Quarterly Report (10-q)

Date : 08/14/2017 @ 4:55PM
Source : Edgar (US Regulatory)
Stock : Adcare Health Systems (GA) (delisted) (ADK)
Quote : 0.91  0.0 (0.00%) @ 2:05AM
Adcare Health Systems (GA) (delisted) share price Chart

Quarterly Report (10-q)


 
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                     

Commission File Number 001-33135
 
AdCare Health Systems, Inc.
(Exact name of registrant as specified in its charter) 
Georgia
 
31-1332119
(State or other jurisdiction
of incorporation)
 
(I.R.S. Employer Identification Number)
 454 Satellite Boulevard NW, Suite 100, Suwanee, GA 30024
(Address of principal executive offices)
(678) 869-5116
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o
 
Accelerated filer  o
 
Non-accelerated filer   o
  (Do not check if a
smaller reporting company)
 
Smaller reporting company  ý
 
Emerging growth company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes  o     No  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes  o   No  ý
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 As of July 31, 2017 19,762,036 shares of common stock, no par value, were outstanding.





AdCare Health Systems, Inc.
 
Form 10-Q
 
Table of Contents
 
 
 
Page
  Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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

3


Part I.  Financial Information  
Item 1.  Financial Statements 
ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s)
 
 
June 30, 
 2017
 
December 31, 
 2016
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,001

 
$
14,045

Restricted cash
 
1,361

 
1,600

Accounts receivable, net of allowance of $4,267 and $7,529, respectively
 
1,496

 
2,429

Prepaid expenses and other
 
1,554

 
2,395

Total current assets
 
6,412

 
20,469

Restricted cash and investments
 
2,308

 
3,864

Property and equipment, net
 
83,227

 
79,168

Intangible assets - bed licenses
 
2,471

 
2,471

Intangible assets - lease rights, net
 
2,420

 
2,754

Goodwill
 
2,105

 
2,105

Lease deposits
 
911

 
1,411

Other assets
 
9,398

 
7,244

Total assets
 
$
109,252

 
$
119,486

LIABILITIES AND DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of notes payable and other debt
 
$
2,639

 
$
4,018

Current portion of convertible debt, net
 
1,494

 
9,136

Accounts payable
 
3,555

 
3,037

Accrued expenses and other
 
7,935

 
9,077

Total current liabilities
 
15,623

 
25,268

Notes payable and other debt, net of current portion:
 
 

 
 

Senior debt, net
 
62,887

 
60,189

Bonds, net
 
6,529

 
6,586

Other debt, net
 
628

 
41

Other liabilities
 
3,627

 
3,677

Deferred tax liabilities
 
226

 
226

Total liabilities
 
89,520

 
95,987

Commitments and contingencies (Note 15)
 

 

Preferred stock, no par value; 5,000 shares authorized; 2,812 and 2,762 shares issued and outstanding, redemption amount $70,288 and $69,038 at June 30, 2017 and December 31, 2016, respectively
 
62,434

 
61,446

Stockholders’ deficit:
 
 

 
 

Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 19,762 and 19,927 issued and outstanding at June 30, 2017 and December 31, 2016, respectively
 
61,610

 
61,643

Accumulated deficit
 
(104,312
)
 
(99,590
)
Total stockholders’ deficit
 
(42,702
)
 
(37,947
)
Total liabilities and stockholders’ deficit
 
$
109,252

 
$
119,486

 
See accompanying notes to unaudited consolidated financial statements

4


ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000’s, except per share data)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 

 
 

Rental revenues
 
$
5,945

 
$
6,890

 
$
11,720

 
$
13,739

Management fee and other revenues
 
359

 
274

 
719

 
507

Total revenues
 
6,304

 
7,164

 
12,439

 
14,246

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Facility rent expense
 
2,170

 
2,168

 
4,341

 
4,347

Depreciation and amortization
 
1,171

 
1,339

 
2,306

 
3,052

General and administrative expense
 
822

 
2,135

 
2,444

 
4,677

Other operating expenses
 
323

 
969

 
878

 
1,172

Total expenses
 
4,486

 
6,611

 
9,969

 
13,248

 
 
 
 
 
 
 
 
 
Income from operations
 
1,818

 
553

 
2,470

 
998

 
 
 
 
 
 
 
 
 
Other expense:
 
 

 
 

 
 

 
 

Interest expense, net
 
1,006

 
1,751

 
2,038

 
3,576

Loss on extinguishment of debt
 

 

 
63

 

Other expense
 
188

 
9

 
283

 
51

Total other expense, net
 
1,194

 
1,760

 
2,384

 
3,627

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
624

 
(1,207
)
 
86

 
(2,629
)
Income tax expense
 

 

 
1

 

Income (loss) from continuing operations
 
624

 
(1,207
)
 
85

 
(2,629
)
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 
(604
)
 
(3,775
)
 
(1,017
)
 
(4,303
)
Net income (loss)
 
20

 
(4,982
)
 
(932
)
 
(6,932
)
 
 
 
 
 
 
 
 
 
Preferred stock dividends
 
1,912

 
1,801

 
3,790

 
3,578

Net loss attributable to AdCare Health Systems, Inc. common stockholders
 
$
(1,892
)
 
$
(6,783
)
 
$
(4,722
)
 
$
(10,510
)
 
 
 
 
 
 
 
 
 
Net loss per share of common stock attributable to AdCare Health Systems, Inc.
 
 

 
 

 
 

 
 

Basic and diluted:
 
 

 
 

 
 

 
 

Continuing operations
 
$
(0.07
)
 
$
(0.15
)
 
$
(0.19
)
 
$
(0.31
)
Discontinued operations
 
(0.03
)
 
(0.19
)
 
(0.05
)
 
(0.22
)
 
 
$
(0.10
)
 
$
(0.34
)
 
$
(0.24
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 

 
 

 
 

 
 

Basic and diluted
 
19,766

 
19,907

 
19,795

 
19,896


 See accompanying notes to unaudited consolidated financial statements

5


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

 
 
Shares of Common Stock
 
Common Stock and Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Balances, December 31, 2016
 
19,927

 
$
61,643

 
$
(99,590
)
 
$
(37,947
)
 
 
 
 
 
 
 
 
 
Stock-based compensation
 

 
154

 

 
154

 
 
 
 
 
 
 
 
 
Common stock repurchase program
 
(118
)
 
(187
)
 

 
(187
)
 
 
 
 
 
 
 
 
 
Issuance of restricted stock, net of forfeitures
 
(47
)
 

 

 

 
 
 
 
 
 
 
 
 
Preferred stock dividends
 

 

 
(3,790
)
 
(3,790
)
 
 
 
 
 
 
 
 
 
Net loss
 

 

 
(932
)
 
(932
)
Balances, June 30, 2017
 
19,762

 
$
61,610

 
$
(104,312
)
 
$
(42,702
)
 
See accompanying notes to unaudited consolidated financial statements

6

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in 000’s)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 

Net loss
 
$
(932
)
 
$
(6,932
)
Loss from discontinued operations, net of tax
 
1,017

 
4,303

Income (loss) from continuing operations
 
85

 
(2,629
)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
2,306

 
3,052

Stock-based compensation expense
 
154

 
720

Rent expense in excess of cash paid
 
310

 
409

Rent revenue in excess of cash received
 
(1,502
)
 
