment | ||||||||
| Stock Based Compensation | ||||||||
| Acquisition Costs | ||||||||
| Other | ||||||||
| Deferred Tax Liabilities: | ||||||||
| Bargain Purchase Gain | ( | ) | ||||||
| Property and Equipment | ( | ) | ( | ) | ||||
| Other | ( | ) | ||||||
| ( | ) | ( | ) | |||||
| Valuation Allowance | ( | ) | ( | ) | ||||
| Net Deferred Tax Asset | $ | $ | ||||||
The
valuation allowance at December 31, 2022 and 2021 was primarily related to federal net operating loss carryforwards that, in the judgment
of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management considers
whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback
and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. Estimated
taxable loss for the year ended December 31, 2022 approximated $
As
of December 31, 2022 and 2021, the Company has $
When
more than a 50% change in ownership occurs, over a three-year period, as defined, the Tax Reform Act of 1986 limits the utilization of
net operating loss carry forwards in the years following the change in ownership. In September 2013, the Company had a split-off, in
which the business activities changed from gaming casinos into real estate related to long-term care. The Company determined that the
pre-2013 net operating losses of $
We
have evaluated whether there were material uncertain tax positions requiring recognition in our financial statements. During the
period from 2016 to 2022, the Company had deducted bad debt allowances for tax purposes. As of December 31, 2022, the Company
deducted $
The following table summarizes the activity related to the Company’s gross unrecognized tax liabilities:
| 2022 | 2021 | |||||||
| Unrecognized tax liabilities, beginning of the year | $ | $ | ||||||
| Increase (decrease) related to prior year tax positions | ||||||||
| Increase (decrease) related to current year tax positions | ( | ) | ||||||
| Unrecognized tax liabilities, end of the year | $ | $ | ||||||
9. GOODWILL
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 years ended December 31, 2022 and 2021,
the Company recorded
Following is a summary of goodwill for the years ended December 31, 2022 and 2021:
| Balance, December 31, 2020 | $ | |||
| Goodwill acquired in 2020 | ||||
| Balance, December 31, 2021 | ||||
| Goodwill acquired in 2022 | ||||
| Balance, December 31, 2022 | $ |
| F-18 |
10. 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.
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’s 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 for which complaint was made. 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. Plaintiff has dismissed these claims with prejudice, and the Company has filed a Motion to be awarded attorney’s fees and costs.
In the matter of Austin.
On December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH, LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and as a result management has concluded that the likelihood of a material adverse result is remote.
Lawson v. C.R.M of Warrenton, LLC d/b/a Warrenton Health and Rehab; ATL/WARR, LLC; Selectis Warrenton, LLC, et.al., Superior Court of Warren County, State of Georgia, Civil Action No. 23CV0076.
This is a personal injury lawsuit filed on June 14, 2023 against various defendants arising out of the death of a patient of the Warrenton Health and Rehab Facility located in Warren, Georgia (the “Facility”). The Facility is owned by the Company’s wholly-owned subsidiary ATL/Warr, LLC. At all relevant times, the Facility was leased and operated by a third party C.R.M. Warrenton, LLC under an operating lease. Neither the Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. Subsequent to the patient care complained of the Company entered into an Operations Transfer Agreement with the lease operator and assumed operating control of the Facility through a new subsidiary, Selectis Warrenton, LLC. The Company believes its exposure in this matter is de minimus and has referred the litigation to its insurance company for management.
11. SUBSEQUENT EVENTS
The Company has evaluated all events or transactions that occurred after December 31, 2022 up through June 29, 2023, which is the date that the financial statements were available to be issued. There were no subsequent events which required adjustment or disclosure in the financial statements except the event described below.
The
CARES Act provides an employee retention credit (“CARES Employee Retention Credit”), which
is a refundable tax credit against certain employment taxes of up to $
| F-19 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SELECTIS HEALTH, INC. | ||
| Date: June 29, 2023 | By: | /s/ Lance Baller |
| Lance Baller | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
/s/ Lance Baller |
||||
Lance Baller
|
Chairman and Chief Executive Officer (Principal Executive Officer) | June 29, 2023 | ||
/s/ Adam Desmond |
||||
Adam Desmond |
Director | June 29, 2023 | ||
/s/ Andy Sink |
||||
Andy Sink |
Director | June 29, 2023 | ||
/s/ David J Furstenberg |
||||
| David J Furstenberg | Director | June 29, 2023 |
| 49 |