(1,344
)
Amortization of deferred financing costs
 
166

 
433

Amortization of debt discounts and premiums
 
7

 
7

Bad debt expense
 
455

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
176

 
(244
)
Prepaid expenses and other
 
27

 
1,251

Other assets
 
(101
)
 
30

Accounts payable and accrued expenses
 
384

 
(16
)
Other liabilities
 
138

 
620

Net cash provided by operating activities - continuing operations
 
2,605

 
2,289

Net cash used in operating activities - discontinued operations
 
(933
)
 
(2,252
)
Net cash provided by operating activities
 
1,672

 
37

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Change in restricted cash
 
1,795

 
4,774

Purchase of real estate, net
 
(1,375
)
 

Purchase of property and equipment
 
(534
)

(44
)
Proceeds from the sale of property and equipment
 

 
1,372

Earnest money deposit



1,000

Net cash (used in) provided by investing activities - continuing operations
 
(114
)
 
7,102

Net cash used in investing activities - discontinued operations
 

 
(1
)
Net cash (used in) provided by investing activities
 
(114
)
 
7,101

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from debt
 

 
203

Repayment on notes payable
 
(2,512
)
 
(6,646
)
Repayment on bonds payable
 
(90
)
 
(85
)
Repayment of convertible debt
 
(7,700
)
 

Debt issuance costs
 

 
(67
)
Proceeds from preferred stock issuances, net
 
989

 
4,547

Repurchase of common stock
 
(187
)
 
(312
)
Dividends paid on preferred stock
 
(3,790
)
 
(3,578
)
Net cash used in financing activities - continuing operations
 
(13,290
)
 
(5,938
)
Net cash used in financing activities - discontinued operations
 
(312
)
 
(671
)
Net cash used in financing activities
 
(13,602
)
 
(6,609
)
Net change in cash and cash equivalents
 
(12,044
)
 
529

Cash and cash equivalents, beginning
 
14,045

 
2,720

Cash and cash equivalents, ending
 
$
2,001

 
$
3,249

 
 
 
 
 








7

ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in 000’s)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Supplemental disclosure of cash flow information:
 
 

 
 

Interest paid
 
$
1,889


$
3,213

Supplemental disclosure of non-cash activities:
 
 
 
 
Non-cash proceeds from debt to purchase real estate
 
$
4,125

 
$

Surrender of security deposit
 
$
500

 
$

Non-cash proceeds from vendor-financed insurance
 
$
198

 
$

Non-cash proceeds from financing of South Carolina Medicaid audit repayment
 
$
385

 
$

  See accompanying notes to unaudited consolidated financial statements

8


ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 2017
 
NOTE 1.                           ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES  

See Part II, Item 8, Notes to Consolidated Financial Statements , Note 1 - Organization and Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 , filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2017 (the “Annual Report”), for a description of all significant accounting policies. 
Description of Business
 
AdCare Health Systems, Inc. (“AdCare”), through its subsidiaries (together, the “Company” or “we”), is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. The Company’s business primarily consists of leasing and subleasing healthcare facilities to third-party tenants, which operate such facilities. The operators of the Company’s facilities provide a range of healthcare services, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.

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

The Company leases its currently-owned healthcare properties, and subleases its currently-leased healthcare properties, on a triple-net basis, meaning that the lessee ( i.e ., the third-party operator of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable. These leases are generally long-term in nature with renewal options and annual rent escalation clauses. The Company has many of the characteristics of a real estate investment trust (“REIT”) and is focused on the ownership, acquisition and leasing of healthcare properties. AdCare’s Board of Directors (the “Board”) continues to analyze and consider: (i) whether and, if so, when, the Company could satisfy the requirements to qualify as a REIT under the Internal Revenue Code of 1986, as amended; (ii) the structural and operational complexities which would need to be addressed before the Company could qualify as a REIT, including the disposition of certain assets or the termination of certain operations which may not be REIT compliant; and (iii) if the Company were to qualify as a REIT, whether electing REIT status would be in the best interests of the Company and its shareholders in light of various factors, including our significant consolidated federal net operating loss carryforwards. There is no assurance that the Company will qualify as a REIT in future taxable years or, if it were to so qualify, that the Board would determine that electing REIT status would be in the best interests of the Company and its shareholders.

As of June 30, 2017 , the Company owns, leases, or manages 30 facilities, which are located primarily in the Southeast. Of the 30 facilities, the Company: (i) leased 14 owned facilities and subleased 11 leased skilled nursing facilities to third-party tenants; (ii) leased two owned assisted living facilities to third-party tenants; and (iii) managed on behalf of third-party owners two skilled nursing facilities and one independent living facility (see Note 7 - Leases herein and Part II, Item 8, Notes to Consolidated Financial Statements , Note 7 - Leases in the Annual Report for a more detailed description of the Company’s leases).

Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. 

9


You should read the unaudited consolidated financial statements together with the historical audited consolidated financial statements of the Company for the year ended December 31, 2016 , included in the Annual Report. 
Use of Estimates

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

Revenue Recognition and Allowances
Triple-Net Leased Properties. The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our consolidated balance sheets. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company’s facilities, rental income for the affected facilities will be recognized only upon cash collection, and any accumulated straight-line rent receivable will be reversed in the period in which the Company first deems rent collection no longer reasonably assured.

Management Fee Revenue and Other. The Company recognizes management fee revenues as services are provided. Further, the Company recognizes income from lease inducement receivables and interest income from loans and investments, using the effective interest method when collectibility is reasonably assured. We apply the effective interest method on a loan-by-loan basis.

Allowances. The Company assesses the collectibility of our rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectibility of rent receivables and working capital loans to tenants on several factors, including, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments or payments on a working capital loan, the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. If the Company changes its assumptions or estimates regarding the collectibility of future rent payments required by a lease or required from a working capital loan to a tenant, the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates. 

As of June 30, 2017 and December 31, 2016 , the Company allowed for approximately $4.3 million and $7.5 million , respectively, of gross patient care related receivables arising from our legacy operations. Allowance for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types. Any changes in patient care receivable allowances are recognized as a component of discontinued operations. All uncollected patient care receivables were fully allowed at June 30, 2017 and December 31, 2016 . Accounts receivable, net totaled $1.5 million at June 30, 2017 and $2.4 million at December 31, 2016 , of which $0.2 million and $0.9 million , respectively, related to patient care receivables from our legacy operations.
Self-Insurance
The Company has self-insured against professional and general liability claims since it discontinued its healthcare operations during 2014 and 2015 (see Part II, Item 8, Notes to Consolidated Financial Statements , Note 15 - Commitments and Contingencies in the Annual Report for more information). The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions; and (v) the venues in which the actions have been filed or will be adjudicated. The Company currently believes that most of the professional and general liability actions, and particularly many of the most recently filed actions, are defensible and intends to defend them through final judgment. Accordingly, the self-insurance reserve primarily reflects the Company's estimated legal costs of litigating the pending actions accordingly. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve

10


may not be sufficient to cover the legal costs actually incurred in litigating the pending actions. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved (see Note 8 - Accrued Expenses ).
Fair Value Measurements and Financial Instruments 
Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—     Quoted market prices in active markets for identical assets or liabilities
Level 2—     Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3—     Significant unobservable inputs
The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.

Adopted Standards

On April 1, 2017, we adopted Accounting Standards Update (“ ASU ”) 2017-01, Clarifying the Definition of a Business (“ ASU 2017-01 ”), which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquired asset is not a business. If this initial test is not met, an acquired asset cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. The primary differences between business combinations and asset acquisitions include recognition of goodwill at the acquisition date and expense recognition for transaction costs as incurred. We are applying ASU 2017-01 prospectively for acquisitions after April 1, 2017. Regardless of whether an acquisition is considered a business combination or an asset acquisition, we record the cost of the businesses (or assets) acquired as tangible and intangible assets and liabilities based upon their estimated fair values as of the acquisition date. Intangibles primarily include certificates of need ("CON") but could include value of in-place leases and acquired lease contracts. For an asset acquisition, the cost of the acquisition is allocated to the assets and liabilities acquired on a relative fair value basis and no goodwill is recognized. We estimate the fair value of assets in accordance with FASB Accounting Standards Codification (“ ASC”) 805 and ASC 820 . The fair value is estimated under market conditions observed at the time of the measurement date and depreciated over the remaining life of the assets.

In March 2016, the FASB issued ASU 2016-09, with the intention to simplify aspects of the accounting for share-based payment transactions, including income tax impacts, classification on the statement of cash flows, and forfeitures. ASU 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The various amendments within the standard require different approaches to adoption, on a retrospective, modified retrospective or prospective basis. The Company adopted the various amendments in its consolidated financial statements for the three month period ending March 31, 2017 with an effective date of January 1, 2017. The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements.


Recent Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. The Company has reviewed the FASB accounting pronouncements and ASU interpretations that have effectiveness dates during the periods reported and in future periods.

In May 2014, the FASB issued ASU 2014-09 , which requires revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. This new standard requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The new guidance does not affect the recognition of revenue from

11


leases. In August 2015, the FASB delayed the effective date of ASU 2014-09 by one year and subsequently amended the new revenue standard under ASU 2016-10 and ASU 2016-12 in April and May 2016, respectively. ASU 2016-10 provides additional guidance for identifying performance obligations and licenses of intellectual property, and ASU 2016-12 clarifies guidance regarding collectibility, noncash considerations and completed contracts at transition. These new revenue standards are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is continuing to evaluate the impact of this guidance on the Company’s consolidated financial condition, results of operations and cash flows. As our main revenue stream is lease revenues, the Company does not expect adoption of this guidance to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

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

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

In June 2016, the FASB issued ASU 2016-13 , which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 , which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted using a retrospective transition method to each period presented. We are currently evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, which simplifies the required periodic test for goodwill impairment and modifies the concept of impairment of goodwill under previous guidance, ASC 350, Intangibles - Goodwill and Other . Under the updated guidance, a goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the total amount of goodwill allocated to that reporting unit. This simplification eliminates previous requirements to determine the implied fair value of goodwill and record a loss on impairment equal to the carrying value of goodwill less the implied fair value. Further, the ASU modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on a prospective basis for annual and interim periods beginning after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.


12


NOTE 2.                           EARNINGS PER SHARE  

Basic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share is similar to basic earnings per share except: (i) net income or loss is adjusted by the impact of the assumed conversion of convertible debt into shares of common stock; and (ii) the weighted average number of shares of common stock outstanding includes potentially dilutive securities (such as options, warrants and additional shares of common stock issuable under convertible debt outstanding during the period) when such securities are not anti-dilutive. Potentially dilutive securities from options and warrants are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from convertible debt are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For the three and six months ended June 30, 2017 and 2016 , approximately 2.4 million and 4.5 million shares, respectively, of potentially dilutive securities were excluded from the diluted income (loss) per share calculation because including them would have been anti-dilutive for such periods.

The following tables provide a reconciliation of net loss for continuing and discontinued operations and the number of shares of common stock used in the computation of both basic and diluted earnings per share:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Amounts in 000’s, except per share data)
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
624

 
$
(1,207
)
 
$
85

 
$
(2,629
)
Preferred stock dividends
 
1,912

 
1,801

 
3,790

 
3,578

Basic and diluted loss from continuing operations
 
(1,288
)
 
(3,008
)
 
(3,705
)
 
(6,207
)
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 
(604
)
 
(3,775
)
 
(1,017
)
 
(4,303
)
Net loss attributable to AdCare Health Systems, Inc. common stockholders
 
$
(1,892
)
 
$
(6,783
)
 
$
(4,722
)
 
$
(10,510
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Basic - weighted average shares
 
19,766

 
19,907

 
19,795

 
19,896

Diluted - adjusted weighted average shares (a)
 
19,766

 
19,907

 
19,795

 
19,896

 
 
 
 
 
 
 
 
 
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
Loss from continuing operations attributable to AdCare
 
$
(0.07
)
 
$
(0.15
)
 
$
(0.19
)
 
$
(0.31
)
Loss from discontinued operations
 
(0.03
)
 
(0.19
)
 
(0.05
)
 
(0.22
)
Loss attributable to AdCare Health Systems, Inc. common stockholders
 
$
(0.10
)
 
$
(0.34
)
 
$
(0.24
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
 
(a)  Securities outstanding that were excluded from the computation, because they would have been anti-dilutive were as follows:
 
 
June 30,
(Share amounts in 000’s)
 
2017
 
2016
Stock options
 
245

 
355

Warrants - employee
 
1,350

 
1,559

Warrants - non employee
 
437

 
437

Shares issuable upon conversion of convertible debt
 
353

 
2,165

Total anti-dilutive securities
 
2,385

 
4,516

 

13


NOTE 3.                           LIQUIDITY AND PROFITABILITY

Sources of Liquidity

The Company continues to undertake measures to grow its operations and to reduce its expenses by: (i) increasing future lease revenue through acquisitions and investments in its existing properties; (ii) modifying the terms of existing leases; (iii) refinancing or repaying debt to reduce interest costs and mandatory principal repayments; and (iv) reducing general and administrative expenses.

At June 30, 2017 , the Company had $2.0 million in cash and cash equivalents as well as restricted cash and investments of $3.7 million . In addition, management anticipates access to several sources of liquidity, including cash flows from operations and cash on hand. Management holds routine ongoing discussions with existing lenders and potential new lenders to refinance current debt on a longer term basis and, in recent years, has refinanced shorter term acquisition debt, with traditional longer term mortgage notes, many of which have been executed under government guaranteed lending programs. Historically, the Company has raised capital through other sources, including issuances of preferred stock and convertible debt.

On May 27, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with JMP Securities LLC to sell, from time to time, shares of the Company’s 10.875% Series A Cumulative Redeemable Preferred Stock, (the “Series A Preferred Stock”), having an aggregate offering price of up to $4,618,472 through an “at-the-market” offering program (the “ATM”). From the inception of the ATM through June 30, 2017 , the Company sold 50,000 shares of the Series A Preferred Stock generating net proceeds of approximately $1.0 million , (see Note 12 - Common and Preferred Stock ). No shares of Series A Preferred Stock were sold under the ATM since June 30, 2017 . On August 2, 2017 the Company terminated the Sales Agreement and discontinued sales under the ATM. Management anticipates renewing its at-the-market offering program with respect to sales of Series A Preferred Stock as a source of liquidity over the next twelve months.

On July 31, 2017, the Company extended the maturity date of a $1.2 million credit facility entered into in December 2012 between a certain wholly-owned subsidiary of the Company and the First Commercial bank associated with its Northwest Oklahoma facility (the “Northwest Credit Facility”) from December 31, 2017 to July 31, 2020.

On August 11, 2017, the Company extended the maturity date of the credit facilities entered into in April 2015, with respect to an aggregate of $0.5 million of indebtedness between certain wholly-owned subsidiaries of the Company and the KeyBank National Association (the “Key Bank Credit Facility”), from October 17, 2017 to August 2, 2019.

Beginning in the fourth quarter of 2017, the Company expects to receive full rent with respect to the facilities (the “Peach Facilities”) subleased by a subsidiary of the Company (“ADK”) to affiliates (collectively, “Peach Health Sublessee”) of Peach Health Group, LLC (“Peach Health”). Prior thereto the Peach Facilities were subleased to affiliates of New Beginnings Care, LLC (“New Beginnings”) prior to the bankruptcy of New Beginnings and are comprised of: (i) an 85 -bed skilled nursing facility located in Tybee Island, Georgia (the “Oceanside Facility”); (ii) a 50 -bed skilled nursing facility located in Tybee Island, Georgia (the “Savannah Beach Facility”); and (iii) a 131 -bed skilled nursing facility located in Jeffersonville, Georgia (the “Jeffersonville Facility”). Rent for the Savannah Beach Facility, the Oceanside Facility, and the Jeffersonville Facility is $0.3 million , $0.4 million and $0.6 million per annum, respectively; but such rent was only $1 per month for the Oceanside Facility and Jeffersonville Facility until the date such facilities were recertified by the Centers for Medicare and Medicaid Services (“CMS”) or April 1, 2017, whichever occurred first (the “Rent Commencement Date”). The Oceanside Facility and Jeffersonville Facility were recertified by CMS in February 2017 and December 2016, respectively. Furthermore, with respect to the Oceanside Facility and Jeffersonville Facility, Peach Health Sublessee is entitled to three months of $1 per month rent following the Rent Commencement Date and, following such three -month period, five months of rent discounted by 50% .

On September 19, 2016, the Company obtained an option to extend the maturity date, subject to customary conditions, of a $4.4 million credit facility entered into in September 2013 between a certain wholly-owned subsidiary of the Company and Housing & Healthcare Funding, LLC (the "Quail Creek Credit Facility") from September 2017 to September 2018, which option management intends to exercise. On August 10, 2017, the Company extended the maturity date of the Quail Creek Credit Facility to December 31, 2017 and retains the option to further extend the maturity date of such credit facility to September 2018. There is no assurance that we will be able to refinance or further extend the maturity date of this credit facility on terms that are favorable to the Company or at all.

Cash Requirements

At June 30, 2017 , the Company had $74.2 million in indebtedness of which the current portion is $4.1 million . The current portion is comprised of the following components: (i) convertible debt of $1.5 million ; and (ii) other debt of approximately $2.6 million

14


which includes senior debt - bond and mortgage indebtedness (for a complete listing of our debt, see Note 9 - Notes Payable and Other Debt ).

The Company anticipates net principal disbursements, over the next twelve months, of approximately $4.1 million , which includes $1.5 million of convertible debt, approximately $0.3 million of payments on shorter term vendor notes, $1.9 million of routine debt service amortization, and a $0.4 million payment of other debt. Based on the described sources of liquidity, the Company expects sufficient funds for its operations and scheduled debt service, at least through the next twelve months. On a longer term basis, at June 30, 2017 , the Company had approximately $10.5 million of debt maturities due over the two -year period ending June 30, 2019 . These debt maturities include the aforementioned $1.5 million of convertible promissory notes, which are convertible into shares of the common stock in addition to $4.4 million with respect to the Quail Creek Credit Facility. The Company believes its long-term liquidity needs will be satisfied by cash flows from operations, cash on hand, borrowings as required to refinance indebtedness as well as other sources, including issuances of preferred stock and convertible debt.

The Company is a defendant in a total of 41 professional and general liability cases. The claims generally seek unspecified compensatory and punitive damages for former patients of the Company who were allegedly injured or died while patients of facilities operated by the Company due to professional negligence or understaffing. The Company established a self-insurance reserve for these professional and general liability claims, included within “Accrued expenses and other” in the Company’s unaudited consolidated balance sheets, of $6.1 million and $6.9 million at June 30, 2017 , and December 31, 2016 , respectively. The Company currently believes that most of the professional and general liability actions, and particularly many of the most recently filed actions, are defensible and intends to defend them through final judgment. Accordingly, the self-insurance reserve primarily reflects the Company's estimated legal costs of litigating the pending actions, which are expected to be paid over time as litigation continues. The duration of such legal proceedings could be greater than one year subsequent to the period ended June 30, 2017 ; however, management cannot reliably estimate the exact timing of payments. The Company expects to fund litigation and potential indemnity costs through cash on hand as well as other sources as described above.

During the three months ended June 30, 2017 , the Company generated positive cash flow from operations and anticipates positive cash flow from operations through the remainder of the current year. In order to satisfy the Company’s capital needs, the Company seeks to: (i) refinance debt where possible to obtain more favorable terms; (ii) raise capital through the issuance of debt or equity securities; and (iii) increase operating cash flows through acquisitions. The Company anticipates that these actions, if successful, will provide the opportunity to maintain its liquidity, thereby permitting the Company to better meet its operating and financing obligations for the next twelve months. However, there is no guarantee that such actions will be successful. Management’s ability to raise additional capital through the issuance of equity securities and the terms upon which we are able to raise such capital may be adversely affected if we are unable to maintain the listing of the common stock and the Series A Preferred Stock on the NYSE American, formerly known as the NYSE MKT.

NOTE 4.                           RESTRICTED CASH AND INVESTMENTS
 
The following presents the Company's restricted cash, escrow deposits and investments: 
(Amounts in 000’s)
 
June 30, 2017
 
December 31, 2016
Cash collateral
 
$
16

 
$
260

Replacement reserves
 
765

 
811

Escrow deposits
 
580

 
529

Total current portion
 
1,361

 
1,600

 
 
 
 
 
Restricted investments for other debt obligations and certificates of deposit
 
467

 
2,274

HUD and other replacement reserves
 
1,841

 
1,590

Total noncurrent portion
 
2,308

 
3,864

Total restricted cash and investments
 
$
3,669

 
$
5,464

Cash collateral —In securing mortgage financing from certain lending institutions, the Company and certain of its wholly-owned subsidiaries are required to deposit cash to be held as collateral in accordance with the terms of such loan agreements.
Replacement reserves —Cash reserves set aside for non-critical building repairs to be completed within the next 12 months, pursuant to loan agreements.
Escrow deposits —In connection with financing secured through our lenders, several wholly-owned subsidiaries of the Company are required to make monthly escrow deposits for taxes and insurance.

15


Restricted investments for other debt obligations and certificates of deposit —In compliance with certain financing and insurance agreements, the Company and certain wholly-owned subsidiaries of the Company are required to deposit cash and/or certificates of deposit held as collateral by the lender or in escrow with certain designated financial institutions.
HUD and other replacement reserves —The regulatory agreements entered into in connection with the financing secured through the U.S. Department of Housing and Urban Development (“HUD”) require monthly escrow deposits for replacement and improvement of the HUD project assets. 
NOTE 5.                           PROPERTY AND EQUIPMENT
 
The following table sets forth the Company’s property and equipment:
 
(Amounts in 000’s)
 
Estimated Useful
Lives (Years)
 
June 30, 2017
 
December 31, 2016
Buildings and improvements

5-40
 
$
89,829

 
$
84,108

Equipment and computer related

2-10
 
10,863

 
12,286

Land

 
4,091

 
3,988

Construction in process
 
 
73

 
602

 
 
 
 
104,856

 
100,984

Less: accumulated depreciation and amortization
 
 
 
(21,629
)
 
(21,816
)
Property and equipment, net
 
 
 
$
83,227

 
$
79,168

 
On May 1, 2017, the Company completed the acquisition of an assisted living and memory care community with 106 operational beds in Glencoe, Alabama (“the Meadowood Facility”) from Meadowood Retirement Village, LLC and Meadowood Properties, LLC (see Note 10 - Acquisitions) .
Buildings and improvements includes the capitalization of costs incurred for the respective CON’s. For additional information on the CON amortization, see Note 6 - Intangible Assets and Goodwill .

The following table summarizes total depreciation and amortization for the three and six months ended June 30, 2017 and 2016 :
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2017
 
2016
 
2017
 
2016
Depreciation
 
$
832

 
$
961

 
$
1,629

 
$
2,214

Amortization
 
339

 
378

 
677

 
838

Total depreciation and amortization
 
$
1,171

 
$
1,339

 
$
2,306

 
$
3,052

 
 
 
 
 
 
 
 
 



16


NOTE 6.                           INTANGIBLE ASSETS AND GOODWILL
    
Intangible assets consist of the following: 
(Amounts in 000’s)
 
CON (included in property and equipment)
 
Bed Licenses - Separable
 
Lease Rights
 
Total
Balances, December 31, 2016
 
 

 
 

 
 

 
 

Gross
 
$
22,811

 
$
2,471

 
$
6,881

 
$
32,163

Accumulated amortization
 
(3,483
)
 

 
(4,127
)
 
(7,610
)
Net carrying amount
 
$
19,328

 
$
2,471

 
$
2,754

 
$
24,553

 
 
 
 
 
 
 
 
 
Amortization expense
 
(343
)
 

 
(334
)
 
(677
)
 
 
 
 
 
 
 
 
 
Balances, June 30, 2017
 
 
 
 
 
 
 
 
Gross
 
22,811

 
2,471

 
6,881

 
32,163

Accumulated amortization
 
(3,826
)
 

 
(4,461
)
 
(8,287
)
Net carrying amount
 
$
18,985

 
$
2,471

 
$
2,420

 
$
23,876

 
The following table summarizes total amortization for the three and six months ended June 30, 2017 and 2016 :
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
2017
 
2016
 
2017
 
2016
CON
 
$
172

 
$
212

 
$
343

 
$
505

Lease rights
 
167

 
166

 
334

 
333

Total amortization
 
$
339

 
$
378

 
$
677

 
$
838

 
 
 
 
 
 
 
 
 

Expected amortization expense for all definite-lived intangibles for each of the years ended December 31 is as follows: 
(Amounts in 000’s)
 
Bed Licenses
 
Lease Rights
2017 (a)
 
$
346

 
$
333

2018
 
692

 
667

2019
 
692

 
667

2020
 
692

 
482

2021
 
692

 
203

Thereafter
 
16,171

 
68

Total expected amortization expense
 
$
19,285

 
$
2,420

  (a)  Estimated amortization expense for the year ending December 31, 2017 , includes only amortization to be recorded after June 30, 2017 .

The following table summarizes the carrying amount of goodwill:
(Amounts in 000’s)
 
June 30, 2017
 
December 31, 2016
Goodwill
 
$
2,945

 
$
2,945

Accumulated impairment losses
 
(840
)
 
(840
)
Net carrying amount
 
$
2,105

 
$
2,105

 
The Company does not amortize indefinite-lived intangibles, which consist of separable bed licenses and goodwill.
 

17


NOTE 7. LEASES
Operating Leases
The Company leases a total of  eleven skilled nursing facilities from unaffiliated owners under non-cancelable leases, all of which have rent escalation clauses and provisions for payments of real estate taxes, insurance and maintenance costs. Each of the skilled nursing facilities that are leased by the Company are subleased to and operated by third-party tenants. The Company also leases certain office space located in Suwanee, Georgia and Atlanta, Georgia. The Atlanta office space is subleased to a third-party tenant.

As of June 30, 2017 , the Company is in compliance with all operating lease financial covenants.
Future Minimum Lease Payments
Future minimum lease payments for each of the next five years ending December 31, are as follows:
 
 
(Amounts in
000’s)
2017 (a)
 
$
4,122

2018
 
8,331

2019
 
8,492

2020
 
8,671

2021
 
8,830

Thereafter
 
46,456

Total
 
$
84,902

(a) Estimated minimum lease payments for the year ending December 31, 2017 include only payments to be recorded after June 30, 2017 .
Leased and Subleased Facilities to Third-Party Operators
The Company leases or subleases 27 facilities ( 16 owned by the Company and 11 leased to the Company) to third-party tenants on a triple net basis, meaning that the lessee (i.e., the third-party tenant of the property) is obligated under the lease or sublease, as applicable, for all costs of operating the property, including insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Peach Health. On June 18, 2016, ADK entered into a master sublease agreement (the “Peach Health Sublease”) with Peach Health Sublessee, providing that Peach Health Sublessee would take possession of and operate the Peach Facilities as subtenant. The Jeffersonville Facility and the Oceanside Facility were previously decertified by CMS in February and May 2016, respectively, for deficiencies related to the operations and maintenance of the facility while operated by the previous sublessee ( see Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases included in the Annual Report for additional information). The Jeffersonville Facility and the Oceanside Facility were recertified by CMS as of December 20, 2016 and February 7, 2017, respectively, which are the Rent Commencement Dates for such facilities.

The Peach Health Sublease became effective for the Jeffersonville Facility on June 18, 2016, and for the Savannah Beach Facility and the Oceanside Facility on July 13, 2016 (the date on which ADK accepted possession of the facilities from the previous sublessee). The Peach Health Sublease is structured as a triple net lease, except that ADK assumes responsibility for the cost of certain deferred maintenance at the Savannah Beach Facility and capital improvements that may be necessary for the Oceanside Facility and the Jeffersonville Facility in connection with recertification by CMS. Rent for the Savannah Beach Facility, the Oceanside Facility and the Jeffersonville Facility is $0.3 million , $0.4 million and $0.6 million per annum, respectively; provided, however, that rent was only $1 per month for the Oceanside Facility and the Jeffersonville Facility until the respective Rent Commencement Dates. In addition, for the Oceanside Facility and the Jeffersonville Facility, Peach Health Sublessee is entitled to three months of $1 per month rent following the respective Rent Commencement Dates and, following such three -month period, five months of rent discounted by 50% . The annual rent for each of the Peach Facilities will escalate at a rate of 3% each year pursuant to the Peach Health Sublease, and the term of the Peach Health Sublease for all three Peach Facilities expires on August 31, 2027.

In connection with the Peach Health Sublease, the Company extended a line of credit to the Peach Health Sublessee for up to $1.0 million for operations at the Peach Facilities (the “Peach Line”), with interest accruing on the unpaid balance under the Peach Line at a starting interest rate of 13.5% , increasing by 1% per annum. The entire principal amount due under the Peach Line, together with all accrued and unpaid interest thereunder, was due one year from the date of the first disbursement. The Peach Line

18


is secured by a first priority security interest in Peach Health Sublessee’s assets and accounts receivable pursuant to a security agreement executed by Peach Health Sublessee.

On April 6, 2017, the Company modified certain terms of the Peach Line in connection with the Peach Health Sublessee's securing a $2.5 million working capital loan from a third party lender (the “Peach Working Capital Facility”). Borrowings under the Peach Working Capital Facility are based on a borrowing base of eligible accounts receivable. The modifications of the Peach Line include: (i) reducing the loan balance to $0.8 million and restricting further borrowings, hereinafter referred to as (the “Peach Note”); (ii) extending the maturity of the loan to October 1, 2020 and adding a six month extension option by the Peach Health Sublessee, assuming certain conditions precedent are met at the time of the exercise of the option; (iii) increasing the interest rate from 13.5% per annum by 1% per year; and (iv) establishing a four year amortization schedule. Payment of principal and interest under the Peach Note shall be governed by certain financial covenants limiting distributions under the Peach Working Capital Facility. Furthermore, the Company guaranteed Peach Health Sublessee’s borrowings under the Peach Working Capital Facility subject to certain burn-off provisions (i.e., the Company’s obligations under such guaranty cease after the later of 18 months or achievement of a certain financial ratio by Peach Health Sublessee).

At June 30, 2017 , there was a $0.9 million outstanding balance on the Peach Note.

Arkansas Leases and Facilities . Until February 3, 2016, the Company subleased through its subsidiaries (the “Aria Sublessors”) nine facilities located in Arkansas (collectively, the “Arkansas Facilities”) to affiliates (the “Aria Sublessees”) of Aria Health Group, LLC (“Aria”) pursuant to separate sublease agreements (the “Aria Subleases”). Effective February 3, 2016, the Company terminated each Aria Sublease due to the applicable Aria Sublessee’s failure to pay rent pursuant to the terms of such sublease. From February 5, 2016 to October 6, 2016, nine wholly-owned subsidiaries of the Company (each, a “Skyline Lessor”) leased the Arkansas Facilities to Skyline Healthcare LLC (“Skyline”), or an affiliate of Skyline (the “Skyline Lessee”), pursuant to a Master Lease Agreement, dated February 5, 2016 (the “Skyline Lease”). The term of the Skyline Lease commenced on April 1, 2016. In connection with the Skyline Lease, the Skyline Lessors entered into an Option Agreement, dated February 5, 2016, with Joseph Schwartz, the manager of Skyline, pursuant to which Mr. Schwartz, or an entity designated by Mr. Schwartz (the “Purchaser”), had an exclusive and irrevocable option to purchase the Arkansas Facilities at a purchase price of $55.0 million , consisting of cash consideration in the amount of $52.0 million and a promissory note with a principal amount of $3.0 million . The Company completed the sale of the Arkansas Facilities to the Purchaser on October 6, 2016. For further information see Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases included in the Annual Report).

Meadowood. On March 8, 2017, AdCare executed a purchase and sale agreement with Meadowood Retirement Village, LLC and Meadowood Properties, LLC (the “Meadowood Purchase Agreement”) to acquire the Meadowood Facility for $5.5 million cash. On March 21, 2017, AdCare executed a long-term lease with an affiliate of C.R. Management (the “Meadowood Operator”) to lease the Meadowood Facility effective on May 1, 2017. For further information, see Note 10 - Acquisitions .

Future minimum lease receivables from the Company’s facilities leased and subleased to third party tenants for each of the next five years ending December 31 are as follows:
 
 
(Amounts in
000's)
2017 (a)
 
$
10,816

2018
 
22,281

2019
 
22,764

2020
 
23,299

2021
 
23,886

Thereafter
 
136,813

Total
 
$
239,859

(a) Estimated minimum lease receivables for the year ending December 31, 2017 , include only payments to be received after June 30, 2017 .

For further details regarding the Company’s leased and subleased facilities to third-party operators, see Note 10 - Acquisitions below and Part II, Item 8, Notes to Consolidated Financial Statements, Note 7 - Leases included in the Annual Report.


19



NOTE 8.                           ACCRUED EXPENSES AND OTHER
 
Accrued expenses and other consist of the following:
(Amounts in 000’s)
 
June 30, 2017
 
December 31, 2016
Accrued employee benefits and payroll-related
 
$
384

 
$
442

Real estate and other taxes
 
436

 
557

Self-insured reserve (1)
 
6,100

 
6,924

Accrued interest
 
248

 
251

Other accrued expenses
 
767

 
903

Total accrued expenses and other
 
$
7,935

 
$
9,077

(1)  
The Company self-insures against professional and general liability cases and uses a third party administrator and outside counsel to manage and defend the claims. The decrease in the reserve at June 30, 2017 primarily reflects the legal and associated settlement amounts paid (see Note 15 - Commitments and Contingencies) .

20


NOTE 9.                               NOTES PAYABLE AND OTHER DEBT
 
See Part II, Item 8, Notes to Consolidated Financial Statements, Note 9 - Notes Payable and Other Debt included in the Annual Report for a detailed description of all the Company’s debt facilities. 
Notes payable and other debt consists of the following:
(Amounts in 000’s)
 
June 30, 2017
 
December 31, 2016
Senior debt—guaranteed by HUD
 
$
34,087

 
$
34,473

Senior debt—guaranteed by USDA (a)
 
20,640

 
22,518

Senior debt—guaranteed by SBA (b)
 
2,264

 
2,319

Senior debt—bonds
 
7,055

 
7,145

Senior debt—other mortgage indebtedness
 
9,651

 
5,639

Other debt
 
1,254

 
1,063

Convertible debt
 
1,500

 
9,200

Subtotal
 
76,451

 
82,357

Deferred financing costs, net
 
(2,090
)
 
(2,196
)
Unamortized discount on bonds
 
(184
)
 
(191
)
Total debt
 
74,177

 
79,970

Less: current portion of debt
 
4,133

 
13,154

Notes payable and other debt, net of current portion
 
$
70,044

 
$
66,816

(a)
U.S. Department of Agriculture (“USDA”)
(b)
U.S. Small Business Administration (“SBA”)

The following is a detailed listing of the debt facilities that comprise each of the above categories:
(Amounts in 000’s)
 
 
 
 
 
 
 
 
 
 
 
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
June 30, 2017
 
December 31, 2016
Senior debt - guaranteed by HUD
 
 
 
 
 
 
 
 
 
 
The Pavilion Care Center
 
Red Mortgage
 
12/01/2027
 
 Fixed
 
4.16%
 
$
1,382

 
$
1,434

Hearth and Care of Greenfield
 
Red Mortgage
 
08/01/2038
 
 Fixed
 
4.20%
 
2,159

 
2,191

Woodland Manor
 
Midland State Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
5,391

 
5,447

Glenvue
 
Midland State Bank
 
10/01/2044
 
 Fixed
 
3.75%
 
8,371

 
8,457

Autumn Breeze
 
KeyBank
 
01/01/2045
 
 Fixed
 
3.65%
 
7,276

 
7,352

Georgetown
 
Midland State Bank
 
10/01/2046
 
 Fixed
 
2.98%
 
3,684

 
3,723

Sumter Valley  
 
KeyBank
 
01/01/2047
 
 Fixed
 
3.70%
 
5,824

 
5,869

 
Total
 
 
 
 
 
 
 
 
 
$
34,087

 
$
34,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior debt - guaranteed by USDA (b)








Attalla

Metro City

09/30/2035

Prime + 1.50%

5.50%

$
6,272


$
7,189

Coosa

Metro City

09/30/2035

Prime + 1.50%

5.50%

5,655


6,483

Mountain Trace

Community B&T

01/24/2036

Prime + 1.75%

5.75%

4,322


4,384

Southland

Bank of Atlanta

07/27/2036

Prime + 1.50%

6.00%

4,391


4,462


Total








 
$
20,640

 
$
22,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior debt - guaranteed by SBA




 
 
 
 
College Park

CDC

10/01/2031

Fixed

2.81%
 
$
1,567

 
$
1,611

Southland

Bank of Atlanta

07/27/2036

Prime + 2.25%
 
5.75%
 
697

 
708

 
Total
 
 
 
 
 
 
 
 
 
$
2,264

 
$
2,319


21


(a)
Represents cash interest rates as of June 30, 2017 as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from 0.08% to 0.53% per annum.
(b)
For the four skilled nursing facilities, the Company has term loans insured 70% to 80% by the USDA with financial institutions. The loans have an annual renewal fee for the USDA guarantee of 0.25% of the guaranteed portion. The loans have prepayment penalties of 3% to 5% through 2017, which decline 1% each year capped at 1% for the remainder of the term.
(Amounts in 000’s)

 
 
 
 
 
 
 
 
 
 
 
Facility
 
Lender
 
Maturity
 
Interest Rate (a)
 
June 30, 2017
 
December 31, 2016
Senior debt - bonds
 
 
 
 
 
 
 
 
 
 
Eaglewood Bonds Series A
 
City of Springfield, Ohio
 
05/01/2042
 
 Fixed
 
7.65%
 
$
6,610

 
$
6,610

Eaglewood Bonds Series B
 
City of Springfield, Ohio
 
05/01/2021
 
 Fixed
 
8.50%
 
445

 
535

 
Total
 
 
 
 
 
 
 
 
 
$
7,055

 
$
7,145

(a)
Represents cash interest rates as of June 30, 2017 . The rates exclude amortization of deferred financing of approximately 0.26% per annum.
(Amounts in 000’s)

 
 
 
 
 
 
 
 
Facility
Lender
Maturity

Interest Rate (a)
 
June 30, 2017
 
December 31, 2016
Senior debt - other mortgage indebtedness




 
 
 
 
Quail Creek (b)
Congressional Bank
12/31/2017

LIBOR + 4.75%

5.75%
 
4,371

 
4,432

Northwest (c)
First Commercial
07/31/2020

Prime

5.00%
 
1,165

 
1,207

Meadowood (d)
Exchange Bank of Alabama
05/01/2022

Fixed

4.50%
 
4,115

 

 
Total
 
 
 
 
 
 
 
$
9,651

 
$
5,639

(a)
Represents cash interest rates as of June 30, 2017 as adjusted for applicable interest rate floor limitations, if applicable. The rates exclude amortization of deferred financing costs which range from 0.00% to 0.86% per annum.
(b)  
On September 19, 2016, the Company obtained an option to extend the maturity date, subject to customary conditions, of the Quail Creek Credit Facility from September 2017 to September 2018, which management intends to exercise. On August 10, 2017, the Company extended the maturity date of the Quail Creek Credit Facility to December 31, 2017 and retains the option to further extend the maturity date of such credit facility to September 2018.

(c)  
On July 31, 2017, the Company extended the maturity date of the Northwest Credit Facility from December 2017 to July 31, 2020.

(d)  
On May 1, 2017, in connection with the Meadowood Purchase Agreement, a wholly-owned subsidiary of the Company entered into a Loan Agreement (the “Meadowood Credit Facility”) with the Exchange Bank of Alabama, which provides for a $4.1 million principal amount secured credit facility maturing on May 1, 2022. Interest on the Meadowood Credit Facility accrues on the principal balance thereof at 4.5% per annum. The Meadowood Credit Facility is secured by the Meadowood Facility.

(Amounts in 000’s)
 
 
 
 
 
 
 
 
 
 
Lender
 
Maturity
 
Interest Rate
 
June 30, 2017
 
December 31, 2016
Other debt
 
 
 
 
 
 
 
 
 
 
First Insurance Funding
 
02/28/2018
 
 Fixed
 
4.24%
 
$
140

 
$
20

Key Bank (a)
 
08/02/2019
 
 Fixed
 
0.00%
 
496

 
496

Pharmacy Care of Arkansas
 
02/08/2018
 
 Fixed
 
2.00%
 
295

 
547

South Carolina Department of Health & Human Services (b)
 
02/24/2019
 
Fixed
 
5.75%
 
323

 

Total
 
 
 
 
 
 
 
$
1,254

 
$
1,063


22


(a)  
On August 11, 2017, the Company extended the maturity date of the Key Bank Credit Facility from October 17, 2017 to August 2, 2019.

(b)  
On February 21, 2017, the South Carolina Department of Health and Human Services (“SCHHS”) issued fiscal year 2013 Medicaid audit reports for two facilities operated by the Company during 2013. In the fiscal year 2013 Medicaid audit reports, it was determined that the Company owes an aggregate $0.4 million related to patient-care related payments made by the SCHHS during 2013. Repayment of the $0.4 million began on March 24, 2017 in the form of a two -year note bearing interest of 5.75% per annum.

(Amounts in 000’s)
 
 
 
 
 
 
 
 
 
 
Facility
 
Maturity
 
Interest Rate (a)
 
June 30, 2017
 
December 31, 2016
Convertible debt
 
 
 
 
 
 
 
 
 
 
Issued July 2012
 
10/31/2017
 
 Fixed
 
10.00%
 
$
1,500

 
$
1,500

Issued March 2015 (b)
 
04/30/2017
 
 Fixed
 
10.00%
 

 
7,700

 
Total
 
 
 
 
 
 
 
$
1,500

 
$
9,200

(a)
Represents cash interest rates as of June 30, 2017 . The rates exclude amortization of deferred financing costs which range from 0.25% to 1.92% per annum.
(b)
On December 8, 2016, the Company announced a tender offer (the “Tender Offer”) for any and all of the Company’s 10% convertible subordinated notes due April 30, 2017 (the “2015 Notes”) at a cash purchase price equal to $1,000 per $1,000 principal amount of the 2015 Notes purchased, plus accrued and unpaid interest to, but not including, the payment date. The Tender Offer expired on January 9, 2017, and $6.7 million in aggregate principal amount of the 2015 Notes were tendered and paid on January 10, 2017. On April 30, 2017, the remaining $1.0 million in aggregate principal amount of the 2015 Notes outstanding was repaid plus accrued and unpaid interest in accordance with the terms of such notes, and all related obligations owed under the 2015 Notes were extinguished at that time.

Debt Covenant Compliance
 
As of June 30, 2017 , the Company had approximately 28 credit related instruments outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, and current ratios. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries). The subsidiary level requirements are as follows: (i) financial covenants measured against subsidiaries of the Company; and (ii) financial covenants measured against third-party operator performance. Some covenants are based on annual financial metric measurements whereas others are based on monthly and quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements.
The table below indicates which of the Company’s credit-related instruments were not in compliance as of June 30, 2017 .
Credit Facility
 
Balance at
June 30, 2017(000's)
 
Subsidiary or Operator Level Covenant Requirement
 
Financial Covenant
 
Min/Max
Financial
Covenant
Required
 
Financial
Covenant
Metric
Achieved
 
 
 
Future
Financial
Covenant
Metric
Required
Congressional Bank - Mortgage Note - QC Property Holdings, LLC
 
$
4,371

 
Operator
 
Minimum Operator EBITDAR (000’s)
 
$500
 
$430
 
(a)
 
$500
(a)
Waiver for violation of covenant obtained.


23


Scheduled Maturities
The schedule below summarizes the scheduled maturities for the twelve months ended June 30 of the respective year (not adjusted for commitments to refinance or extend the maturities of debt as noted above):
For the twelve months ended June 30,
(Amounts in 000’s)
2018
$
4,139

2019
6,343

2020
2,560

2021
2,958

2022
5,568

Thereafter
54,883

Subtotal
$
76,451

Less: unamortized discounts
(184
)
Less: deferred financing costs, net
(2,090
)
Total notes and other debt
$
74,177



NOTE 10. ACQUISITIONS
On March 8, 2017, AdCare executed the Meadowood Purchase Agreement with Meadowood Retirement Village, LLC and Meadowood Properties, LLC to acquire the Meadowood Facility for $5.5 million cash. In addition, on March 21, 2017, AdCare executed a long-term, triple net operating lease with the Meadowood Operator to lease the facility upon purchase. Lease terms include: (i) a 13 -year initial term with one five -year renewal option; (ii) base rent of $37,500 per month; (iii) a rental escalator of 2.0% per annum in the initial term and 2.5% per annum in the renewal term; (iv) a cross renewal provision, whereby the Meadowood Operator may exercise the lease renewal for the Meadowood Facility if its affiliate exercises the lease renewal option for Coosa Valley Health Care, a 124 -bed skilled nursing facility located in Gadsden, Alabama (the “Coosa Valley Facility”); and (v) a security deposit equal to one month of base rent. The Company completed the purchase of the Meadowood Facility on May 1, 2017 pursuant to the Meadowood Purchase Agreement, at which time the lease commenced and operations of the Meadowood Facility transferred to the Meadowood Operator.

The following table sets forth the preliminary purchase price allocation of the Meadowood Facility:
(Amounts in 000’s)
 
Estimated Useful
Lives (Years)
 
May 1, 2017
Buildings and improvements
 
15-32
 
$
4,700

Equipment and computer related
 
10
 
400

Land
 
 
100

Property and equipment
 
 
 
5,200

In place occupancy (a)
 
32
 
300

Purchase Price
 
 
 
5,500

 
(a) In place occupancy is included in property and equipment, net on the Company’s unaudited consolidated balance sheets.

On May 1, 2017, in connection with the Meadowood Purchase Agreement, a wholly-owned subsidiary of the Company entered into the Meadowood Credit Facility with the Exchange Bank of Alabama, which provides for a $4.1 million principal amount secured credit facility maturing on May 1, 2022. Interest on the Meadowood Credit Facility accrues on the principal balance thereof at 4.5% per annum. The Meadowood Credit Facility is secured by the Meadowood Facility.


24


NOTE 11.                        DISCONTINUED OPERATIONS

For the discontinued operations, the patient care revenue and related cost of services prior to the commencement of subleasing are classified in the activities below. For a historical listing and description of the Company’s discontinued entities, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 11 - Discontinued Operations included in the Annual Report.
The following table summarizes certain activity of discontinued operations for the three and six months ended June 30, 2017 and 2016 :
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in 000’s)
 
 
2017
 
2016
 
2017
 
2016
Total revenues
 
 
$

 
$

 
$

 
$

Cost of services
 
 
597

 
3,758

 
1,006

 
4,278

Interest expense, net
 
 
7

 
17

 
11

 
25

Net loss
 
 
(604
)
 
(3,775
)
 
(1,017
)
 
(4,303
)

NOTE 12.                        COMMON AND PREFERRED STOCK

Common and Preferred Stock Repurchase Activity

In November 2016, the Board approved two share repurchase programs (collectively, the "November 2016 Repurchase Program"), pursuant to which AdCare was authorized to repurchase up to 1.0 million shares of the common stock and 100,000 shares of the Series A Preferred Stock during a twelve -month period. The November 2016 Repurchase Program succeeded the repurchase program announced on November 12, 2015 (the “November 2015 Repurchase Program”), which terminated in accordance with its terms. Share repurchases under the November 2016 Repurchase Program could be made from time to time through open market transactions, block trades or privately negotiated transactions and were subject to market conditions, as well as corporate, regulatory and other considerations. The Company could suspend or continue the November 2016 Repurchase Program at any time and had no obligation to repurchase any amount of the common stock or the Series A Preferred Stock under such program. The November 2016 Repurchase Program was suspended in February 2017.

During the six months ended June 30, 2016 , the Company repurchased 150,000 shares of common stock pursuant to the November 2015 Repurchase Program for $0.3 million at an average purchase price of approximately $2.05 per share, exclusive of commissions and related fees and made no repurchases during the three months ended June 30, 2016 . Pursuant to the November 2015 Repurchase Program, the Company was authorized to repurchase up to 500,000 shares of its outstanding common stock during a twelve -month period. During the three and six months ended June 30, 2016 , the Company made no repurchases of the Series A Preferred Stock.

During the six months ended June 30, 2017 , the Company repurchased 118,199 shares of the common stock pursuant to the November 2016 Repurchase Program for $0.2 million at an average price of $1.54 per share, exclusive of commissions and related fees and made no repurchases during the three months ended June 30, 2017 . During the three and six months ended June 30, 2017 , the Company made no repurchases of the Series A Preferred Stock.

Preferred Stock Offerings and Dividends

Dividends declared and paid on shares of the Series A Preferred Stock were $0.68 per share, or $1.9 million and $3.8 million for the three and six months ended June 30, 2017 , respectively, and $1.8 million and $3.6 million for the three and six months ended June 30, 2016 , respectively.

During the three and six months ended June 30, 2016 , the Company sold 43,204 and 230,109 shares of Series A Preferred Stock under the Company’s At Market Issuance Sales Agreement, dated July 21, 2015, at an average sale price of $22.15 and $20.51 (excluding fees and commissions) per share, respectively. The Company received net proceeds of approximately $0.9 million during the three months ended June 30, 2016 and $4.5 million during the six months ended June 30, 2016 , after payment of sales commissions and discounts and all other expenses incurred by the Company.

During the three and six months ended June 30, 2017 , the Company sold, under the ATM and pursuant to the Sales Agreement, a total of 50,000 shares of the Series A Preferred Stock generating net proceeds of $1.0 million at an average price of $21.80 per

25


share, exclusive of commissions and related fees. As of June 30, 2017 , the Company had 2,811,535 shares of the Series A Preferred Stock issued and outstanding. On August 2, 2017, the Company terminated the Sales Agreement and discontinued sales under the ATM.

Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a "Change of Control," as defined in the Company's Articles of Incorporation. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to the redemption date.

The change-in-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without Company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are outside of the issuer's control. The assessment of whether the redemption of an equity security could occur outside of the issuer's control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable.

For historical information regarding the Series A Preferred Stock, the ATM and prior share repurchase programs, see Part II, Item 8, Notes to Consolidated Financial Statements, Note 12 - Common and Preferred Stock included in the Annual Report.

NOTE 13.                        STOCK BASED COMPENSATION

For the three and six months ended June 30, 2017 and 2016 , the Company recognized stock-based compensation expense as follows: